藝康 (ECL) 2004 Q4 法說會逐字稿

Welcome to the Ecolab fourth quarter 2004 earnings release conference call. At this time all participant's lines are in a listen only mode. After the presentation we will conduct a question and answer session. Today's conference call is being recorded. If you have objections you may disconnect at this time.

I would like to turn the call over to Mr. Mike Monahan, Vice President External Relations. Mr. Mike Monahan, please begin.

Hello, everyone. Thanks for joining us. 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 the factors that could cause actual results to differ are described in the section of our most recent forms 10K and 10Q under the heading forward looking statements and risk factors, and in our fourth quarter earnings release. A copy of our earnings release is available on Ecolab's website at Ecolab.com/investor.

Now, on to the numbers. Ecolab enjoyed a terrific year in 2004 as we beat all of our -- through all three of our financial objectives, specifically, full year earnings per share reached $1.19, up 16 percent over $1.03 from ongoing operations last year and in the middle of our forecasted $1.18 to $1.20 range. Return on to gain equity reached 24 percent, and we maintained our A rated balance sheet. We took advantage of the strong year by accelerating investments in the second half. The fourth quarter reflected continued strong underlying business trends, which we said we would take advantage, as we accelerated investments in our technology and R&D. We continued investments in our sales and service force, and we reduced our sales and promotions and incentives all while delivering an outstanding full year performance. We expect a good year in 2005, and are excited by the prospects ahead.

Our end markets remain attractive and our businesses are ready to take advantage of them. We know we face some head winds in 2005, due to raw material costs and slower economies in Europe, and we understand how important our execution must be in 2005. We nonetheless look for Ecolab's 2005 EPS to show another year of steady growth, and rise to the $1.30, $1.34 range.

Turning to the details, Ecolab's consolidated sales for the fourth quarter rose 12 percent. Looking at the components; Volume and mix were up 4 percent. Acquisitions and divestitures were up 3 percent. Pricing was up 1 percent and currency was 4 percent. Sales for the U.S. cleaning and sanitizing operations increased 9 percent. Reporting improved sequential gains -- pardon me, reporting improved sequential sales growth rates for most divisions. Excluding acquisitions and divestitures, sales grew 7 percent. U.S. institutional sales rose 5 percent in the fourth quarter.

Excluding both the Daydot's acquisition and the divestiture of Facilitec, institutional sales growth was also 5 percent. The various end market segments including the restaurant, lodging, health care, travel and government markets showed good growth. Institutional continued to set the industry pace. As a very successful year of new products, heightened service levels and improved account retention led the year. We also continued to make good competitive gains. As mentioned in our third quarter release in October call, we took advantage of the strong 2004 trends and we reduced sales and incentives and promotions in the fourth quarter, which, in turn, reduced fourth quarter institutional sales and income growth.

New product and program introductions continue to contribute to institutional growth. These included Wash'n Walk and 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. Grease Express, a fast foam degreaser. A fourth family of all purpose surface cleaning products, which includes an all purpose citrus based cleaner. A specialized glass surface cleaner, and a high performance cleaner for difficult stains. These new offerings all did very well and beat their objectives.

Daydot's food safety products business, acquired in early 2004, continued to perform well, and we remain excited about our increased food safety business potential. Looking ahead, the strong product line, enhanced field sales force and continued steady growth in our major markets bode well for us. We will leverage this in 2005 through aggressive selling, pricing, and a focus on improving our customer service and sales force productivity. We expect institutional will show improved growth in the first quarter and we expect continued attractive trends through 2005.

Kay sales were up an outstanding 17 percent. 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 a fast casual restaurant chains. The rollout of a sizable 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 continue with major grocers and new chains were signed up. New products and programs also bolstered Kay's sales. We expect further double digit growth in Kay's first quarter.

Textile care sales were up 18 percent in the quarter. Again, driven by significant corporate account wins, made early in the year, and by improved account retention. Sales force changes in training have benefited results. And account profitability has improved. As a result of the new account gains, product mix and good account retention, we look for good growth in the first quarter. Reported sales for professional products grew 4 percent in the fourth quarter. However, adjusting for acquisitions and the product lines we exited, professional products ongoing sales are up 7 percent versus 2003 due to strong growth in the distributor segment.

We continue to focus on growing our corporate accounts business in the janitorial market with an emphasis on retail, health care and billing service contract through market -- or segments. We expect professional products first quarter sales growth to be in the double digit range as corporate account gains in our key market segments and an emphasis on our new stone care and ultra-durable floor finish offerings drive sales. Also, the fourth quarter was 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.

Fourth quarter sales for our health care division rose a strong 14 percent as good sales of instrument care solids and skin care products, along with new contracts with group purchasing organizations, drove the sales gains. Looking ahead, we expect further growth in the first quarter as the fundamental health care business and its outlook remain strong.

Water Care sales rose 10 percent in the fourth quarter as growth was led by Water Care's cross selling strategy with a food and beverage and health care markets. Investments in training and sales head count and continued emphasis on the circle to customer strategy produced double digit growth for 2004. As you probably have seen a few weeks ago, Ecolab acquired Midland research laboratories. A Kansas based provider of water treatment products and services to the food and beverage and institutional markets. Its revenues are 16 million. Midland provides Ecolab additional scale in the water care business, and a sales and service force that geographically compliments our existing sales team. We are excited to have the Midland people join us and look forward to their help in developing this part of our circle of customer strategy. We expect Water Care to continue good momentum and show strong growth in 2005.

Food and beverage sales increased 16 percent in the fourth quarter, excluding the results from outside, which was acquired July 30, food and beverage sales increased 5 percent. Outside sales were up nearly 40 percent in the fourth quarter, due to a significant account win and F&Bs -- and as F&B's large sales force began cross selling products to Alcide and F&B accounts. The Alcide acquisition continues to provide strong growth with meat and poultry customers with an excellent performance by it's SONOVA antimicrobial carcass treatment product line. Through this acquisition, Ecolab is now the leading cleaning and sanitizing supplier to the meat and poultry industry. We have integrated the [utter cold] and SONOVA product lines into Ecolab's agri and meat and poultry businesses.

The Alcide integration is going well, and the top line synergies are obviously having a strong impact on F&B sales. Dairy plant and agri sales grew nicely, as increased volumes with existing accounts and new business leverage better market conditions to drive sales. The food and soft drink businesses also saw good growth reflecting the strength of our corporate account relationships. Looking to the first quarter, food and beverage with a strengthened product offerings expects to continue to show improved growth as it focuses on customer retention and drives new account acquisition.

Vehicle Care sales grew 1 percent in the quarter. Higher gas prices, unfavorable weather and big oil company sales of retail gas stations to smaller franchisors hurt sales on the quarter. These were offset by strong direct sales, including recent growth in the detailing business. In response to the sales weakness, Vehicle Care introduced a new in-line detailing product, a new solid detergent and an economy line of cleaning products. In addition, the division rolled out contracts with two large auto retailers and one of the larger conveyer chain operators in the United States. With its focus on securing new business, continued to add to make upgrades to the sales force, and additional products slated for 2005, Vehicle Care will leverage its new products and focus on chain accounts to deliver improved sales growth in the first quarter.

U.S. other service sales increased 7 percent in the fourth quarter. Pest Elimination sales continued to show good growth rising 11 percent in the fourth quarter. Business remains solid for Pest Elimination and it continues to expand its offerings and markets. New account activity remains strong, and Pest picked up a major multiunit account in 2004 that will benefit future growth as it continues its gradual rollout in 2005. The new full service restaurant program was introduced early last year and is doing well. Other programs tailored for specific markets like the Bed Bug program, new interior rodent traps and a pheromone based cockroach base have provided better customer penetration and new growth opportunities for Pests.

The EcoSure quality assurance businesses 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 first quarter 2005. Sales for GCS increased 1 percent in the fourth quarter. We continue to see steady improvement in the GCS operations, and are seeing the results pay off in terms of improved fundamentals. Gains have been made in key performance areas including, incoming call handling, dispatching, technician productivity, first time repairs, and customer satisfaction ratings as we continue to make important progress in building this business. 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 our investments in the business to build the infrastructure for growth and further scaleup.

We initiated a 100 percent customer call back program to ensure repair satisfaction. We are rolling out a GPS navigation system to help improve technician productivity. We are also investing in proprietary service capabilities that will help change and manufacturers, manage their business better and provide us important market differentiation. Customer reaction to these has been quite favorable, and we expect to continue to roll them out in the first half of 2005 and contribute to the business growth this year. We know we still have a lot of work to do, but feel the business fundamentals are on the right track, and we expect 2005 will represent the turning point for the business. We look for the first quarter to show further sales and profit improvement as GCS works to build sales momentum through the year.

Measured in fixed currencies, international sales increased 8 percent. Excluding acquisitions and divestitures, international sales and fixed currencies grew 4 percent. When measured in U.S. dollars, international sales, excluding acquisitions and divestitures, increased 12 percent. Europe, Africa and Middle East sales rose 8 percent at fixed rates in the fourth quarter. Excluding acquisitions and divestitures sales rose 3 percent. Europe's institutional sales growth improved in the fourth quarter as new accounts, good results from new house keeping and wear washings products, additional sales and service headcounts, and new sales initiatives offset the impact of slower central country economies and tourism.

Food and beverage sales rose modestly as good food and pharmaco sales offset soft beverage volume. Beverage customer volume appears to have been hurt by the cooler summer weather which reduced consumption. F&B used new products, new account gains and additional sales headcount to offset this. Textile Care sales growth improved, offsetting consolidating markets with products that focus on energy and water savings for the customer. Professional products sales grew as new products, new accounts and some distributor inventory rebuilding offset the continuing trend of reduced maintenance spending. Health Care sales rose nicely as new skin care products and a significant account win benefited results.

European Pest Elimination business continues to make excellent progress. And we're integrating the organization's and developing the right organization to generate consistent long term growth. Sales in the UK -- sales rose in the U.K. as new contract volume and additional services are showing good trends. A pest program for the F&B market is underway, and we are also seeing good results as we introduce a program for the catering market. Electronic reporting will be introduced this year. The French pest operation is on target for its integration plan, and we are adding people and introducing targeted market programs. We look for Europe's first quarter, fixed currency sales to improve slightly as new initiatives and products, along with more field sales and service associates work to offset the soft economies.

Fourth quarter 2004 Asia/Pacific sales grew 3 percent in local currencies as strong growth in north and southeast Asia drove the results. Excluding a small divestiture, sales were up 4 percent. When reported in U.S. dollars, sales increased 8 percent. Looking at the segments, institutional sales showed good growth as New Zealand and East Asia lead the gain. East Asia continues to shows very strong sales growth areas like Hong Kong and China. Food and beverage also showed good results. East Asia reported strong growth as the bottle cleaning business has been robust, particularly in China, bolstering good conveyer loop sales. Australia's F&B sales rebounded.

We are pleased to say none of our associates were are injured in the December tsunami tragedy, though a number lost family members. None of our facilities were damaged but, unfortunately, some of our customers sustained damages. We continue to work with relief agencies and our customers to supply them with needed cleaning and sanitizing products. Our Asia/Pacific associates have worked tirelessly to support the relief efforts, and we are very proud of them. We continue to support our associates and customers in the region and wish them well. The first quarter should see improved growth in the Asia/Pacific region.

Fourth quarter sales for Ecolab's Canadian operations grew 4 percent in local currency and were up 12 percent in U.S. dollars. Institutional sales measured in local currency rose nicely, reflecting improved hospitality industry and recovery from the impact of last year's SARS outbreak. Food and beverage sales were off. Sales in Latin America were up 16 percent in local currency and increased 16 percent more than reported in U.S. dollars. Results were very good throughout the region led by strong performances in Mexico, Venezuela and Argentina.

The Caribbean produced solid growth despite the hurricane's impact on the region. This was another fantastic performance by the region. Institutional results were driven by an improved service focused in Brazil, continued success with the food retail program, and a strong tourism market. Food and beverage results were boosted by very strong results in Mexico, Chile and Venezuela. Pest elimination continued this aggressive pace in Latin America, recording another double digit gain for the quarter. Overall, we expect good growth to continue in the first quarter for Latin America.

Turning to the expense side of the income statement, the fourth quarter 2004 gross margin was 50.3 percent, compared to last year's 50.9 percent. The 60 basis point decline was due to higher delivered product costs and a less favorable business mix, which more than offset cost efficiency improvements. SG&A expenses were 38.9 percent of net sales, down 10 basis points from last year. Last year's SG&A expense included a charge for death benefits for retired executives. Adjusting for that charge, fourth quarter 2004 SG&A rose 40 basis points as a percent of sales due to our investments in the sales and service force, R&D, information technology and acquisitions, as well as higher incentive base compensation costs.

As anticipated, operating margins for our U.S. clean and sanitizing business were off. And operating income declined 16 percent. Adjusted for acquisitions and divestitures, operating income decreased 23 percent. Planned investments in our sales and service force, technology and research and development, higher delivered product costs and incentive based compensation costs and a less favorable business mix, more than offset sales growth and cost savings programs. Operating income for our U.S. other services increased $3 million as Pest Elimination led the gain. GCS also saw improvement as a loss narrowed versus last year. On a constant currency basis, International's operating income rose 10 percent. Operating margins increased 30 basis points, 12.1 percent, as proper gains were achieved through higher sales and careful cost management.

Ecolab's fourth quarter consolidated tax rate rose 130 basis points to 36.3 percent from 35.0 percent a year ago. For the full year 2004, the tax rate was 36.5 percent, down 160 basis points, compared with 38.1 percent last year. Excluding unusual items and special charges, full year tax rates for ongoing operations were 36.8 percent this year, versus 38.0 percent for last year. In looking at the differences, the 2003 4th quarter rate was unusually low at 35 percent and reflected an adjustment to the final full year rate from the higher estimates accrued during 2003. For the full year, the lower full year 2004 rate, primarily reflected lower international rates and tax savings efforts. We presently expect our 2005 tax rate to be close to 2004's 36.8 percent rate from full year ongoing operations level.

We repurchased 1.1 million shares during the quarter. For the full year, we repurchased 4.6 million shares. None of this activity is that diluted net income per share for the fourth quarter was $0.27, up 4 percent over last year's EPS from ongoing operations and right in the middle of our forecasted 26 to 28-cent range. Looking at the balance sheet, Ecolab's total debt to total capitalization ended the quarter at 31 percent, down from 34 percent a year ago, despite 2004's more active acquisition activities. Depreciation was $54 million in the quarter, and amortization was 9 million. Capital spending for the quarter was 87 million. That's a review of the fourth quarter.

Looking ahead to the first quarter of 2005, we begin which cautioning these 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, divestitures, the adoption of new financial accounting standards or other material events that may be completed after the date of this Webcast. This business outlook section should be considered in conjunction with the information on forward-looking statements in our press release and periodic reports which lists factors that may cause results to differ.

In the first quarter we expect Institutional to improve on its fourth quarter sales growth performance. We look for Kay, Pest Elimination, Health Care, Textile Care and Water Care to sustain a solid momentum and Professional Products and GCS are expected to see improving sales trend. We also expect each of our international regions to outperform their markets despite challenging conditions. As a result, we expect diluted earnings per share for the first quarter to be in the 27 to 29-cent range, and compare against a very strong year ago period when Ecolab EPS was up 25 percent and we earned $0.25 from net income and $0.26 from ongoing operating. Full year 2005 diluted earnings per share is expected to be in $1.30 to $1.34 range. We caution against higher estimates at this time , due to the still somewhat unsettled raw material markets and recent Wall Street forecasts calling for possibly less robust economic activity ahead.

Beginning with the third quarter ending September 30, 2005, Ecolab will adopt SAF -- SFAS, 123(R). The new standard for expensing stock options. The above forecast for the first quarter and full year 2005 do not include any impact from this accounting rule change. As part of the transition to the new standard, Ecolab expects to restate its earnings history in line with the pro forma amounts historically disclosed in Ecolab's financial statements. Ecolab expects to have these restated results available on Ecolab's website, www.Ecolab.com/investor.

One last note on up coming Ecolab events. We will hold a tour of our booth at the National Restaurant Association show in Chicago on May 23rd. Also, we are planning to hold our bi-annual investor meeting September 8 in St. Paul. We will have more details later on the events. That concludes my remarks. This conference call will be available for replay on our website through February 11. Operator, please begin the question and answer period.

Thank you. At this time we are ready to begin the question and answer session. [Operator Instructions] Our first question will come from P.J. Juvekar from Smith Barney.

Hi, Mike.

Hi P.J. Say, would just like to mention that Doug Baker has joined us, so he will be here for the question and answer session.

The U.S. cleaning margins were so weak. Even weaker than what you had after 9-11. Can you just talk about the issues and quantify them? How big was the impact from the new sales force decoding?

Sure. As we mentioned in the script that the impacts included the reduced sales and the sales incentives and promotions. The investments that we made and things like that. If we look at the impact, it was about half, due to the reduced sales and promotions, about a quarter due to the investments, and about a quarter due to business mix.

And when you say business mix and being less favorable, can you just talk about that?

As you would guess, as you reduce in sales and promotions, it's probably going to be in your largest division, which is our institutional division. And as you also know, Institutional, because of it's product deleveraging and scale, tends to be a more profitable division. As you reduce activity in that division, that has an impact on your profit mix and also has a little bit of deleveraging, too.

Do you continue to -- do you plan to continue to do that, reduce promotion in 2005?

Not year on year like we did this year. P.J., this is Doug. If you look at our Q4, when we normalize for investments, one time events year on year, variable comp, and then the promotion and mix, which are related, you end up with OI growth, better, or slightly better than sales growth which is what you would expect. And really the underlying business performance in Q4 was very solid.

How much pricing are you getting in the core U.S. Institutional business?

Well, we didn't have much incremental pricing in Q4 at all, nor did we expect to. The way the pricing's going to come on, traditionally we get about a point a year, so [every fall](ph) we go after pricing two different ways. And really the goal is to sustain and build margin. We do it after raw price increases and through mix within customers. We are targeting much more aggressive pricing and mix targets this year within our businesses to offset the rise. But, those are going to come on, P.J., some in the first, more in the second and be at full run rate by mid year.

Right. It just seems like the cost management side seems to be a little bit disappointing in the U.S.

In what, Q4?

In Q4.

But, P.J., I think, if you -- if you went back, I think what we did in Q4 exactly what we said we said we were going to do in Q4. In fact, if you look at 2004 in total, it was a very successful year. When we started the year, we said our main goal was to accelerate our organic sales momentum, and that's exactly what we did throughout the year. While delivering 16 percent EPS growth. And we did a heck of a job, I think, rebuilding our organic sales growth and fundamental sales growth. We talked about getting Institutional on these guys back up into the 6 to 8 percent range, which has been our historic target.

We have gotten these businesses, if you start normalizing for promotions and others, back into this range, we believe it's going to be sustained going forward. If we did anything, we wanted to make sure we continued to fuel the growth. So the investments we made in Q4 were designed to continue to propel sales. We put on additional sales people early. That's what we talk about accelerated sales investments. And the reason is we want to fuel the sales growth. We all know we got some raw material ahead winds. We're not unique. We are probably are unique in that it doesn't hit us quite as hard because of our margin perspective as it does other specialty chemical folks. But, we have to get after the margin and get after the other stuff, and we're going to do it principally through growth but also through pricing and cost savings. I think we are well underway, and we have to plan to do it, which is why we forecast 2004 -- or, excuse me, 2005 double digit EPS.

And, P.J., when you talk about cost management, in terms of the raw materials, that wasn't the fact as we walked through what the impacts were. There were things that were elective or within the control of the business. As we mentioned, the reduced sales and promotions, the fact that we hired over 150 sales and service people in the fourth quarter alone. We made investments in the R&D and tech business. And these are all things that we have been talking about, really since the second quarter, and we're very explicit about in the third quarter. So, from the cost management side, I think we are looking at costs that were investments that we talked about. And the raw material was just a very minor part of the cost variance.

Thank you.

Thank you. Our next question will come from David Begleiter from Deutsche Bank.

Doug and Mike. Doug, with another quarter under your belt in GCS, can you comment on the improvements that are being made, and what's the potential for this business going out one or two years?

Dave, GCS -- with the fundamentals we've been looking at in GCS, and we're going have to -- these are the four things that have to be right for us to long term, get to our 10 percent plus OI margin, which is the initial target. Right. We want to get this in the teens like everything else. One is sales. Sales has now grown for two quarters in a row. It had declined prior to that. We have started rolling out major new customers and we're doing it very effectively. Customer satisfaction, ie., when we talked to customers after we performed for them, those scores have gone up dramatically in the fourth quarter, even over the third, which is an improvement over the second, and it would be one of our higher performing divisions now in terms of customer satisfaction.

Tech productivity, ie., how much does each tech perform in terms of service events in a month, continue to grow in the fourth quarter. That is key, because, basically what you are trying to do is leverage that labor, that continues to go in the right direction. And then you have receivables. You have to go collect after you perform the work. These are the four key metrics. All improved throughout last year. We feel good early this year as we watch this business and see what's going on. I think we are clearly in the midst of a recovery right now on this business. It is going to continue to take some time. We will probably cross the profit threshold sometime , near the end of this year is our hope. But clearly, it's going to be another, if you want, investment year that will be accretive.

Do you have the loss for GCS in Q4 and for your '04? Doug or Mike.

Well, for the quarter, it was the operating loss was about 4 million bucks compared to about 6 million last year.

Makes the full year, Mike, what number?

For the full year? About 16, 17 million.

One more thing, Doug, on the competitive landscape, anything from Johnson Diversey that concerns you?

I would say we don't see any real change in behavior from Johnson Diversey. We've heard them talk about pricing. These things are usually, well it takes us awhile to see them in the market but we have seen that in some of their public statements. I haven't seen a real change in their behavior, frankly, over the last three years. At the same time, we continue to out perform them in terms of sales growth in almost every region since the last period reported. We are continuing to take business from a variety of our competitors and including J.D. So, I would say I haven't seen anything dramatically different from them.

Thank you very much .

Our next question comes from Robert Ottenstein from Morgan Stanley.

Hey guys. Approximately, how much of a raw material increase are you budgeting for 2005? How much pricing do you need to offset that? And can you talk a little bit, maybe, about your contract, the contract structure of your relationships of your customers that will allow you to get the pricing?

We are looking for raws to be up in the mid single digits this year. We think we will cover that with pricing, but, obviously, Robert, as you know, and have seen with other companies, true, I'm sure, is that your pricing lags a little bit. So, we will get better impact in the second half than the first half.

Do you need like 2 percent price increase to offset that?

We will be looking at pricing, we'll be looking at mix, we'll be looking at a lot of things to get there. I think you will find, as you watch the margins, we will be able to achieve what we need to achieve.

Thank you very much.

And our next question will come from John McNulty from Credit Suisse First Boston.

I wanted to touch base with you on your balance sheet. If you take a look at your debt levels, net debt to cap is under 30 percent at this point. At what point do we start to see you use some of that leverage that you have available on your balance sheet, whether it's through acquisitions or maybe some share repurchase? I know that's kind of later down the list in terms of what you're looking for. But, when can we kind of expect you to use some of that fire power?

As you know, the number one usage of cash is always going to be acquisitions. Number two has been for share repurchase and neutralize shares. And then, after that we've said we would take a look at what would improve share holder value. I don't think we were at the point, John, of looking at alternatives beyond the first two.

John, we still feel we've got a pretty robust acquisition pipeline, and our plan is to use it. Obviously, the timing is determined by, do we like the business and do we like the price? Those things come into focus at different times. But, we like our pipeline.

Are the prices getting to a point now where things are starting to look attractive, especially in this kind of difficult raw material environment, or are you still waiting for things to come down a bit?

If you have go back to 2003, we didn't have many acquisitions, we had more in 2004. That wasn't because of a lack of interest or pricing. It was mainly just trying to get some deals closed. Because, these things have a life to their own. It wasn't as much interest in pricing as it was just trying to get the deals done.

Yes. But, where are we on valuations? I think the valuations are more realistic now, certainly than they were in the 2000 and '01 period. I think people also wanted to get 2001 and '02 out of their history before they started selling, because they felt it would dampen their results. Now, candidly on a few, we want to make sure they got raws recognized in them before we do anything. We like the pipeline, and I think you'll see good activity this year just like you did last year.

Okay, great. One then just one other balance sheet question as well. Your receivables took a pretty sizable jump up, even relative to sales. Can you walk us through what some of the issues might be there?

Yes. I think they're up -- if we adjust for currency, it's up two, three days, so part of that is acquisitions , and part of it is some change in terms of the distributor in Europe.

So, should we expect them to get back down to more normalized levels? Or is that change, more of a permanent thing that you will have to deal with going forward?

Ecolab, one thing is we're always going to be driving it down. We recognize the issue, and we're going to be getting after it over the next couple of quarters. You can rest assured we're going to be on that.

We remain focused on cash. Our business is under standard targets.

All right. Thanks a lot, guys.

John, I guess the only other thing I would mention is, from time to time we've seen this kind of ebb and flow, and a couple years ago we saw the same thing. We got after it and got them done, and we have to get back after it again.

Thank you. Our next question will come from John Roberts from Buckingham Research.

Good afternoon, guys.

Good afternoon.

Last year Asia/Pacific was about 6 or 7 percent of your revenues. And, there are a lot of specialty chemical companies with Asia, 20 percent of their sales, and growing at 20 percent and you were kind of flat in the quarter. What's the thought process, longer term about Asia?

We believe Asia represents an excellent growth market, obviously, particularly northeast Asia where we had a lot of focus and are growing. It's hard to compare against other companies, because you have to also get into what their share and respective markets. We have large positions in the two largest markets in the world, which is the U.S. and Europe and those two businesses give us scale on what help us generate cash.

The business in Asia, particularly in the high growth markets, getting a lot of effort from us and successful effort. China had another very strong quarter, continues to grow. We like our position there and our business there. It's a money making business. So we have never viewed that as a business for investing just for the long term. We want to invest for both the long and for the near term. If the rest of Asia is important, you're in different markets, Japan's economy shows signs of life and then kind of drops off. It's still a major influence on the region, and we've got a fairly sizable position in Australia as well

And one thing I would like to add, is perhaps as opposed to some of the countries -- companies that you look at, because of the nature of our business, the bulk of our business tends in Japan and Australia, which is about two-thirds of it. China, which is a fast growing market, ours is up something like 40 percent this year, but from a small base, it's only about 5 percent of the Asia/Pacific. So, [fast growing of it], but because of China's stage of development, the hospitality industry, et cetera, is not as robust as it would be in a more mature economy like Japan and Australia.

The same way you grew in Europe through joint venture initially and so forth, do you think that's how you eventually at some point step up in Asia?

I don't envision it that way. There isn't a person with a position that would be appealing, number one, throughout the region. We are the major player when you start looking outside Japan, throughout the region. I think the plans we have in place and how we're going after Asia is the right way. And as that economy develops, particularly northeast Asia, I feel well positioned to capture the growth.

We're obviously looking for acquisitions there. But I think they're going to be on the smaller size, John, rather than the large size like Europe offered us.

Our next question will come from Robert Koort from Goldman Sachs . Not getting a response from his line and we will go -- there you go.

Yes, this is Edlain Rodriguez, actually. Quick question. What's the outlook in 2005 for your key end markets of sales, hotels and restaurants? Do you expect any slowdown at all from the strong 2005? I mean, 2004. Also, as a follow-up to the price in question, if you getting price increases because of higher fixed rate costs or higher raw material costs, do you expect to give them back once you are declined or are they stickier than for some other companies. Thank you.

This is Doug. I will answer the pricing one first and the end market (indiscernible) second. The pricing -- could we get pricing and mix, no, we aren't doing this solely on the backs of input costs. That's not how our pricing works, so our price is based on solutions, value we bring to the customer, advantages, et cetera. So, we do not look at this or view this as, call it a temporary price edition that will go away say when fuel hits some kind of random number. So, we believe, yes, they have staying power.

I will tell you I think that's it's a little bit the secret to this whole story. If you look at '05 and here we are we're forecasting double digits. Right. We know we've got raw materials. How we are getting after this has very significant staying power. That is the absolute plan. We are getting after this with growth. We are getting after it with pricing and mix, and the pricing and mix, we believe are going to be there a lot longer than the raw material increases, and after cost savings but it's not cost avoidness, per se, there'll certainly be some of that. It is getting after process and waste within the Company that's got sustainability. And, we like the '05 plan, not only because it's going to deliver double digits here, but we believe it's going do a great job setting us up for continued acceleration in '06 and 07. Now -- the end markets. We are planning on any major change in our end markets.

The thing I'd add is, and as you know, our market's going to be very stable growth markets over time. Some of them like lodging right now are very hot. But overall we've got very stable growth markets, and we continue to expect them to be stable growth markets going ahead.

Right.

Thank you.

And our next question will come from Jeff Cianci from UBS.

I just opened the acquisition question, I didn't see the cash flow this year. What did you wind up doing in cash flow acquisitions this year? And what are you looking at for '05, and would it be a wide range, assuming it is a wide range? Maybe you guys would prioritize where that would be, would it be U.S. Institutional share, will it be Pest International, just a little color on that?

Well, we spent about $130 million on acquisitions in 2004, Jeff.

Okay. Of -- expecting '05 to be bigger than that.

We would love it to be bigger than that. Jeff, I will go back to earlier comments. Some of this is dependent upon the market and what's happening out there and can we get the right business at the right price. With that said, I feel we can clearly be in that range and our target is to be much greater than that.

Now, where are we going put the emphasis? The same places I think we talked about for the last three, four quarters or couple of years. We clearly want to expand Pest globally. It's a proposition that's working well for us. We like what we've done. The businesses are performing quite well and we want to get after that and expand our model. We think we have a leveragable asset. We'll continue to work on (indiscernible) and our core businesses. We talked about the outside performance in the fourth quarter. That the business that we bought just in July of this year, it's doing very well. And, frankly, we are exceeding our sales synergy objectives, if you will, which is, frankly, the most important thing you want to accomplish when you bring on a business. So, I think you're going to expect to see us to do -- continue to do stuff in the Water Care market, like we did, in the Pest market, our focus on existing core businesses, and Health Care remains interest for us as well.

Thanks. If I could ask one more on international margins, that you made great progress there, and appears it will continue, wondering what any mix effect could be? In other words, let's say Europe were to be weak but international Asia and Latin America were strong. Are there any regional margin differences we should be aware of? If not, can we expect close to 100 basis points a year there?

Jeff, if I could jump in. There is some differences. Latin America is presenting a little better than Europe. I think the net of it is, we are looking for all of them to improve their margins. We said before that we think Europe can improve its margins, 300 basis points or more. And that same is true for Asia/Pacific Latin America. So, in terms of a delta, I think you are looking for roughly the same out of all of them.

So, you are saying that the upside (indiscernible) Europe is same as the upside in Europe in margins, in your earnings?

Yes. We're saying about 300 basis points, 400 basis points out of all those regions.

So, there will always be a difference? Always think Europe will be below the rest of the world?

What we've said is we wanted to get to 12, 13 percent because it's at like 10 percent now. And when we get to 12 or 13, we will take another look to see whether we drive it higher. For now let's just get to the 12, 13.

Yes. Our goal is to have a moving target. Everybody asked me, are we going get this to corporate average. We want to get it up into the teens, and we hope the corporate average is much higher than that by the time we get there.

And as a reminder, if you like to ask a question, please, press star one on your touch-tone phone. Our next question will come from Dmitry Silversteyn from Longbow Research.

Good morning, gentlemen. Couple of questions. First of all, help me understand why the reduction in promotions and rebates in your cleaning and sanitizing business in the U.S. should have a detrimental impact on margins? I would have thought that lack of promotions implied higher prices and less expenses and margins would go up.

Dmitry, it's a fairly simple equation. When you don't promote, and don't have those sales as a result of it, you don't have the gross profit falling on down through your P&L.

And the other thing, Dmitry, is you tend to look at your fastest movers in an area and those often tend to be our higher margin items as well.

So, Dmitry, any time you look at a one quarter event, you will have that kind of impact. I guess if I take your question and say over a couple year period, if you reduce your reliance on promotion, should you see margins increase, I guess the answer is, yes, assuming that you have no sales impact.

Maybe like Macy's never having a sale. Certainly improved things for them.

So, it's a question of reduced volume growth that's affecting the margins because of reduced promotions

Right. In a 13 week period.

Fair enough. Can you give us an idea of what your capital expenditures and hiring plans in the sales force are like for 2005? I assuming the hiring plans aren't going to be as aggressive as in 2004?

Our plans in '05 are to continue hiring our sales and service force because it's one of the most important growth fuels we have. And really the plan. I'd say, it's going to be in the 4 percent, 4 to 5 percent range folks next year. And that's what we're targeting. We feel good about our growth prospects going in next year. And we feel, clearly, that this year is going to continue to improve as we move forward.

I know that some people have said that the forecast for the full year seemed cautious. And, we're going to say, one of the ways to look at our view of the year is what we are willing to invest. We are talking about typical-type of investment in sales and service 4 to 5 percent. We're not cutting back on that. So, I think it's an understatement of our confidence in 2005. The other thing, Dmitry, asked about CapEx, we are expecting to be around 300 million in 2005. The only thing I mentioned there is, remember we were completing a new research and development center, and some of the costs are in that.

When you were talking about, just a follow up on Jeff's question earlier, when you were talking about 3 to 400 basis points improvement in operating margins in International operations, is this off of 2003 base of margin or for 2004?

2004.

So, you're looking for an additional 3 to 4 percent improvement in the operating margin?

We've always said, we thought that Europe could be a 12 to 13 percent operating margin business. And, again, once we get there, we will see if it goes more. We've said that Asia/Pacific, Latin America should about equal the U.S. levels. So, overtime we expect to get there. We've often used as a measure, roughly 50 basis points a year, in terms or a guide of what we will shoot for. Sometimes we exceeded that. Like in Europe, over the last few months, we certainly exceeded that rate.

Okay. Thank you very much.

Thank you. And our last question will come from Rosemarie Morbelli from Ingalls and Snyder.

Good afternoon. Could you give us a feel for a little more details on this change of distributor in Europe?

It was just, the terms we had with a distributor in Europe, Rosemarie, it wasn't a change in distributor.

So, what did you do? You are paying them more than you used to? Paying them less? What is the change.

Simply on the receivable about the time which they had to pay.

Oh, okay. So, it is not a question that you changed and then you didn't get paid by the old one?

Correct.

So, what are they getting compared to North America.

I couldn't tell you what the terms of that contract were nor would we make that public anyway. It was a change in the terms that we had with them.

Okay. You also, in the text, talked about international margins being up in most regions. Could you give us a better feel as to where they were not up and why? If is it most, I am assuming it is not in all regions. Somebody didn't do it better.

For the year, margins were up, I think, across the board for all of our regions.

So, maybe it was a comment regarding the fourth quarter?

I'm sorry, Rosemarie?

Maybe that comment was only applying to international margins in the fourth quarter. But, based on the comment, and I did not memorize the press release, the margin was up in most regions of internationally.

Right, right. I said for the year. You are meaning in the quarter? There was one region off a little bit, Asia. But, I don't read much into that.

So, you don't think this is a trend that would continue in early '05 which is why --

No. For the year they were up. For the quarter they were off. Anything can happen in a quarter. You can't look at them quarter to quarter. You do have to look at them over a little longer period of time. We don't read too much into that.

Okay. I don't know if you have the numbers, but do you have an estimate at least for the impact from expensing -- expensing the stock options for the year?

Yes. We think it's going to be in line with the historic numbers we've been showing in our annual report which is around 6 percent or so. We haven't completed the numbers yet, but, it should be in line with what we've been showing in our annual report.

So, 6 percent hit from complying with that particular new rule?

Right, that's what we have shown in the past.

Okay. And, what was the overall CapEx for 2004?

And, Rosemarie, we are still completing our numbers and all that, and we'll have it, obviously, ready to implement in the third quarter. But, it's probably going to be pretty close to those numbers. CapEx for 2004 was 276, and again, that includes part of that R&D center.

And then one last question, regarding the margin in your institutional business, which was down as we all talked about, substantially in the fourth quarter, is that kind of a decline something that we are ongoing to be looking at in the first half of 2005 as you get hit by the raw material costs but your mix in price is not yet fully in place?

No. The fourth quarter cleaning and sanitizing and institutional margins are not going to be indicative of the margins you're going to see in the first half. We tried to go through. If you look at the underlying business, when we adjust for what we've talked about, our accelerated investments and other costs, some one time, we had a solid pretty performance in those businesses. So, no we expect to have a growth in these businesses in terms of operating income moving forward.

If you add all of the people you have added in the fourth quarter, on a one time costs, they are going to continue, I need to check if my memory serves me right, about a year to cover their costs.

Rosemarie, I go back to the press release. Where what we said is, we expected to hold margins for the first quarter about the same as a year ago. And that's against some head winds of raw materials costs, of all these hirings, et cetera. So, I think we're doing a pretty good job in the first quarter. We're going to continue to have a good steady sales growth. We're going to hold our margins against some head winds like that, and produce a good quarter. We think that you're going to have a year in which we're going to be a little bit more back half weighted, perhaps, in the earnings growth than normal, but that's, I think, reflective of what we talked about with the costs and the pricing. So, I think we're in pretty good shape and we're pretty confident about the year ahead.

Thank you.

Thank you.

At this time I show no further questions.

Thank you everyone for your participation on this call. We hope this is helpful to you and have a very good day.