藝康 (ECL) 2004 Q3 法說會逐字稿

Welcome to the Ecolab third quarter 2004 earnings release conference call. At this time all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. To ask a question, please press star 1. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to the turn the meeting over to Mr. Mike Monahan, Vice President, External Relations. Mr. Monahan, please begin.

Thank you. Hello everyone and thanks for joining us, and our congratulations to the Boston Red Sox and condolences to Yankee fans. This webcast teleconference will include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Some of those factors that could cause actual results to differ are described in the section under our most recent forms 10-K and 10-Q, under the heading "Forward-looking Statements and Risk Factors," and in our the third quarter earnings release. A copy of our earnings release is available on the Ecolab's website at ecolab.com/investor. Now on to the numbers.

The three months ended September 30 showed yet another strong quarter as improved sales gains and operational improvement led diluted net income per share to rise 9% to 36 cents per share. When compared with net income per share of 33 cents last year, excluding one time items from last year, EPS grew a robust 13%. The strong earnings performance leverage continued growth in our domestic and international businesses, along with favorable currency and tax rates.

As we indicated in prior teleconference calls, we are continuing to invest in our future by using our earnings strength to make supplemental investments in our business. While these investments increased our costs in the second half of 2004, we believe they will sustain our growth into the future. We remain confident in our outlook and expect a strong year with 2004 EPS up 15% to 17% to the $1.18, $1.20 per share range, compared with $1.03 earned from ongoing operations in 2003. And while we are still putting together our plans for 2005, we expect another year of attractive growth in 2005.

Turning to the details. Ecolab's consolidated sales for the third quarter rose 11%. Looking at the components: volume and mix were up 5%; acquisitions and divestitures were 2%; pricing was 1%, and currency was 3%. Sales for U.S. cleaning and sanitizing operations increased 8% , showing improved sequential sales growth rates for almost every division. Excluding acquisitions, sales grew 6%. U.S. institutional sales rose 6% in the quarter. Excluding both the Daydot's acquisition and divestiture of Facilitech, institutional sales growth was also 6%, continuing to show improving sequential quarterly sales trends.

Institutional sales advanced in all end markets including the restaurants, hospitality, healthcare, travel, and government markets with improved sequential growth in all areas. We continued to drive institutional sales through enhanced service to increased account retention, new product and program initiatives to further penetrate our existing customers and aggressive new account sales and development efforts. We also continued to make good competitive gains. New product and program introductions continued to contribute strongly to institutional growth:

Wash 'n Walk, an easy to use, high performance kitchen floor product; our improved line of wear washing detergents with etch protection; Formula One, a new on-premise laundry solution, and Grease Express, a fast foam degreaser, are all doing very well and remain ahead of budget. Institutional also launched several new programs in the quarter. Among these was the force family of all purpose, citrus-based surface cleaning products, which includes an all purpose cleaner, a specialized glass surface cleaner, a high performance cleaner for difficult stains.

Several other new programs and products were also launched. The Daydot's food safety products business acquired in the first quarter, has continued to perform well and we remain excited about our increased food safety [inaudible] business potential there. Looking ahead, the strength in product line, enhanced field sales force, and continued growth in our major markets bode well for us. We expect institutional sales to continue to show good year-over-year performance in the fourth quarter, and we expect continued strong trends into 2005.

Kay sales were up an outstanding 20%, led by strong gains in QSR and food retail. Kay's exceptional performance was a result of new account growth, including the broader QSR market, and the fast food casual -- pardon me, fast casual restaurant chains, the rollout of a sizeable new QSR chain customer, better account penetration, and more effective field sales coverage. QSR performed well with good results from major and new fast food chains. The food retail business continues to do very well as rollouts continued with major grocers and new chains were signed up. New products and programs also bolstered Kay results. We expect further double digit growth in Kay's fourth quarter, though it will moderate somewhat from the current high levels to more historic trendline rates around 10%.

Textile care sales were up 12% in the quarter, again, driven by significant corporate account wins made early in the year and significantly improved account retention. Sales force changes and training have benefited results and account profitability has improved. As a result of the new account gains, product mix conversions and good retention, we look for continued strong growth in the fourth quarter. Sales for professional products in the third quarter reflected Ecolab's phase down in 2004 of low-margin janitorial businesses. Reported professional product sales declined 18%.

Adjusting for the business we exited, professional products ongoing sales were flat to last year as corporate account gains were offset by weak distributor sales. We continue to focus on growing our corporate account business in the janitorial market with an emphasis on the retail, healthcare, and building service contractor segments. We expect professional products fourth quarter sales to improve, as janitorial gains with corporate accounts offset slower distributor sales. Also, the fourth quarter will be the last quarter that we will have to compare against the business we began exiting in the second half of 2003, so sales comparisons will be easier to read going forward.

Third quarter sales for our healthcare division rose 13% as good sales of instrument care solids and skin care products, new contracts with group purchasing organizations and perhaps some inventory buildup by distributors, drove the strong sales gain. Looking ahead, we expect good gains in the fourth quarter, though the momentum may be moderated somewhat because of third quarter's possible inventory buildup. However, the fundamental healthcare business and its outlook remain strong.

Water care sales rose 6% in the third quarter with growth in several of our key major markets. Water care's cross-selling strategy with the food and beverage, healthcare and textile care division continues to produce new account gains and healthy growth. We are investing in head count and training and will continue to emphasize the "Circle the Customer" strategy in the water care business to produce better results in the fourth quarter.

Food and beverage sales increased 12% in the third quarter. Excluding the results from Alcide, which was acquired July 30, F&B sales increased 5%. Dairy, plant, and agri sales grew nicely, as increased volumes with existing accounts and new business leveraged better market conditions to drive sales. The food and soft drink businesses also saw good growth, reflecting the strength of our corporate account relationships.

With the Alcide acquisition completed and looking strong, Ecolab is now the leading cleaning and sanitizing supplier to the meat and poultry industry. We are integrating Alcide's agri and meat and poultry businesses, as well as it's excellent technology, with Ecolab's business. Looking forward, food and beverage, under new leadership and with a strengthened offering, expects to continue to show improved growth as it focuses on customer retention and drives new account acquisition.

Vehicle care sales declined 3% in the quarter. Wet weather through most of the quarter and higher gas prices hurt sales. In response to the sales weakness, vehicle care introduced a new detailing product: a new solid detergent and an economy line of cleaning products. In addition, division rolled out contracts with two large auto retailers. With its focus on securing new business and continuing to make upgrades to the sales force, vehicle care will leverage its new products and focus on chain accounts to deliver sales growth in the fourth quarter.

U.S. other services sales increased 7% in the quarter. Pest Elimination sales continued to show good growth, rising 9% in the third quarter. Business remains solid for Pest and it continues to expand its offerings and markets. New account activity remains strong, and Pest picked up a major, multi-unit account in the quarter that will benefit future growth as it begins a gradual rollout later this year.

The full -- the new full service restaurant program was introduced early in the quarter, as Pest continues to tailor programs for specific markets to enhance growth. Additional targeted new programs will be introduced in the coming months. The EcoSure food safety audit business continues to show robust growth as it picks up new business with major chain accounts. We expect Pest Elimination to show continued good sales gains in the fourth quarter 2004.

Sales for GCS increased 2%. We continue to develop the business operations and are seeing the results pay off, in terms of improving fundamentals. Gains in key performance areas including dispatching, technician productivity, first time repairs, customer satisfaction ratings and so forth, are enabling us to make important progress in building this business. We're also developing proprietary service capabilities that help change in manufacturers manage their business better.

Marketplace reaction to the strategy has been quite favorable. We have also bolstered the sales team and have been successful in our selective marketing to corporate accounts. Encouraged by the improving operations, we will continue to make further investments in the business to build the infrastructure for growth and further scale up. We still have a lot of work to do, but feel the business fundamentals are on the right track. We look for the fourth quarter to show further sales improvement, as GCS works to build momentum.

Measured in fixed currencies, international sales increased 8%. Excluding acquisitions and divestitures, international sales in fixed currencies grew 5%. When measured in US dollars, international sales, excluding acquisitions and divestitures, increased 11%. Europe, Africa and Middle East sales rose 8% at fixed rates in the third quarter. Excluding acquisitions and divestitures, sales rose 3%. Europe's institutional business continued to deliver good gains, offsetting slow trends in Central Europe. The division worked hard to offset soft economies in Germany and weak tourism Italy using new products, aggressive marketing and new markets to achieve growth.

Food and beverage sales also turned in good growth with gains in food, dairy and beverage, and added head count, benefiting results. Textile care reported modest improvement, offsetting consolidating markets with products that focus on energy and water savings for the customer. Professional product sales were off as reduced maintenance spending hurts product sales. Healthcare sales rose nicely as new skin care products and a significant contract win benefited results. Our recently acquired European pest elimination businesses are continuing to make progress and we are integrating these organizations and developing the right sales and service standards to generate consistent long-term growth.

In the UK, a pest program for the F&B market is underway and seeing good results as we introduce a program for catering market. Electronic reporting will be introduced next year. France is implementing new reporting and organizational changes to lay the foundation for growth and we are adding people and introducing targeted market opportunities. We presently look for Europe's fourth quarter, fixed-currency sales growth, excluding acquisitions, to continue at similar rates as the new initiatives and products, along with more field and sales service associates work to offset soft economies.

Asia-Pacific's third quarter sales grew 9% in local currencies, strong growth in North and Southeast Asia, and comparison against a period that was affected by SARS drove the results. When reported in U.S. dollars, sales increased 15%. Looking at the segments, institutional sales showed good growth. Australia and Japan used new programs like Market Guard and corporate accounts to offset soft consumption trends. East Asia continues to record very strong sales growth in areas like Hong Kong and China.

Food and beverage also showed strong results. New Zealand sales continued to make excellent gains in the farm and dairy markets. East Asia reports strong growth as the bottle cleaning business has been robust, particularly in China, bolstering good conveyor lube sales. Japan's F&B sales rebounded. The fourth quarter will compare against a stronger period last year and we hook for Asia-Pacific sales growth to moderate in the fourth quarter.

Third quarter sales for Ecolab's Canadian operations grew 6% in local currency and were up 9% in U.S. dollars. Institutional sales measured in local currency rose nicely, reflecting an improved hospitality industry and recovery from the impact of last year's SARS outbreak. Food and beverage sales showed good gains in the quarter as new business and improved account retention were offset by reduced equipment sales.

Sales in Latin America were up 12% in local currencies and increased 10% when reported in U.S. dollars. Results were solid throughout the area and led by a strong performance in the Caribbean. Most other countries showed double-digit growth. This was another great performance by the region. Institutional results were driven by an improved service focus in Brazil, continued success with food retail program, and a strong tourism market.

Food and beverage results were boosted by very strong results in the Caribbean and Venezuela. Pest elimination continued its aggressive pace in Latin America, recording another double-digit gain for the quarter. Overall, we expect growth to continue in the mid single digits for the fourth quarter as the region's continued good fundamental trends are temporarily dampened by the impact of the hurricanes on the Caribbean business.

Turning to the expense side of the income statement, the third quarter 2004 gross margin was 52.3%, compared to last year's 51.3%. The 100 basis point increase was due to the benefits from improved business and product mix and cost savings initiatives. SG&A expenses were 37.6% of sales, up 120 basis points from last year, due to investments in the sales force, R&D, information technology, acquisitions, as well as higher sales commission and incentives.

Operating income for our U.S. cleaning and sanitizing business rose 5%. Operating margins slipped 40 basis points to 18.1%, as the previously mentioned investments, sales related costs, and freight expense offset the favorable business mix and cost efficiency improvements in several divisions. Operating income for the U.S. Other Services declined as Pest Elimination gains were offset by higher costs in GCS, driven primarily by a charge related to the GCS transition to a centralized business model.

On a constant currency basis, international's operating income rose 13%. Operating margins increased 60 basis points to 12.9%, as profit gains were achieved through higher sales and careful cost management. Third quarter results included two special items that were effectively offset each other. In connection with our purchase of Alcide, Ecolab is required by accounting standards to write off in-process R&D expenses for work that did not have identifiable, near-term application. That charge was $1.6 million after tax. The quarter also included a $1.9 million favorable tax benefit related to prior-period R&D tax credits. Net, there was no material impact on EPS from one time items in 2004's third quarter.

Ecolab's third quarter consolidated tax rate fell 380 basis points to 35.6% from 39.4% a year ago, primarily reflecting the previously mentioned tax benefits, low international tax rates, and tax savings efforts. Adjusted for the one-time tax benefit the tax rate would have been 36.8%. We presently expect 36.9% to be our tax rate for ongoing operations for the full year.

We repurchased 2.1 million shares during the quarter as we made up for lost time when we were out of the market during the SEC registration process for the July 30 Alcide acquisition. Net of this activity is that diluted net income per share for the third quarter was 36 cents, up 13% over last year's EPS from ongoing operations. Looking at the balance sheet, Ecolab's total debt to total capitalization ended the quarter at 32%, down from 35% a year ago, despite 2004's more active acquisition activity. Depreciation was $54 million in the quarter and amortization was $9 million. Capital spending for the quarter was $59 million.

DSO in fixed currencies was up a couple of days due to acquisitions, and DOH was down a couple of days with the last year -- versus last year in fixed currencies. As you may have seen, [Henkel] announced that a recent agreement with Clorox which will serve to fund Henkel's needs following the Dial acquisition, and as a result, Henkel said it's position in Ecolab's shares would remain unchanged. That's the review of the third quarter.

Looking ahead to the fourth quarter we begin by cautioning that the following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of business acquisitions, divestiture, or other material corporate transactions that may be completed after the day of this release. This business outlook section should be considered in conjunction with information on forward-looking statements in our press release and periodic reports, which list factors that may cause results to differ.

In the fourth quarter, institutional will continue its solid sales growth performance. We look for Kay, Pest Elimination, healthcare and water care to sustain their excellent momentum, and professional products and GCS are expected to see improving sales trends. We also expect each of our international regions to outperform their markets, despite challenging conditions. With the strong underlying trends this year and our good, fundmental momentum, we plan to accelerate investments in technology and R&D, continue adding sales and service head count, and reduce some sales incentives and promotional activity in the fourth quarter.

These in investments, consistent with with what we had mentioned in both the first and second quarters, will cause operating margins to soften in the fourth quarter as we take advantage of the strong earnings trends in 2004 to build for longer-term growth, and will result in somewhat lower than normal sales growth, primarily in the U.S. cleaning and sanitizing segment in the quarter. As a result of these planned actions, we expect diluted earnings per share for the fourth quarter to be in the 26 to 28 cents range and field full year, 2004 diluted earnings per share in the $1.18 to $1.20 area, a 15% to 17% gain over 2003's $1.03 from continuing operations and consistent with the consensus estimate range.

Looking further ahead, we are in the midst of our 2005 planning process. While we cannot make any definitive comments regarding projections at this point ,we believe that current consensus 2005 EPS estimate appears to be a reasonable balance between the improving business growth we expect and the anticipated headwinds from Europe and raw materials. So that's the story for Ecolab's third quarter.

It was a strong earnings performance that leveraged steadily improving markets. Ecolab's rising sales trend and continued margin strength from our U.S. and international businesses enabled us to, once again, outperform both our markets and the industry to gain market share and to make important supplemental investments to build our business for future growth. We remain confident in our business and our outlook for a 15% to 17% EPS gain over 2003, one representing the 12th year of double-digit EPS growth from ongoing operations in the last 13 years for Ecolab. And we aim to extend that record again in 2005.

That concludes my remarks. This conference call will be available for replay on our website through October 29. Operator, please begin the question-and-answer period.

Thank you, sir. [Operator Instructions.] Mr. David Begleiter, Deutsche Bank, you may ask your question.

Thank you. Good morning --afternoon, Mike.

Hey, David.

In terms of the higher SG&A expenses, could you break out between IT acquisitions, the sales force, increased commissions, how that increase in investment is being broken out?

If we look at the fourth quarter, we are saying, as you can see from the tax rates, about a penny. But then if we look at the package of the other activities that we are undertaking, pardon me, we think that we are looking at probably another penny or so of investment that we are making that quarter.

Okay. On Kay, ex the new QSR customer, what were sales up in the quarter, around 10%?

David, I don't have that number. That was -- it was going to be higher than 10%, probably in the mid teens.

Okay. On your freight costs you mentioned, can you just break out a dollar impact from the higher freight costs and how that might impact Q4 and '05 as well?

It might have been a million or two for the quarter, but it wasn't significant. And as far as 2005 goes, you know, I don't think it's going to be a substantial factor.

And last thing, just on GCS, how much was that one-time charge in the quarter?

About a million.

Thank you very much.

Mr. B.J. [inaudible,] Smith Barney, you may ask a question.

Hey, Mike.

Hey B.J. How are you doing?

Good. Now that Henkel is behind, you may have more capital available to make acquisitions. Can you discuss the acquisition pipeline and are you willing to go a little bit bigger in terms of the acquisition size?

I think our pipeline's probably as full as we've had it before. We're always looking at a lot of companies. Taking them from the pipeline to an actual acquisition, as you all know, is always a tough process, and the timing of those things is not entirely predictable. But looking ahead, we continue to be active, we continue to look at a range of areas for acquisitions.

We've always said that we're not afraid of doing larger acquisitions, just that the reality is that the bulk of the deals tend to be on the smaller end. I think if we look at our mode of acquisitions over the past it's been in the $20-$30 million range. I mean, we're not afraid of doing the large ones, there just aren't many big ones around.

Okay. And then you talked about adding to the sales force. Can you talk about how much, because earlier in the year, I think, you talked about adding 500 people. Now, is this in addition to that?

Yeah, we have increased the head count additions by about a percent this year, which is a little over another 100 people.

Okay. So total 600 for 2004, up from 500?

Organic?

Yeah.

Probably close, yeah.

And then your international margins were up almost close to 13%, so they have gone from low 8% to close to 13%. How much incremental margin opportunity do you have?

Remaining for international?

Remaining for international, yes.

Well, we have often said that you have to break that into two pieces. I mean, in Europe we think that European margins probably have another 200-300 basis points of improvement to the 12-13% area. I mean right now, they are more right around 10. As far as Asia-Pacific, Latin America, we've said that they should probably about equal U.S. levels, so they have got another 200-300 basis points of improvement.

And when are you targeting that by next two years?

Well, what we have said is that we are trying to balance growth with profitability. So as you know, most of our investments tend to be expense related in terms of R&D, product development, sales and service head count, so for us it is always balancing those two. And for us, what we've said is, roughly, 50 basis points a year is kind of a general target that we would shoot for.

Great. Thank you.

Thank you.

Mr. John McNulty, Credit Suisse First Boston, you may ask a question.

Yeah. Hey, Mike. Quick question on your sales force increases. Again, it sounds like you increased them about 5-6% this year. Is that what you're saying? And then how does that compare to what your normalized increases would be? Is that closer to a 2-3% area?

We're going to be about 5%, John, this year. We started out the year thinking it would be about 4. If you look on a longer term, historic basis it's been around 4-5%.

Okay. And then on another topic. In the area of share repurchases, it looks like you did ramp your repurchases back up to make up for what you didn't do in the second quarter. You bought back about 2 million shares or so, yet your share count total was actually up about a million and a half, sequentially.

I'm wondering if Ecolab plans on stepping up its repurchases a bit, now that it's balance sheet is pretty cleared up here, the Henkel issue is also gone. And it looks like there is a lot of option creep out there, so I'm wondering if you're going to at least try to buy back the creep this year, if not go maybe a little bit beyond that?

Yeah, I think we will, John. I mean, we only had two months in the quarter in which we could be buying because of the Alcide close, so we didn't have a lot of time to do the repurchase. We bought a bunch and our goal is always to neutralize shares, and that's our goal again this year.

Okay. Great. Thanks a lot.

And the other thing, John, as you know, the primary use of our cash flow is always going to be acquisitions, et cetera, so the share repurchase, as you point the out, is for neutralization, not for reduction.

Sure, okay.

Mr. Mark Gulley, Banc of America Securities, you may ask a question.

Yes, Michael. GCS losses. Can you compare the losses this quarter to what they have been, both with or without that nonrecurring charge?

It was about the same as last year.

So losses have stabilized?

Well, that is always a dangerous statement ,but, yeah. I mean we think that we are at a turning point for GCS in terms of the operations. As we have talked about before with the business is there is a lot of leverage in this, and once we can start to build the topline I think that we will start to see the bottom line come along pretty nicely.

As you also know, we've been reluctant to do much aggressive marketing on the top line for GCS until we get all the ducks in a row here. And what we are saying today is that we are encouraged by the signs that we are seeing in the key performance indicators for GCS, so we remain very optimistic about the business and we look for improved profitability in 2005, certainly in the fourth quarter and in 2005 for GCS.

How long will it take to get to the target margins when you embark on this effort?

Well, that is going to be that same balance mark of growth versus profitability. As you know, we've got a pretty good toe hold in the U.S., we want to expand that, so we want to grow that business. But at same time, we also know that we need to have a return on our investment. So, you know, the margins were way low when we got it.

We have improved them and we will be improving as we go along. So again, it's going to be that balance. But you can look for improved profitability in 2005 and sequential years after this.

Another favorite subject on these calls is the progress you are making in your cross-selling efforts. Can you update us on how close you are to full implementation and what results can you report so far?

Well, we have rolled out that initial program to our corporate accounts people and we started a launch with the field. So there's not too much to report for the field. And in terms of the corporate accounts, we think it is going pretty well. But I also want to point out that when we look at this market, it's obviously a work in progress and will be a work in progress as we go forward.

The other thing is that we have some experience with the "Circle the Customer" progress. We started with a field test to do well in our market guard program, which is one in which we bring Kay, Pest Elimination and professional products in with customers, and that's done very, very well. So the prototype gives us a great encouragement that the full rollout will be very successful. So, so far, so good. And again, it's the first effort that we continue to enhance every year as we go forward.

Okay. Sounds good. I'll get back in queue.

Mr. Bruce Simpson, William Blair you may ask a question.

Hi, Mike.

Hey, Bruce, how are you/

Fine, thank you. Go Red Sox. I would like to ask about the impact of input prices. It seem the cost of soda and various platic components are rising pretty dramatically in prices. Is there any way to quantify either what that did in this quarter or your expectation how that's bundled into the next quarter or '05?

It really didn't have much impact in the third quarter. We don't expect much impact in the fourth quarter. And looking ahead to 2005, I think, as all of you are aware, Ecolab does buy a broad range of commodity products and no one raw material represents more than 10% of our total purchases. We do try to use long-term contracts to ensure stable supply, and through these efforts our cost index has been relatively mild over the past cycles. We've never experienced the highs or lows of the spot markets and we're not now. Now, 2005 could be different, but as you might guess we are working very aggressively to address the current raw material environment with contractual means, [inaudible], products, reformulations, pricing, et cetera. We, again, expect to effectively manage the issue in 2005.

But, you know, also to recall that when we looked a input costs for Ecolab, the biggest one that remains: our people. It is roughly 30% of our sales, whereas cost of goods is less than that. So our focus is always on making sure we get the right sales and service head count. But again, for raw materials, it is something that we're certainly being aggressive about going after.

And given that you've opened that, could you follow through with benefit or pension costs and so forth, and the impact that that's having on margins? There any way to quantify that?

Nothing significant right now.

Okay. Well, let me step over then to the demand side. And when I saw you over the summer, you said you really didn't think that the company had seen any kind of material slowing in the core markets of restaurants, hotels, hospitality, and so forth. Is there an index or a way for you to quantify what you feel like that core unit volume demand is doing? Is restaurant and hotel demand slowing yet or is it still just sort of steady?

Well, remember that we are certainly participants in the market, but then we also build on that market with market share gains, new services, and all this other stuff. So I mean, for us, when we look at the restaurant industry, the lodging industry, we're looking at the same indicators everybody does; you know, room demand, occupancy rates, foot traffic, restaurant sales, et cetera.

But for our business, as we look at it, and remember we've got these street accounts programs and "Circle of Customer" programs and all these other things adding onto it, as we look at the business we feel pretty good about things.

Mike, you're unusually elusive today. I'll try to pin you down with a specific one. Do you have cash flow from operations in the quarter?

Yeah. Which numbers are you are looking for, Bruce? Cash from continuing ops?

Yeah.

That was $184 million.

184. And could you give us a Cap Ex number? Could you repeat that, please.

Yeah. It was $59 million.

Okay. The last thing is if I could just pin you down on GCS, would you give us either -- or both -- the sales in the quarter and the specific dollar loss from GCS in the quarter?

Sales were $29 million, and lost about 3.5.

Is that pre or post tax?

Operating income, or operating loss.

Thanks, Mike.

And Bruce, if you believe that's being elusive about the restaurant stuff, there's really not much more I can say. I mean, there's the public indicators. All I can tell you is that when we build on that we're adding, like I say, more accounts, more services, more business on top of it.

So if we look at our own business, as you can see with the institutional division being up 6%, you can use that as an indicator. But there's really not much more that we've got, other than the fact that we've got these base levels that everybody sees and build on top of that with our own business and value add.

I guess what I was trying to get at is just sort of the trend as you've seen it over the last couple of quarters. It seemed like '04 has a lot of promise to be by far the best year, in terms of hotel lodging and restaurants, and do you feel that that has been a significant driver of your unit growth or is it more company-specific market share gains?

Well, you know, if I look at the segments within institutional, they have all shown sequential growth this year. So, you know, and again, against some of those markets I have to believe that you are seeing us outperform the markets, as we've always seen, through market share gains, you're right, through additional new accounts, through new products, new services, et cetera.

Now, if we look around the world, obviously, Europe is still a little mixed and slow, but I think if we look at our business I think we're enjoying some very good results.

Okay. Thanks, Mike.

Thanks.

Mr. Robert Ottenstein with Morgan Stanley, you may ask your question.

Hey, Mike. A couple of questions. First, I think you had mentioned that the sales force gain would be running approximately 600 this year. Can you give us a general breakout of where that is? U.S., Europe, Asia, and what particular divisions?

Well, it's pretty much what you expect. In the divisions that are growing fast, you're adding more people to them. In terms of U.S., international breakout, it's pretty much a balance between the two.

50/50 between the two?

Yeah. Pretty much.

Can you give us a sense of how much -- how many people are you adding to U.S. institutional?

Institutional, year-over-year, will be up over a hundred people.

A hundred people?

Yeah.

Okay. And second question. I mean you're your usual sanguine self on the raw material issue. Should it start to look like it's going to be a problem? How much pricing flexibility do you see out there? I know you don't like to use raw materials as excuse to raise prices, but it does look like a unusual period that we're headed into, or already it. So what is your sense in terms of pricing flexibility for raw materials and the general competitive activity out there that would potentially allow you to do that?

Well, first of all, historically, we've been successful in getting sufficient, or more than sufficient pricing, to cover our costs. And as I mentioned, as we look at the raw material headwinds that we're facing in 2005, we're taking, as you would expect, appropriate and aggressive actions to deal with those. We're looking at substitute raw materials, reformulations, cost reductions that we can obtain to offset that.

In terms of pricing, again, we're not going to publicly talk a lot about pricing with our customers, but what we can say is that we're dedicated to going out to ensure that we get pricing to cover our raw materials costs. That's going to be our plan and we plan to manage against that. We always focus on the value that we bring to customers in the products that we have. And while pricing is always very important to us, and we're going to go out and get the pricing this year, we can't also forget that one of the other key ways that Ecolab benefits margins is through new products.

And we've got a lot of new products introduced in 2004 that we're still rolling out through 2005 that will have a beneficial impact on margins. So in answer to, very specifically, number one, on raw materials, we're doing everything we can to lower our costs of raw materials through contract reformulation, substitute products, et cetera. Second, on pricing, we're going after pricing and we believe. the environment is there in which we can obtain adequate pricing for our products. And then third, most important is, the bigger driver for us is new products and the margins that we can improve as we add value to customers through those new products.

Do you think that we'll see -- I mean pricing has kind of been 1% forever, or at least the last 5-6 years. Do you think we'll see, like, 1.5, 2 next year?

It could rise up a bit, Robert. I mean, one of the things is we'll look at how successful we are on the first part of that, the reformulation, substitutes, et cetera, and see what we need, and then we'll get the proper pricing for what we need on top. So it may go higher than that, you're right.

Thank you very much.

Thank you.

Rosemarie Morbelli with Ingalls Snyder, you may ask you question.

Hi, Mike. Following up on the pricing, can you -- do you buy some of it in the mix as you introduce new products that have higher selling prices and higher margin, and this is we we are not really seeing it?

Oh, absolutely. That is part of the volume in mix.

Okay. So there is some price in that?

Yeah.

And back to GCS. They lost 3.5 million in the first quarter, $3 million in the second. The 3.5 million in the fourth quarter, does that include the 1 million of nonrecurring costs?

No.

Okay. So we have seen, actually, an increase in the loss as opposed to an improvement, quarter-over-quarter?

Well, on the total basis. The question I had was what was the operating loss for GCS, which is in that a little over 3.5. The charge was on top of that, but the question was regarding the operating loss.

All right. So if you -- what are you --

And Rosemarie, that charge is a one-time charge --

Okay. That was going to be part of my question.

-- not and ongoing charge.

No leftover in the fourth quarter?

Well I hope not.

So in the fourth quarter are we going to see the losses coming back down to the second quarter level, or is there something going on that is not going to allow you to do that even though revenues are going up?

We expect the loss to improve over the fourth quarter and the third quarter, maybe similar to the third quarter.

Okay. So that is not an improvement if you have topline growth and you continue losing 3.5 million as you did this quarter?

Rosemarie, we're looking for a slight improvement over the third quarter and a big improvement over the fourth quarter of last year.

Okay.

So, and part of this, Rosemarie, is remember that, as we said, we are continuing to make and we will continue to make investments in GCS as we go forward. We are driving this business to build it for the future, for a service that we think is very lucrative going forward, and we're not going to try and manage operating profits on a quarter-to-quarter basis; what we're going . going to and do is build this business for success in the future.

And if that means that one particular quarter does not show sequential improvement, that doesn't bother us too much. Our main thing is to make sure we got the business right and set. And so we realize you can't run losses forever. We've said we're going to have improved operating performance in 2005, we expect to cut the loss materially in 2005, but we're not going to make short-term sacrifices just to show up a good number on the business.

Okay. Did I understand, probably, you are showing improvement in '05 but you could still have a loss?

That's correct.

Okay. Regarding Kay, you mentioned quite a few rollouts. What is the growth rate of that particular business once they are totally done?

Long-term, we look at Kay as an 8-10% type growth business. Over the past couple of years, I think it's been in the mid teens, so it's doing very, very well. So it's not just one particular rollout; it's doing very well in the QSR business, in the FSR business.

So, again, just to put it into perspective, this is not one customer that's driving it; it's a range of businesses and customers that Kay has. And as I said, we exclude that large customer -- I don't have the number in front of me, Rosemarie -- but I believe it would have been up in the mid teens, nonetheless. So it'ss enjoying a very good period right now. We're enjoying the growth, we hope to continue it as we go forward. But as I've said, over our long-term basis, we've always said it's about an 8-10% growth business.

But as you are adding -- I mean, there are still some QSR customers that you don't have and FSR is really kind of new, so it almost looks as though 15% is more of a normalized type of growth rate for at least the next several years.

We sure hope so.

All right. And on the number of shares, are you ever -- and I know the question has been asked, but I'm not too sure I got the answer right -- are you ever going to buy enough to at least cover all of the dilution from the options?

Yes.

You will?

Yes.

Because so far you haven't.

Well, as we said, we were out of the market during the registration period for Alcide and that prohibited us from buying any shares. As soon as the deal closed we became aggressive, and in the two months, August and September, we bought 2 million shares in our stock. Our goal is to neutralize shares for the year, and we intend to do that in the fourth quarter.

Okay. When I said that so far you had not, I was not really referring to '04 year-to-date, but since 2001 your number of shares has crept up every single year. So you have never, so far, bought enough to cover those options. Mike?

Rosemarie, that doesn't right. I mean, if I look at year end 2002, we had 262 million shares. We had 262.7 at the end of 2003, and going back to 2001, I don't have the number in front of me, but --

You were up to 59.

-- at least for those two years we certainly were flat, so I'm not sure that's correct.

Well, all right. I'll have to look at the numbers because mine are different from yours, but that's all right. I'll look at them.

Okay. And back in 2001 we had 261.

I have 59.8 and then you go to 61.6 and 62.7 and then --

Rosemarie, let's talk about those numbers because my numbers show that we've been relatively flat for the last three years.

Okay. All right, we'll talk later. Interest expense, are you expecting it at this level or should it go up because of the acquisition in Q4?

We're looking for flat -- relatively flat net interest expense in the fourth quarter.

And then quickly, could you give us your expected Cap Ex and amortization and depreciation for '04 and then your expectations for '05?

Well, we have none for '05 yet, simply because we're in the middle of the budget. I don't think we are going to see any huge, out-of-trend increase in it, but for this year we are looking for around $250 million for Cap Ex.

Okay. And for amortization and depreciation around 260?

Bear with me a moment. That sounds right.

Okay, thanks.

Thank you.

Mr. Mark Gulley, Banc of America Securities, you may ask your question. Mr. Gulley, please check your mute button.

I guess Mark is gone.

Dmitri Silverstein, Longbow Research, you may ask your question.

Good afternoon, Mike. As usual, by the time you got to me most of the questions have been answered, but I do have a couple outstanding. You mentioned that looking at '05 -- and I know it's too early to talk about it -- but you mentioned that is was a reasonable estimate, or range of estimates, which you see out there.

To the extent that you've having strong growth this year, and you've commented on several conference calls that you've accelerated some investments to put that money to good you to drive future growth. Is it possible in '05 that you will back off some of these investments or just returning them to normal level, generate earnings growth that's closer to the mid teens rather than low double-digit levels?

Well, we continue to hold 15% as our goal for EPS growth. I mean, what we've said is that we are putting together our plans for 2005. We recognize that we've got some tailwinds, as the vernacular goes, with very good markets and topline growth for our business, but at the same time we do face some headwinds with the raw materials in Europe.

So our goal will be remain 15% at all times, but given those things, the headwinds we face with Europe and raw materials, we felt that at this point, the estimates -- the consensus estimates looked to be a reasonable balance between those two for us.

Okay. Okay. Fair enough. If you look at, excuse me, the growth in Kay business. A couple of people already asked about it, but once you're through what I would call the market penetration phase as it is in your business, and you're going after -- it seems like every year you're fighting a new group of businesses to sell products to that fit under the Kay umbrella.

But once you reach kind of a steady state, why would this business growth be any different from your institutional growth? Is it because the QSR and the casual dining restaurants are growing faster as a market segment, or is there something inherently different about the way you approached this market that led you to believe that this is a high single-digit grower rather than a mid single-digit grower, longer term?

Well, I mean, if it was simply a QSR business it would not be growing as fast as it is. The reason it's growing as well as it does, Dmitri, is because it's expanded into the food retail business, the grocery business, and now it's expanding into the movie theater business. So I mean, you can segment out pieces of the business and they're growing at different rates, but as long as Kay is able to continue to develop other segments that are, you know, how do I put it, not as heavily product or service concentrated as, say, a restaurant or hotel, it can continue to enjoy very good growth going forward.

So I guess it's back to are we able to continue to develop new markets for the Kay business to continue its growth.

Okay. So it is a question of being in the market penetration phase for a long time?

Yeah. It's continuing to find new markets and continuing that penetration to keep your market opportunity huge.

Okay. Finally -- not finally -- but the next question is, looking at pest elimination business in Europe with the two acquisitions you've made in UK and France, you talk about this business doing well but to the extent that it had a certain amount of sales when you bought it and has a certain amount of sales and profitability now, how is it doing versus, you know, 2003?

Well, we're seeing good growth in both of them in the UK and France. Remember that the first order of activity for us is to integrate the people, to get them trained into the types of of protocols that we use, the service relationships, to reorient the sales team. So we are getting modest growth out of these things but at this point that's great for us, because we are also, more importantly, getting development of the protocols and organization that we want.

And we think that with the new sales that we are getting, in other words, the contracts that we are getting, we'll be up at very attractive rates of growth as we get in through 2005.

Okay. So you will start reporting, or at least making a little bit more quantitative comments on this business, in 2005 hopefully?

Right. Right. Because at this point, the major focus is make sure you've got them, kind of, looking and acting like the pest elimination business that we want. And that takes a bit of time when you make an acquisition.

Okay. Speaking of Europe, what was your growth? You gave us a growth of 3% excluding foreign currency. What was the growth excluding acquisitions?

Just a second here. It was -- Europe without acquisitions was up 3%.

Okay. I thought you said it was 6% overall?

That's fixed currency, excluding acquisitions.

What was, 6%?

No. 3% is Europe at fixed currencies without acquisitions.

Okay. And the reported was?

As reported, it was up 8.

8%, okay.

At fixed currencies.

8% excluding currency?

Yeah, 8% excluding currency, but including acquisitions.

Okay. So you basically had 5% internal growth and 3% from currency and 3% from acquisitions.

For the consolidated company?

For Europe.

Yeah.

Okay. All right. I just wanted to make sure. I mean, I misheard the number so I just wanted to go back to that. And finally, on the Latin America, I'm sorry, I missed your constant currency and reported growth.

Latin America was up 12% at fixed currencies. There was no acquisitions.

Okay. And including currency?

Oh, boy. Hang on.

Um-h'm.

10%.

Okay. So currency was down 2%. Okay. And the depreciation in the quarter was -- did you say 56 million?

I'm sorry, Dmitri.

Depreciation in the quarter, did you say it was 56 million?

Depreciation was 54 million.

54 million. Okay. That's it, Mike, thank you.

Thank you, Dmitri.

If you would like to ask a question, please press star one. One moment. Sir, at this time there are no further questions.

Okay. Thank you, everyone. Have a good day.