藝康 (ECL) 2005 Q1 法說會逐字稿

Good afternoon. Welcome to the Ecolab first-quarter 2005 earnings release conference call. All participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). This conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Mike Monahan, Vice President External Relations.

Hello, everyone, and 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 defer are described in the section of our most recent Form 10-K under the heading "forward-looking statements and risk factors" and in our first-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 once again delivered in its forecast as first quarter 2005 hit the top end of our $0.27 to $0.29 range. We saw robust sales trends in our U.S., Latin America, Canada, and Asia-Pacific operations with high single digit or better gains in nearly all areas. Our businesses have executed well on the first quarter's key priorities.

As expected, GCS delivered good sales growth and narrowed its loss. It continues to be on track and its opportunities are terrific. We remain committed to our aggressive growth objectives and, though the unusual raw material environment of 2005 has been a challenge, we have been and are continuing to take effective actions to ensure both attractive growth this year while continuing to make the right investments to produce stronger results in the future. We expect to deliver solid growth in 2005 and build our future. We believe we're on target for another year of steady growth in 2005 and expect earnings to rise in the $1.30 to $1.34 range.

Turning to the details, Ecolab's consolidated sales for the first quarter rose 9%. Looking at the components, volume and mix were up 4%, acquisitions and divestitures were 1%, pricing was up 1% and currency was 3%. Sales for our U.S. and cleaning and sanitizing operations increased 8%; excluding acquisitions and divestitures sales grew 7%. This was the fifth consecutive quarter of improvement in the organic sales growth rate for U.S. cleaning and sanitizing.

Reported U.S. institutional sales rose 4% in the first quarter. Excluding acquisitions and divestitures, institutional sales growth was 5%. The various end market segments, including the restaurant, lodging, and travel markets, continued to show good growth. As usual, institutional set the industry pace as heightened service levels, effective sales programs and promotions, and competitive gains led the quarter.

Institutional has also been aggressive in addressing the higher cost environment and focused on pricing and cost savings initiatives in the first quarter. This activity has been and continues to be successful, though that early focus shifted new product and program introductions to later in the quarter and had a slight impact on first-quarter sales growth.

We continue to generate good growth momentum from new programs launched in 2004, as well as the new programs launched in the first quarter of 2005, including an innovative food contact surface sanitizer which is easier to use and provides higher efficacy over a broader application range and the recently announced strategic alliance with Panter, which has expanded our range of water filtration programs.

The Daydots food safety products business acquired in early 2004 performed well as we continue to integrate it into Ecolab's comprehensive food safety and brand protection business. Looking ahead, the strong product line, enhanced field sales force, continued steady growth in our major markets, and the work underway in the first quarter all bode well for us in 2005. 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 to show improved sales growth in the second quarter.

Kay sales were up a very strong 20% led by strong gains in QSR and food retail. A portion of the first quarter growth was due to promotional activity. Adjusting for that, Kay's underlying double digit growth performance was a result of new account growth including the broader QSR market and the fast casual restaurant chains, the rollout of 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.

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's results. After the very strong first-quarter start, we expect Kay's second quarter sales growth to show sales gains in the mid to upper single digits before returning to better growth in the second half.

Textile Care sales were up 10% in the quarter, again, driven by significant corporate count wins made early last year and by improved account retention. Textile Care continues to focus on better account penetration, account profitability, and improving service levels. However, the market remains mature and competitive and, as Textile Care annualizes against the major win last year, we expect the second quarter to be about flat.

Professional Products sales grew 11% in the first quarter. Excluding acquisitions, Professional Products grew at 7% as new product introductions and strong growth in the corporate account and distributor segments drove growth. We continue to focus on growing our corporate accounts business in the janitorial market with an emphasis on the retail, Healthcare, and building service contractor segments. We expect Professional Products' second quarter sales growth to show good gains as corporate account wins in our key market segment and an emphasis on our new stone care and ultra durable floor finish offerings drive sales.

First-quarter sales for our Healthcare division rose a strong 14% as good sales of instrument care solids and waterless skincare products bolstered by new group purchasing organization contracts drove the sales gains. We continue to extend our penetration within the group purchasing organization and integrated delivery network that are important to Healthcare sales and distribution.

In addition, we are introducing new products this year in waterless surgical hand soaps that will significantly cut surgeon prep time and improve their hygiene. We will also introduce additional instrument disinfection products and products for endoscope cleaning. These will help further broaden our product offering in Healthcare and each will show the product differentiation and customer value that Ecolab is known for. Looking ahead we expect further attractive growth in the second quarter as the fundamental Healthcare business and its outlook remain strong.

Reported Water Care sales rose 33% in the first quarter. Excluding the results of the Midland Research Lab which was acquired in January, Water Care sales rose 6%. Geographic coverage, market breadth, and cross-selling opportunities have been enhanced with the addition of the Midland sales associates as well as an expanded product line. We are investing in training, productivity, tools, and additional sales headcount. We have immediately engaged the Midland associates in our Circle the Customer sales strategy and expect this to help Water Care continue its good momentum and show strong growth in 2005.

Food and beverage sales increased 13% in the first quarter. Excluding the results from Alcide, which was acquired July, 2004, F&B sales increased 3%. Alcide sales were up 50% in the first quarter due to a significant 2004 account win, and as F&B's large sales force continues 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 its SANOVA antimicrobial carcass treatment product line.

We have integrated Alcide's other Gold and SANOVA product lines into Ecolab's agri and meat and poultry businesses. And through this acquisition Ecolab is now the leading Cleaning and Sanitizing supplier to the meat and poultry industry in the U.S.

Dairy plant sales growth softened slightly compared to the recent trends, reflecting a difficult year-on-year comparison and annualization of late 2003 customer gains. The food, soft drink, brewery and agri businesses saw good growth, reflecting new business and the strength of our corporate account relationships. Looking to the second quarter, Food and Beverage with its strengthened offering in the protein market expects to continue to show steady growth as it focuses on customer retention, new account acquisition, and expansion of the SANOVA platform.

Vehicle Care sales grew 14% in the quarter. The robust sales growth was driven by increased market share in the street business, results of an upgraded sales force, and strong gains in the detail market. In addition, the division is utilizing our Circle the Customer strategy by partnering with Food and Beverage and Kay to offer fleet washing services to existing corporate accounts.

During the first quarter, Vehicle Care introduced a new in line detailing product and a new solid detergent. With its focus on securing new business, continuing to make upgrades to the sales force and additional products slated for 2005, Vehicle Care will average its new products and focus on chain accounts to deliver solid sales growth in the second quarter.

U.S. other services sales increased 10% in the first quarter. Pest Elimination sales continue to show good growth, rising 12% in the first 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 multi-unit account in 2004 that will benefit future growth as it continues its gradual rollout in 2005.

The new full-service restaurant program introduced early last year is doing well. Other programs tailored for specific markets, like the bedbug program referred to in today's Wall Street Journal, new interior rodent traps, and pheromone based cockroach baits, have provided better customer penetration and new growth opportunities for pest. The EcoSure quality assurance services business continues to show robust growth as it picks up and new business with major chain accounts. We expect Pest Elimination to show continued good sales gains in the second quarter of 2005.

As noted in the last two quarters, we have continued to see steady improvement in the GCS operations in fundamentals. In the first quarter, GCS delivered on expectations as sales increased a strong 8%. And more encouraging, the operating loss shrank by one-third year-over-year and showed even better sequential improvement. Progress continues to be made in key performance areas including technician productivity and customer satisfaction ratings. In fact, reflecting the gains made in those areas, the first quarter's solid growth came primarily from its existing basic clients. We believe this is a positive indication of existing user satisfaction with GCS Services and a very positive sign for the future.

We remain encouraged by the improving operations. The 100% customer call back program to assure repayer (ph) satisfaction continues to show good results. And the GPS navigation system has been rolled out. We are also investing in proprietary service capabilities that will help chains and manufacturers manage their business better and provide us important market differentiation. And we are also selectively investing in other areas that will provide differentiation, scalability, and enhanced profitability.

We are just beginning our marketing efforts towards chain accounts and expect to realize those benefits in later quarters. We feel the business fundamentals are on the right track and look for GCS to show solid growth and year-over-year profit improvement in the second quarter as well as continue to improve through the second half and into 2006.

Measured in fixed currencies international sales increased 4%. Excluding acquisitions and divestitures, international sales in fixed currencies grew 3%. When measured in U.S. dollars, international sales, excluding acquisitions and divestitures, increased 8%. Europe, Middle East and Africa sales rose 2% at fixed rates in the first quarter. Excluding acquisitions and divestitures, results were slightly higher as solid sales in Eastern, Northern, and Western Europe were offset by lackluster economies in the central countries.

Europe's institutional business rose slightly as new accounts, net customer gains, and good results for new housekeeping and warewashing products modestly offset consumption declines in Central Europe. Institutional continues to drive new product introductions and develop its expanded sales and service headcount, which along with sales initiatives work to offset the impact of slower central country economies and reduced tourism spending.

Food and Beverage sales showed a steady gain as good chemical sales offset lower equipment sales in the quarter. Food and Beverage volume was good despite tough market conditions as consumers shifted to lower-priced food brands. Textile Care sales were flat. Consolidating markets were offset with products that focus on energy and water-savings for the customer. Professional Products sales declined as distributor inventory reduction and continued depressed market conditions weighed hard on results. Distributors reduced inventories in the face of continued weak economies. Customers have also reduced their cleaning frequency. There were no major account losses reported. Healthcare sales were strong as new infection control products, a significant account win, and good trends in the UK and Eastern Europe helped sales growth.

Europe sales -- European Pest Elimination business continues to make good progress. The UK business has grown its new contract at double-digit rates and is establishing a strong sales and service culture that is crucial to the success of the business. In addition, the UK has developed a good add-on business and has begun the rollout of the handheld computer for improved data capture, reporting, and customer billing. The French pest operation is on target with its integration plan and we are developing the right organization and culture to generate consistent long-term growth, adding people and introducing targeted market programs.

We look for Europe's second-quarter fixed currency sales to show modest real growth. As the sales and product initiatives, along with more field sales and service associates, work to offset the soft central European economies. First quarter 2005 Asia-Pacific sales grew 7% in local currencies as strong growth in Japan and East Asia drove the results. Excluding acquisitions and divestitures, sales were up 8%; when reported in U.S. dollars, sales increased 10%.

Looking at the segments, institutional sales showed strong growth as Japan and East Asia drove the increase. East Asia continues to show very strong sales growth in areas like Hong Kong, Taiwan, China, and Thailand. Australia showed more moderate growth. Overall we are seeing stronger fundamentals in the Asia-Pacific institutional market and have achieved important wins in the chain and food retail markets. Food and Beverage also showed good results with Japan again providing strong gains. Japan's growth is being driven by the farm and dairy markets. East Asia also reported robust business as the bottle cleaning business continues to be strong, particularly in China, bolstering good conveyor lube sales. Australia's F&B sales also showed good growth. We expect the second quarter should see continued to solid growth for the Asia-Pacific region.

First-quarter sales for Ecolab's Canadian operations grew 9% in local currency and were up 16% in U.S. dollars. Institutional measured in local currency increased, reflecting an improved hospitality industry. Food and Beverage sales showed solid growth and Textile Care, Kay, and Pest all reported robust gains.

Sales in Latin America were up 15% in local currency and increased 17% when reported in U.S. dollars. Results were strong throughout the region, led by excellent performances in Mexico, Argentina, Chile, and Central America. Overall this was another robust performance by the region. Institutional results were driven by strong tourism markets in Mexico, Central America, and Argentina. Results were also driven by new account gains over the past year and growth in the food retail market.

Food and Beverage results were driven by superb results in Mexico, Chile, and Central America. There continues to be strong demand in the beverage and brewery markets in this region. Pest Elimination continued its aggressive pace in Latin America, recording another double-digit gain for the quarter. Overall we expect healthy growth trends to continue in Latin America in the second quarter.

Turning to the expense side the income statement, the first quarter 2005 gross margin was 50.8%, compared to last year's 51.6%. The 80 basis point decline was due primarily to higher delivered product cost and the less favorable business mix which were partially offset by price increases and cost savings. We continue to be aggressive in pursuing pricing and have been successful in obtaining price increases. However, due to the timing of our raw material contracts which tend to post price increases at the beginning of the year, and the timing of our customer contract renewals, which occur all year long, there will be a lag as pricing catches up with costs. We believe we will see gross margins improve in the second half of 2005.

SG&A expenses were 39.0% (ph) of sales, a decline of 30 basis points from last year. SG&A expenses improved relative to sales, primarily due to sales leverage and aggressive cost savings programs which offset business investments. Ecolab's U.S. Cleaning and Sanitizing operating income was off 1% to 76 million as the benefits of higher sales, cost efficiencies, and increased pricing and promotions were offset by higher deliberate product costs and business mix. Operating income for U.S. other services increased 63% as both Pest Elimination and GCS showed strong profit improvement. As noted, GCS has significantly narrowed its loss compared with both the fourth quarter and year ago periods, benefiting from its higher volume and improved efficiencies in its operations.

International fixed currency operating income rose 4%. Excluding acquisitions and divestitures, fixed currency operating income rose 1% as sales growth, pricing initiatives, and cost efficiencies were partially offset by higher deliberate product costs and business mix. Ecolab's first-quarter consolidated tax rate declined 190 basis points to 35.2% from 37.1% a year ago. The first quarter 2005 includes the benefit of onetime items including a deduction for product contributed to the Tsunami relief efforts and a tax credit for a state settlement. Excluding the onetime items, the tax rate for ongoing operations was 36.2%, which is the rate we expect for the second quarter and full year.

We repurchased 3.6 million shares during the quarter. The net of this activity is that diluted net income per share for the first-quarter was $0.29, up 16% when compared to reported EPS of $0.25 and up 12% over last year's EPS from continuing operations of $0.26, reaching the top end of our forecast of $0.27 to $0.29 range. Looking at the balance sheet, Ecolab's total debt to total capitalization ended the quarter at 35%, down from 37% a year ago but above the 31% recorded at December 31, 2004. This primarily reflected increased short-term debt from the higher share repurchase activity. Depreciation was 56 million in the quarter and amortization was 9 million. Capital spending for the quarter was 58 million.

That's a review of the first-quarter. Looking ahead to the second quarter of 2005 we begin by cautioning these statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include potential impact of business acquisitions, divestitures, higher than anticipated raw material price increases or other material events that may be considered after the date of this webcast. This business outlook section should be considered in conjunction with the information on forward-looking statements in the press release and periodic reports which list factors that may cause results to differ.

In the second quarter we expect institutional to improve on its first-quarter sales growth performance. We look for Pest Elimination, Health Care, GCS, Professional Products, and Water Care to sustain their solid momentum and Kay will likely see growth in the mid to upper single digits. We also expect a better overall performance from international business with the gains led by Latin America and Asia-Pacific regions. As a result we look for diluted earnings per share for the second quarter to be in the $0.32 to $0.33 range, and compare against a very strong year ago period when Ecolab EPS was up 18% and we earned $0.30.

Full year 2005 diluted earnings per share are expected to be in the $1.30 to $1.34 range. Ecolab plans to adopt SFAS 123R, the new standard for expensing stock options when it becomes effective, currently anticipated to be the beginning of 2006. The above forecast for the second 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. Ecolab expects to have these restated results available on Ecolab's website, www.Ecolab.com/investor. A note on upcoming events. We will hold a tour of our booth at the National Restaurant Association show in Chicago on May 23rd. Also we're planning to hold our biennial investor meeting September 8th in St. Paul. We'll have more details on the events in the next week.

Also for your information our CFO, Steve Fritzie, will lead the second quarter call in July as I will be out of the office for the last part of that month. I will return in August to resume the subsequent conference call, so please treat him well in my absence. That concludes my remarks. This conference call will be available for replay on our website through April 29. Operator, please begin the Q&A period.

(OPERATOR INSTRUCTIONS) Robert Koort, Goldman Sachs.

Actually this Amy Zelfer (ph). I'm with Goldman Sachs and I'm calling on behalf of Bob Koort. Actually two quick questions. I noticed that your U.S. cleaning and sanitation margins continued to be weak in first quarter. Just wondering, can you talk further about the key issues in this business? And provide some quantitative analysis regarding the pricing in core U.S. institutional business that accounts for this kind of stuff. And also, what is the outlook for this business in 2005?

That is a few questions. To start off regarding the margins on U.S. Cleaning and Sanitizing, U.S. Cleaning and Sanitizing has the division that sells products utilizing raw materials. As you know, U.S. other services, which includes Pest and GCS, use very few raw materials. So as a result the impact of raw materials hits U.S. C&S the hardest. We've mentioned that raw material pricing hit us pretty much across the board in the first-quarter, whereas our pricing is rolling in as contracts come up over the year. Therefore there is going to be a lag to the pricing whereas the cost increase comes right away. We have all said a lot of this already and we will continue to do so, and expect that you U.S. C&S margins will improve in the second half as our pricing and cost-savings gain more traction.

Okay, thank you. And then a follow-up question about your raw materials outlook in 2005. I just want to know the updates of your budget for raw materials in 2005 and how much pricing do you guys expect in 2005 to offset the raw materials price, or if there is any.

Sure, as you know raw materials represents only about 15 to 20% of our sales and no single raw material represents more than, say, 10% of our purchases. So nothing is particularly large and raw materials is actually not even the largest cost component. The largest cost component for Ecolab is our people which is our true service and product differentiation. With that said, for raw materials we're looking for them to probably be up in the upper single to perhaps maybe double digits range. And as far as pricing, as we said, we are being very aggressive on pricing throughout our organization and we're looking for pricing to at least offset the raw materials this year and we think we will be successful in doing so.

Okay, thank you.

David Begleiter, Deutsche Bank.

Mike, on GCS, what quarter do you expect that business to go into the black?

We have said we thought we would be approaching breakeven in a quarter (ph) or so. I think we are looking for 2006 to be the year it breaks in the black. We had a terrific quarter, David. GCS narrowed its loss by a one-third from a year ago and even more than that on a sequential basis, so it is really showing great trends. As we said, the sales were up and we're seeing great customer satisfaction trends. So we really do think the GCS in on a roll and it is just a matter of time to build toward that profitability which we think will hit by the first quarter.

Just on the costs, you mentioned some cost saving issues in institutional. Can you go through those a little more quantitatively? What can we look for on the cost side in that business?

I think as you know we have undertaken a lean process approach to our business, which is really focused on improving processes. That is the real big hit, the long-term hit for us. Clearly we're going to get cost savings this year. We have not identified any specific targets publicly for cost savings this year. We think we're going to have significant amount, but again they are going to be much more focused I think on the lean approach to process improvement, which gives you not only current savings which drive out waste, but also long-term savings as well.

Just on the pricing front, any competitive reactions, support or otherwise? Is any business being lost as you push aggressive pricing?

No, we have not seen any customer losses due to pricing and as far as competitive activity, it is kind of across the board. Generally I think it has been pretty supportive. I think as you look at our results versus the market, etc., I think we're doing pretty good. So again you're always going to find a pocket here or there, but generally I think that it has been a positive environment. The other thing is remember that we're probably buying our materials cheaper than anybody else in the market. So anybody else who is smaller than us has probably a higher cost structure than we do.

Thank you, Mike.

John McNulty of CSFB.

A couple quick ones. On the GCS business, it sounds like the growth that you have seen is with current customers and you haven't really made a big push yet to really branch out and try to bring in a lot of new customers into this area. Do you think all the problems that you have had in the past have been fixed so that you can start making a big push there, and if so when can we kind of expect to see that?

I don't we would ever be so bold and say all problems. We think we have got clearly the bulk of them done. We're starting the marketing to chain accounts now. As you know, we want to be sure that we had a product that we felt confident in, going to our accounts, we put in place ahead of corporate accounts for GCS. They are partnering with the other divisions and going forward. So I think we're just kind of on the takeoff phase for that marketing effort and they will pick up steam as we go ahead. Clearly we realize we still got more work to do in GCS. It is always going to be continuous improvement there, but we do think we are over the hump and have what we need to go and effectively market to our chain accounts now.

Also can you give us a little color in terms of salesforce increases that you saw in terms of numbers or percentage in the first quarter?

On a year-over-year basis gross headcount is up 7% for sales and service. On an organic basis that is something like 4%. In the first quarter from year end, obviously we didn't do as much because we brought on so many people in the fourth quarter last year.

Okay, and then just one last question. On the pricing side, you had 1% price in the first quarter. It sounds like there is certainly more where that came from, to be expected. What can we expect on a year-over-year basis on price from you looking out over the next few quarters?

I think you'll see us running at 2.

If I am right, that's about double, maybe a little more than double what you normally do. It that about right?

We have been running around 1% the last couple of years.

Great, thanks a lot.

Robert Ottenstein, Morgan Stanley.

Two questions, Mike. On a follow-up on this pricing question, if your pricing is going from 1 to 2%, unless your raw material costs or other costs are going up a lot, you're going to earn a lot more money than the kind of guidance you've got out there. Can you clarify that?

I appreciate your optimism. We do have some other costs that are increasing too, just like anybody else, medical, fuel, and other things. So we do think that this will be positive for Ecolab but I don't think we are at a runaway yet for EPS. We are maintaining some caution on the outlook. We have seen raw materials pop up again in the first quarter, a little more than we expected, and we're just trying to maintain some caution regarding the rest of the year.

On the raw material side, is there any important contracts that rollover throughout the year that have a certain time horizon that you can pinpoint for us that we should be aware of?

I don't think there's any trigger point or milestone, Robert. They are kind of all through the year and I don't think is any particular -- the one thing is on our raw materials, we feel that we have got some good contracts in place to assure supply for us. That is the number one thing. As far as pricing, we think we're getting good pricing. We're doing the standard stuff we have talked about before, reformulations, product substitutions, SKU reduction. We're doing a lot of stuff to try and address this. Knock wood -- we think that we've got some good stuff in place and I don't think we're facing any particular big risks going forward on a contract turnover.

Finally, Europe on the volume side has clearly been disappointing. It has been disappointing for awhile. There are probably long-term structural issues there in the economy and also structural issues and differences from the U.S. business, just in terms of hospitality and restaurant infrastructure over there. Do you think that it is time to review your strategy there and your whole cost to serve that market?

Those are insightful comments about the European economy and the structure of the business, but I think we've already done that. As we have said before, with Europe we have been very aggressive on pursuing the markets in Europe that are growing. We've been very successful in East Europe. We're seeing good growth there. Northern Western Europe, we're doing well there. It is really Germany and Italy, which is kind of hard to avoid if you're going to be in the European market with our customer set. The second thing is, we have been changing the product portfolio in Europe.

Since we bought it, as you have seen, we have introduced Pest Elimination. We have been, I think, pretty aggressive about building that business and it's doing very well. We have expanded our Healthcare business, which is a good growth area for Europe. And we continue to be on the hunt for acquisitions in growth areas to change that product portfolio. And then the other part of it is also, we're going to go where the growth is. We will continue to focus on investing in East Europe and other areas which are higher growth. So I think we're already done that. It is frustrating for us, too, that we have got roughly half our sales in Germany/France/Italy and those are countries which are more mature and slow. But I think that given the customers that we have got, we have to be there and we will just focus on the higher growth areas and markets that we can go after.

How far are along you in Europe in migrating the accounts to higher margin products that was part of the initial strategy?

I think we still have room to go. We have come a long way but we still have room to go in there. Also I think that they have been pretty good about developing higher margin products as well. So I think there is certainly room to grow there in Europe, but again the approach to European growth and margins is going to be, Robert, I think as you have clearly said, looking at the product portfolio which we are enhancing in terms of business portfolio. Also the product portfolio. And then I think as we have talked about in the past, too, working on efficiencies in the European business in terms of the administrative and stuff like that. We think that we've got some good potential there over the next several years to improve it.

Thank you very much, Mike.

Jeff Zekauskas, JP Morgan.

A couple of things. Were there any asset write-downs in the U.S. Other Service in last year's quarter?

No.

Just that the profit change seems -- can you just analyze the profit change relative to the sales growth?

In U.S. Other Services? Well it was good growth out of both Pest Elimination and GCS. As I said, GCS narrowed their loss by one-third from a year ago.

How did they do that?

One thing is we've made major improvements in the back office that we have been working on, so that improved the cost side. And on the topline it grew 8%, which GCS has a lot of fixed cost orientation and you get pretty good leverage out of that. That is one of the reasons as we start to market this in the second half, we think that the profitability will show some sharp improvement. But both Pest and GCS showed good improvement in profit, so there was nothing really funky in last year's quarter.

These are sustainable improvements in your opinion.

We think that we've got sustainable improvement underway in both Pest Elimination -- well particularly GCS, but also continued growth in Pest Elimination.

I'm sorry, I think in answer to a previous question you talked about the percentage change in raw materials for you, in raw material inflation. Could you just say that number again?

I said upper single digits to maybe double-digit.

Upper single to double.

I said maybe double.

So can you go back again to talk about the gross margin compression in the U.S. Cleaning and Sanitizing business? Is it mostly a mix issue or is it mostly a raw material issue?

It is mostly raw. Like we said, basically the raws -- simplistically our raw material contracts all renewed January 1, so you get hit with the cost increases then, as opposed to our customer contracts, which renew every single day. So we don't put in blanket price increases so you can't neatly offset one against the other in a particular quarter. We can do it over time which we are going to do and you'll see that benefit in the second half, but we just can't match it that precisely because we have got a difference in the way the contracts work. Costs come right away for our customers, they're every day.

Just to do a calculation, that business grew at a high single digit rate. So normally the operating profit growth should be somewhere between 6 and 10 million or 6 and 9 million for the fourth quarter, that is. So if you're going to increase prices by a couple of percent, then what that would do is more or less offset the cost inflation. Is that the idea?

Well, our idea on a longer-term basis for pricing is to have pricing at least offset the raw materials plus we hope some more. Secondly, we're undertaking as we said, aggressive cost savings to address that as well. So far we have been very successful in the I think our pricing that we have been able to obtain. And clearly there is a mix in the divisions. Some are a little slower, some are a little faster in getting on that. So I think though that we are making good progress and I think everyone here feels pretty good about it.

So were you disappointed in the U.S. Cleaning and Sanitizing results or you just thought this was timing and that the results were perfectly fine?

Believe me, nobody at Ecolab is happy when you see U.S. C&S come in at a 1% decline, so we're not happy about it. But it is basically what we expected when we laid out our plans for the year. And we said that we think that will probably suffer more -- it suffer as well in the second quarter with U.S. C&S OI being slow. After the second half we look for it to be very good. So it's just this timing between the raw materials and the pricing, if you want to make it a very simplistic message.

Okay, thank you very much.

Bruce Simpson, William Blair.

Mike, not to beat this one to death but one more attempt to try to quantify the raws. Is there a way to say of the X percent -- of the 130 -- 150 basis point decline in operating margins within the U.S. C&S business, that approximately this proportion of it is from raws or don't you want to be pinned down and breaking it that fine?

I am thinking. Most of it, more than half, would be the raw materials, two-thirds.

So if you said in the past that -- of U.S. C&S, I think you said between 15 to 20% is the raw material costs. And just for the sake of argument take the more aggressive side and say 20%. And then would I be right in thinking that you said roughly high single, low double year-over-year price hikes? Did that all begin on January 1 rather than influencing the fourth quarter?

First of all, remember when we talk about the 15 to 20% we are talking about consolidated Ecolab, and that includes obviously international is a different mix, and other services which has a very different mix of raw materials. So that is a consolidated basis. And as far as the raw material costs, as you know they just keep coming in every month. So we have got hit coming into the year and then in the first quarter we got additional costs increases. We are handling those. We are addressing those through our pricing, cost savings, etc. While we did get additional costs in, we think that we have got the plans in place to offset those. We feel very comfortable with that and we feel confident in our outlook. So again it is not what anybody wanted, but I think that given what we've got we're doing a pretty good job and I think we will be successful in handling them.

I agree and I'm just trying to get my arms around quantifying it. So when you say high single or perhaps into doubles, you're just talking about first quarter 2005 over first quarter 2004. Would that be right?

No, full year. It was less in the first quarter. I'm talking about a full year impact.

That is your estimate for pricing for all of '05 over all of '04 for raw materials?

Correct.

Okay. And the other thing, I wonder if you can look forward to your move into the new R&D center. Is that already priced into your EPS guidance for June or is it just not material, or will be not until the third quarter?

It is it no big deal. It is in all of our numbers. As you know, we purchased this facility for 17 million. We're going to put another 30 million or something of capital into it to turn it into an R&D lab, so it's not that much. We have already started moving some people in, so it is hardly anything.

Okay, and the last thing, we you look at the institutional business in Kay, where are you getting better demand trends reflecting overall foodservice? It is coming from Kay and quick service restaurants or is it coming from fine dining?

Well if you just look at the percentage numbers, Kay is up (indiscernible), that is the QSR market. I don't know. I hadn't thought about that question, Bruce.

Okay, I will circle up with it later.

Part of it is the full-service restaurant is a much bigger market than say QSR. I would have to think about the answer. It would not be fair to give one right now.

Okay, thanks.

PJ Juvekar, Citigroup Smith Barney.

A question on share buyback. My impression was that you're doing most of that to offset dilution from options. It seems like you have accelerated the buyback. Could you just talk about what you expect for the rest of the year?

Normally what we do is we set out to offset option dilution every year, which really runs about 4 to 5 million shares. And so I think this year, I would expect, will be somewhere in the same range. Part of the reason was, as you know the S&P had the re-weighting (ph), so we saw some opportunities to buy some shares in the first quarter.

Do you expect similar plays for the rest of the year?

What we have said is we look to 4 to 5 million shares a year, so I think at this point that is our best shot for what we planned to repurchase this year.

Okay. For the last couple of quarters you have talked about less favorable business mix in North America. Could you just compare margins in your different businesses, Cleaning and Sanitizing, and tell us where this lower businesses mix is coming from?

Well, it had to do with -- in part, it had to do Kay as they brought on a new customer. There was some upfront costs in bringing that customer on. So it was kind of basically that customer coming online, and then some timing differences at another division in terms of their customer mix and the timing of the pricing. Like I said, some of the divisions are ahead, some are little bit behind. So one of the divisions is a little behind in that and there's a timing difference there.

Do the higher growth businesses have low margins? Is that what is causing this mix shift?

No, it doesn't necessarily. Typically the larger, more mature businesses you would think would have higher margins. The smaller businesses and newer business have lower margins, but they're also showing some of the stronger earnings growth as well.

Okay, thank you.

Jeff Cianci, UBS.

Hey, Mike. Just want to explore the whole marketshare thing. I'm wondering if some of this price lag, if you will, may be resulting in some share gain. You pointed out that some of the smaller competitors have also -- are feeling the cost squeeze and maybe they don't have the same raw material ability you do. So can you comment? Has the share moved upwards at all? Is this an opportunity for you to gain share?

Well, first of all I think that based on the numbers that you look at that are publicly available in terms of the markets, competitors, etc., I would say it looks like Ecolab continues to gain marketshare. But this is not something where we're going to use price as a weapon to pick up a lot of share. We're going to price appropriately to our business, to our value offering to customers and we are going to compete more on that service level than we are on any other level.

It would seem like an opportunity though. That is just the stated objective that Doug says, let's not do that? So the share gain is more of a -- the customers you're after are not price sensitive. Is that what you are saying?

That's a good point, Jeff. We'll take it under consideration.

There you go. Thanks, Mike.

Dmitry Silverstein, Longbow Research.

Good morning. A couple of questions. Can you talk about the institutional business? You mentioned that part of that 4% growth came from price. How much pricing was there in institutional sales?

First of all, if you adjust for acquisitions and divestitures, it was up 5%, and institutional was similar to the overall price increase of around 1 in the first quarter.

So you're getting similar price increases across most of your businesses and there's not one part of your business where the customers are accepting more of a price increase than another?

It varies by division, but overall, yes, 1% is pretty much it.

Looking, if I'm doing math right here, your international margins were pretty flat year-over-year, maybe 10 basis points or so higher. What were the margins like in Europe versus the rest of the world? Was there a margin improvement offset by lower margins elsewhere, or was it pretty steady across your various geographies?

They're pretty steady.

So across these geographies, the margins were pretty flat but maybe a slight upward bias?

Yes.

Thank you very much, that's all I had.

(OPERATOR INSTRUCTIONS) Rosemarie Morbelli, Ingalls and Snyder.

Hi, Michael. When we looked -- still going back to pricing and your ability of doing so, did I understand properly and did you say that while you get your raw material cost increases almost on a monthly basis nowadays, you increase pricing only once a year when your contracts expire?

No, it is kind of the other way around. Our contracts come up every day. We have no set date for a contract. We have no blanket pricing. It's just with every customer, it's a different contract, it renews on a different day. Typically on the raw materials, what we were seeing was their annual or multiyear contracts that typically had annual or quarterly price changes.

So shouldn't that allow you to catch up with your raw material cost increases without any lag whatsoever?

We're getting cost increases more often. You guys see that in the papers even more than we do that, but they're just kind of rolling in all the time now. The thing was that we were trying to say is that we got a big hit when our contracts ran off last year, around the beginning of the year there is a big increase. We continue to get some increases and it's just a lag for us to put our pricing through to all our customers. And so what we've said is, there would be a lag through the first half but you'll see the benefits in the second half and that is why we look for margins to improve for U.S. C&S in the second half of the year.

All right, still not very clear today, but forget that. As you're looking at selling price increases and margin improvement, do you expect to end the year with the same margin for Cleaning and Sanitizing for this year same as last year, 16.2%, even though it was substantially lower in the first quarter?

Yes, we do.

Any chance that you can actually improve that margin versus '04?

There is always a chance, but right now our objective is to get it even.

Okay, so it is not --.

And you know Ecolab.

It is not in the cards, I know. And you like to surprise us.

Well, we will drive for more.

You have only a one penny difference -- I mean, not difference -- range for the second quarter. Your estimate is for $0.32 to $0.33, but you have $0.09 for the full year. What are your assumptions at both ends of that particular range?

It is a $0.04 range for the year, $1.30 to $1.34.

I'm sorry, I heard 39 which is why I thought it was rather huge.

No, it is clearly $1.30 to $1.34.

Okay, so nothing -- it is mostly a question of passing through those selling price increases. Is that what is viable between the two ends?

I'm not clear on that question. Could you rephrase it?

I'm not sure I can do that more precisely. I am just wondering what is the difference? If you look at $1.30 are you assuming that you'll get, for example, 1% price increase and at $1.34 you'll get your 2% and then some? Or is there a difference in the savings and the efficiencies when you look at either end? You must have some assumptions for $1.30 and some assumptions for $1.34.

I don't think you can boil it down to one criteria, Rosemarie. It is a mix of things. We are looking at a lot of different things going on. You're looking at European growth. You're looking at pricing. You're looking at costs. You're looking at cost savings. There is a whole mix in there and when we add them all up, that's what we are looking for. Typically the second half of the year represents a little bit more of earnings, 50, 55% of our EPS. So I think that it is all pretty consistent with past patterns and the range simply reflects the mix of the various things we're looking at.

Okay, and then the last two quick questions. Vehicle Care, at 14% this is quite strong versus historical growth of that business, isn't it?

Absolutely.

Where did that growth come from and is that business profitable as we speak?

Very clearly, it is important to point out that Vehicle Care, while it may have differing sales growth rates over the quarter, it has consistently improved its profitability over the quarter. It had a very good quarter. This time we think that part of it is because of the better sales force and the work that they have done in developing the detail market and the car dealership markets. So those have done well. But at the end of the day, it is still a lot of the conveyor business too. I think it is good progress. We hope the progress continues with Vehicle Care, but I don't think we're ready to sign up yet for consistent double-digit sales growth yet, although they do have a lot of good things in place, that will hopefully get them there soon.

Is this the first quarter of this kind of growth? Your memory is better than mine.

I think they have had double-digit growth in past quarters.

Okay, so on a nine-year-old basis, what is a reasonable kind of growth rate for that particular piece of your business?

What we want to develop with them is double-digit sales growth. And we think that they've got the strategies in place now, particularly if they go after -- they are going to be entering the fleet market both for Ecolab customer type fleets, as well as national car sales firms and fleets like that. So we think there are some elements in place that give them a pretty good shot to get there. But the most important thing about Vehicle Care I think, Rosemarie, is to recognize that as profits have continued to improve, they've done a great job on the bottom line. The profits have steadily improved in that business. Even when the sales growth may not have been there, they continue to improve profitability.

You said they are targeting a different market, which is why they are being more successful then what your previous strategy was. Am I correct?

I think it is in addition to the strategy. They are continuing to focus on the in-bay and the conveyor market. But they are adding onto these other markets, which I think is the right thing for them to do to broaden their markets and diminish some of the weather impacts and seasonality.

Okay, and lastly do you have an estimate for the impact of FAS 123?

I think it would be around $0.08 a share.

Thanks a lot.

Thank you. For those who are still on, in answer to Bruce's question regarding the difference between a full-service restaurant and QSR, they are growing around the same.

At this time we have no further questions.

If there are no other questions, thank you much for your attention and have a good afternoon.

This concludes today's conference. You may disconnect at this time.