藝康 (ECL) 2005 Q2 法說會逐字稿

Welcome to the Ecolab's second quarter 2005 earnings release conference call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. To ask a question at that time please press star one.

Today's conference is being recorded. If you have any objections you may disconnect at this time.

I would like to turn the call over to Mr. Steve Fritze, Chief Financial Officer. Please begin, sir.

Hello, everyone, and thanks for joining us. This Steve Fritze, Ecolab's CFO pinch hitting for Mike Monahan who is on a questionable vacation in Australia where his wife is making a keynote address at an international conference.

As you will recall, Mike indicated this would happen at the end of the last conference call with his parting instructions to be nice to me. So enough kidding around.

Before we get going I do, however, want to remind you that this webcast teleconference includes 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 Form 10-K and 10-Q under the heading, "Forward-looking Statements and Risk Factors' and in our second quarter earnings release. A copy of our earnings release is available on our Ecolab's Web site at ecolabcom/investor.

Now on to the numbers.

Ecolab once again delivered on its forecast of second quarter 2005 EPS rose double-digits to hit the top end of our $0.32 to $0.33 forecasted range. We saw robust sales trends in the U.S. and Latin America with good gains in Canada and Asia Pacific.

Our businesses executed well rolling out a number of new products and programs while making additional progress in our pricing and cost savings initiative.

As expected, the GCS turnaround continued as GCS delivered another quarter of good sales growth and improved profitability. It is on track and its outlook is strong.

We remain committed to our aggressive growth objectives. And though the raw material environment of 2005 and the soft European economies have 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 for strong future results.

Our ongoing investments in sales force hiring and training, new products and technology, are important to ensure future growth and underscore our commitment to building for the long-term while at the same time delivering good growth in 2005.

We are optimistic about our prospects and believe we are on target for another year of good growth in 2005. As a result, we're raising our full-year 2005 earnings estimate to $1.32 to $1.35 range.

Turning to the details, Ecolab's consolidated sales for the second quarter rose 11%. Looking at the components, volume and mix was up 5%, pricing was up 2%, acquisitions and divestitures were up 1%, and currency was 3%.

Sales for U.S. Cleaning and Sanitizing operations increased a robust 10%. Excluding acquisitions and divestitures sales grew 8%. This was the sixth consecutive quarter of improvement in the organic sales growth rate for the U.S. Cleaning and Sanitizing.

Reported U.S. Institutional sales growth accelerated from the first quarter rate growing 10% in the second quarter. Sales were helped by customers ordering in advance of the busy 4th of July holiday weekend.

The various end market segments, including restaurant, lodging, and travel markets continued to show good growth. As usual, Institutional set the industry pace as a focus on food safety, effective sales programs and promotions, and good competitive gains led the quarter.

Institutional has also been aggressive in addressing the higher cost environment, implementing comprehensive cost savings initiatives and pricing in the quarter. We continue to generate good growth momentum from new programs launched in 2004 as well as an acceleration from 2005 programs.

These new programs include the 360 Degrees of Protection program which provides customers with a comprehensive program combining the full range of Ecolab products and services to deliver enhanced food safety and lower customer operating costs, as well as an innovative food contact sanitizer which is easier to use and provides higher efficacy over a broader application range.

Looking ahead, the strong product line, improved marketing programs, enhanced field sales force, and a continued growth in our major markets all bode well for us in 2005. We plan to leverage this in the second half of 2005 through aggressive selling and a focus on improving our customer service and sales force productivity.

We expect Institutional to show good sales growth again in the third quarter although potentially below the very robust levels delivered in the second quarter.

As expected and discussed in the last teleconference call, Kay sales growth moderated in the second quarter rising 5%. Second quarter results were negatively impacted by first quarter's promotional activity and the comparison to last year's second quarter where results included our initial sales to a major new account. Adjusting for those impacts, sales would have again increased double-digits.

Leading the quarter were Kay's food retail and warehouse club sales. Kay also enjoyed new account gains in the broader QSR market in the fast casual restaurant chains providing more effective field sales coverage.

QSR's underlying business remains solid with good ongoing demand for major existing and new fast-food chain accounts. The food retail business continues to do very well as rollouts continued with major grocers and new chains were signed up.

New products and programs also bolstered Kay's results. We expect Kay's sales growth to accelerate through the second half of 2005 despite facing very tough growth comparisons and end the year in a strong fashion.

Textile Care sales were up 6% in the quarter as growth with existing accounts, new business, and better account retention enabled Textile Care to offset a soft market and annualization against a major new customer roll out last year.

Textile Care continues to focus on account retention and penetration, account profitability, and improving service levels. We believe these will offset the mature market and we look for modest gains in the third quarter.

Professional product sales grew modestly in the second quarter, although excluding acquisitions, professional product sales declined slightly as new product introductions and growth in corporate account sales were offset by slower distributor sales. We continue to focus on growing our corporate account business in the janitorial market with an emphasis on the retail, Healthcare, and building service contractor segments.

New products include Bright FX, a complete bundle of floor care products designed to actually whiten the appearance of floors for retail stores, as well as a line of ultra durable floor finishes that offer improved wear resistance and reduce maintenance. We expect Professional Products third quarter sales growth to improve as corporate account wins in our key market segments and an emphasis on our retail and ultra durable floor finish offerings drive sales.

Second quarter sales for the Healthcare division rose a strong 22%. Good sales of instrument care solids and waterless and antibacterial skin care products bolstered by new group purchasing organization contracts signed later last year which helped sales.

We continue to extend our penetration within the GPO and integrated delivery networks that are important to the Healthcare sales and distribution. In addition, we have introduced our new waterless surgical scrub and we'll be introducing a new multiple enzyme detergent for use in the manual cleaning of endoscopes and surgical instruments.

This product will be a line extension to our current line of liquid surgical instrument cleaners. These will help further broaden our product offering in both the operating room and sterile processing segment of the Healthcare market.

Looking ahead we expect further attractive growth in the third quarter as our hygiene opportunities within the Healthcare business remain strong.

Reported Water Care sales rose 29% in the second quarter. Excluding the results of the Midland Research Labs acquisition in January, Water Care sales were flat.

However, 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 to customer sales strategy and, therefore, expect this to help Water Care continue its good momentum and show strong growth in the second half of 2005, both from the underlying business and Midland.

Food and Beverage sales increased 14% in the second quarter. Excluding the results from Alcide side, which was acquired in July 2004, F&B sales increased 5%.

Alcide sales were up 12% in the second quarter due to a significant 2004 account win and as our 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 Synova antimicrobial carcass treatment product line. We have integrate Alcide's UDDERgold and Synova product lines into Ecolab's eggery 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 was very good reflecting better penetration of accounts with existing and new products like [Accelerate]. The food, soft drink and beverage businesses also saw good growth reflecting new business in the strength of our corporate account relationships.

Looking to the third quarter, Food and Beverage with a 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 Synova platform.

Vehicle Care sales grew 13% in the quarter. The robust sales growth was driven by increased market share in the street business, the result of the upgraded sales force and strong gains in the detail market.

In addition, the division is starting to utilize our circle the customer strategy by partnering with Food and Beverage and Kay to offer fleet washing services to existing corporate accounts. During the second quarter Vehicle Care introduced Rain-X Online, a product to be used by conveyor and in-bay car washes to add an innovated and differentiated surface protectant designed to repel water and deliver high shine and protection to the entire car.

With its focus on securing new business, upgrading its sales force, leveraging new products and focusing on chain accounts, Vehicle Care expects to deliver solid sales growth in the third quarter.

Next, U.S. Other Services sales increased 12% in the second quarter. Test elimination sales continue to show good growth rising 13%. Business remains solid for Pest Elimination. New account activity remains strong.

Programs tailored for specific markets like the bed bug program, new interior rodent traps, and pheromone-based cockroach bait have provided better customer penetration and new growth opportunities for Pest Elimination. In addition, the Eco-Sure quality assurance services business continues to show strong growth as it picks up new business with major chain accounts.

We expect Pest Elimination to show continued sales gains in the third quarter of 2005.

Continuing at very positive trend, GCS reported another quarter of good improvement in its operations and importantly its fundamentals. In the second quarter GCS delivered on expectations as sales increased a strong 10%.

Even more encouraging, the operating loss shrinked by nearly half year-over-year and showed good sequential improvement in addition. GCS continues to show strong performance in key areas including customer satisfaction ratings, technician productivity and line profitability.

Reflecting the gains made in those areas the second quarter solid sales growth came primarily from its existing base of customers. This is a positive indication of the existing user satisfaction with GCS service and a very positive sign for the future.

We remain encouraged by the improving operations. The 100% call-back program to assure repair satisfaction continues to show good results. And the GPS navigation system has been rolled out and is yielding benefits.

We launched Uni-Track, the database for our customers that documents the equipment in their operations and provides a complete repair history so they can better manage their expenses, and we are also selectively investing in other areas that will provide differentiation, scalability, and enhanced profitability.

Our marketing effort to our chain accounts is underway and the pipeline is filling and looking strong. We are effectively addressing chain customers desires to get their arms around repair spending that, due to the prior absence of a national provider, was previously viewed as an uncontrolled expenditure at the local level.

With its national coverage GCS is offering chains greater control as well as the database information to understand their cost and benchmark them for improved operating efficiency. The GCS business fundamentals are on the right track and we look for GCS to continue its solid growth and year-over-year profit improvement in the second half of 2005 and into 2006.

Europe, Middle East, and Africa sales rose 3% in the second quarter at fixed currency rates, as solid sales in Eastern and Northern Europe were offset by lackluster economies in major countries. Europe's Institutional sales rose modestly as new accounts, new sales channels, and continued good results from new housekeeping and wear washing products offset consumption declines in major countries.

Institutional continues to drive new product introductions and develop its expanded sales and service headcount, which along with sales initiatives worked to offset the initiative of slower economies and reduced tourism spending in Germany and Italy.

Food and Beverage sales showed a steady growth rate as solid chemical sales growth more than offset lower equipment sales in the third quarter. Food and Beverage volume was good despite tough market conditions.

Account wins in Eastern Europe and the U.K., which benefited from new product introductions, more than offset plant consolidation and a consumer shift to lower price food brands which hurt demand.

Textile Care sales rose slightly as consolidating markets were offset with products that focus on energy and water savings for the customer. Professional product sales rose slightly as gains in the Healthcare industry and gains with large customers offset continued difficult market conditions.

Healthcare sales rose modestly as the benefits of new infection control products, the significant contract win, and good trends in the U.K. and Eastern Europe were partial offset by slower German results.

The European Pest Elimination business continues to make good progress. The U.K. business continues to grow its new contracts and has established a strong sales and service culture that is crucial to the success of the business.

In addition, the U.K. has developed a good add-on business and the rollout of hand-held computers for improved data capture reporting. And finally, customer billing should be complete by year-end.

The French Pest Elimination operation is on target with its integration plan and we are developing the right organization and culture to generate consistent long-growth adding people and introducing targeted market programs. Like the U.K. before it, service is protocols are being upgraded and a strengthened sales organization with more effective tools is being developed.

We look forward for Europe's third quarter fixed currency sales to again show modest real growth as sales and product initiatives along with more field sales and service associates work to offset soft major European economies.

Next, second quarter 2005 Asia Pacific sales grew 6% in local currencies as growth in Australia and East Asia drove the results. When reported in U.S. dollar sales increased 11%.

From a divisional perspective, Institutional sales showed solid growth. East Asia continued its strong sales growth of especially in high potential countries such as China, Thailand, and Taiwan. We achieved important account wins in chain restaurants and hotels as well as food retail markets.

Food and Beverage also showed good growth as Australia and East Asia performed very well. Both the beverage and brewery sectors continued to show good growth particularly in Australia.

The division overall has benefited from increased product penetration and account gains. With good momentum throughout the region, we expect the solid growth trends to continue in the third quarter for the Asia Pacific region.

Second quarter sales for Ecolab's Canadian operations grew 5% in local currency and were up 15% in U.S. dollars. Institutional sales measured in fixed currency increased modestly. Food and Beverage sales showed solid growth, and Professional Products and Pest Elimination reported robust sales gain.

Sales in Latin America were up a strong 15% in local currencies, and increased 20% when reported in U.S. dollars. Results were strong throughout the region and were led by excellent performances in Mexico, Argentina, Chile, and Central America.

Institutional growth was driven by new account gains and solid account penetration. Institutional continues to benefit from new account gains over the past year, strong tourism markets in Mexico and Central America and growth in the food retail market.

Food and Beverage results were driven by strong demand in the beverage and brewery markets.

Pest Elimination continued its very aggressive pace in Latin America recording yet another outstanding double-digit gain for the quarter. Over all, we expect healthy growth trends to continue in Latin America in the third quarter.

Turning to the expense side of the income statement.

The second quarter 2005 gross margin was 50.7% compared to last year's 51.6%. The 90 basis point decline was due primarily to higher delivered product costs 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. We saw a significant pickup in the second quarter pricing relative to the first quarter, and expect gross margins to improve in the second half of 2005 as pricing catches up with increased raw material costs that have affected us since the start of the year.

SG&A expenses were 38.1% of net sales. This was a decline of 50 basis points from last year. The SG&A expense ratio improved primarily due to the impact of pricing, sales leverage, and aggressive cost savings programs, not reductions in sales headcount or R&D programs.

Ecolab's United States Cleaning and Sanitizing operating income increased 3% to 77 million, as the benefits of higher sales cost efficiencies and increased pricing were partially offset by higher delivered product costs. Operating income for U.S. Other Services increased 38% as both Pest Elimination and GCS showed strong profit improvement.

As noted, GCS again significantly narrowed its loss compared with both the first quarter and the year-ago period benefiting from its higher volume as well as its improved operating efficiencies.

International fixed currency operating income rose 2% as sales growth, pricing initiative, and cost efficiencies were partially offset by a higher delivered product costs and business mix.

Ecolab's second quarter consolidated tax rate declined 170 basis points to 35.5% from 37.2% a year ago, primarily reflecting tax savings efforts and international mix. The effective income tax rate estimate for the full-year of 2005 was reduced to 35.8% from 36.2% in the first quarter.

We did not repurchase shares during the second quarter, however, for the first six months of 2005 we have repurchased 3.6 million shares and are ahead of our normal repurchase pace. The net of this activity was a diluted net income per share for the second quarter reached the top end of our forecasted of 32 to $0.33 range, up 10% to $0.33.

Looking at the balance sheet, Ecolab's total debt to total capitalization ended the quarter at 33%, down from 34% a year ago, but above the 31% recorded at December 31, 2004. The increase from year end is primarily due to increased short-term debt from higher first quarter share repurchase activity.

Depreciation was 57 million in the quarter, and amortization was 9 million. Capital spending for the quarter was 71 million. We also had had good performances in working capital with both DSO and DOH showing good trend.

That's the review of the second quarter. Looking ahead to the third quarter of 2005 we begin by cautioning that 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, higher than anticipated raw material price increases, or other material events that may occur after the date of this webcast.

This business outlook section should be considered in conjunction with the information on the forward-looking statements in our press release and periodic reports which list factors that may cause results to differ.

In the third quarter we look for our U.S. businesses to show further solid momentum. We also expect a better overall sales performance from our international business with the gains led by Latin America and the Asia Pacific regions.

As a result, we look for diluted earnings per share for the third quarter to be in the $0.39 to $0.40 per share range compared against the $0.36 earned last year. We believe our outlook for the full-year 2005 remains solid.

A clearer raw material picture, good business trends, and traction in our pricing and cost savings efforts contributed to our slightly raising our full-year forecast range from diluted earnings per share of $1.32 to $1.35 from the prior $1.30 to $1.34 range. As this implies we expect a very strong fourth quarter increase which also reflects an easy comparison to last year when additional investment activity affected earnings. We caution against raising 2005 estimates beyond our new range.

A note on upcoming Ecolab events.

We are planning to hold our biannual investor meeting September 8th in St. Paul. Please contact Nicole at Mike Monahan's office for sign-up and details.

That concludes my remarks. This conference call will be available for replay on our Web site through August 5. Operator, please begin the question-and-answer period.

Thank you, sir. We will now begin the question-and-answer session. [Operator instructions] One moment, please, for the first question. Our first question comes from David Begleiter with Deutsche Bank. You may ask your question.

Thank you. Hello, Steve, how are you?

Hi, David.

You mentioned there was some pre-buying ahead of the July 4th holiday. Could you expand on that? How much you think was pulled into Q2 form Q3?

Well, it's hard to quantify that. It's just the way the weekend and the number of days of the holiday was this year. So we saw strong sales as a result of that, but it's hard to put a real number on it, Dave.

Fair enough. And just pricing, Steve, you mentioned you expect an acceleration picked up in Q2 versus Q1. Would you expect a further acceleration in Q3 and are you offsetting raw materials yet with your pricing?

Yeah, effectively in the, you know, from a margin basis that answers no. In terms of offsetting from a dollar basis we did in the second quarter. It was very close.

I'm not going to say we're going to hit 3% pricing so I think 2% is the answer, it just is, whether it's 2.4% versus 2.0%. So, yes, I do expect us to continue to accelerate pricing.

And last, Steve, just on your cost reduction, where have you targeted your cost reduction actions?

The cost reduction action is really, I guess largely you could say it's a customer focused endeavor. It's really about how do we create capacity in the business to better support our customers, whether it's in our administrative areas, whether it's in our production areas.

It's really pretty much throughout the business and what it is a lean program. It's really focused on business processes and how to make them more effective, make us easier to do business, drive out waste. It's been a really good program.

Thank you very much.

Our next question comes from P. J. Juvekar with Smith Barney. You may ask your question.

Good afternoon, Steve.

Hi, P.J.

I think Mike could have done this call from Australia at 3:00 in the morning?

I'm glad this is recorded so he can hear that comment.

For the past few quarters you've talked about higher delivered costs. Let me just go into a little bit more detail how much of that is gasoline or energy versus any other costs?

Well it's hard to split out what's going on in the chemical markets and what's causing what here. Is it petro-based, or is it just simply high global demand for some of the chemistry that's part of our, you know, part of the inputs into our products?

This is something that we saw starting in global markets basically in the third quarter a year ago. We basically didn't see much of an impact. In fact, none in third quarter and very small in the fourth quarter. But it's really more of a supply and demand thing.

Yes, fuel costs impact our service vehicles and the like, but that really isn't the driving factor of what's going on. It's really chemicals and it's really global demand.

Can you give us an update on the 600 field people that you hired last year? When do you think they'll start contributing to the bottom line?

To some extent you can see the sales growth acceleration so I'm sure some are coming on line now, but in addition to that there's, you know, we've in the past basically said that, hey, by the end of the year they're really going full bore.

By end of '05.

Yes. If they were hired in the fourth quarter a year ago.

Does that mean [they] become profitable by end of '05?

We've been hiring consistently, and still are. In fact, our headcount quarter-over-quarter each of the last couple of quarters has been up about 1%. So we're continuing on an organic trend that towards 4% headcount increase again this year. So we're really investing in the business.

Okay. Thank you.

Yep.

Our next question comes from Robert Ottenstein with Morgan Stanley. You may ask your question.

Thank you. Steve, can you give us a little bit more color in terms of GCS profitability, and kind of give us a sense of when you think those breakeven?

Yeah, even at the start of the year, maybe even late last year, we were talking about trying to get to a breakeven run rate by the end of this year. We are clearly on course to do that. The profitability has been improving both every quarter sequentially as well as strongly year-over-year. There's a lot of good news coming out of GCS, whether it's technician profitability, whether it's customer satisfaction, so we feel really good about that business, Robert.

So you're saying Q4?

Yep. I said by year end, not Q4.

Okay.

Just to be clear.

So it could be --

By year-end.

Could be Q3. And can you give us a sense of given the infrastructure that you have in place, how fast you think you can absorb new sales, where the sales could be three years out and what kind of operating leverage that business has?

We think we have pretty good, I mean, that's what we've really shown here during the current year, that we have significant business leverage opportunities in terms of technician productivity as long as we're able to more effectively dispatch them and help support the technician in the field to make them more productive, and, you know, we put the tools in place to help do that so we think that there's significant room yet to improve that productivity by making their job easier.

Right. So what do you see sales being there three years from now? What kind of margins do you think that business can generate?

Robert, I don't have a three-year target. I can tell you this, on the long-term, this is a huge business opportunity for Ecolab.

It's been said the market is about $3 billion in size. I expect it's going to have strong sales growth and, you know, we'll end up with double-digit operating margins, but we don't have a precise timetable to do that.

I guess, you know, what I'm trying to get at is there any kind of point where, because of all the corporate sales that are coming on, you could have extremely high growth, 20, 30% a year, or is it more like most of your other businesses in which it'd be really tough to get much more than 15, 20% growth in a year?

20 to 30%, Robert, sounds great but I can't sign up for anything like that. I think it will be good double-digit growth.

Okay. Thanks a lot.

Yep.

Our next question comes from John McNulty with CSFB. Sir, you may ask your question.

Hi, Steve. Just a couple of quick.

Did we lose you?

One moment, sir. Mr. McNulty, your line is open, sir.

Great. Thanks a lot. Just a couple of quick questions. In the area of pricing you had said you put through 2% price increases. What's been the competitive response, or what are you seeing from your competitors with their raw materials also kind of coming under pressure at this point?

First of all, we didn't put through a 2%, just to make sure everybody else on the call understands, and I know you do, John. Basically we didn't put through a 2% price increase.

What we are is, we have contracts of every duration possible with our customers and basically as those contracts are rolling over we're increasing pricing. So the net effect is the 2% that we're talking about.

Sure.

And that will continue. And then the question regarding competition, you know, I don't have a good view into competitive raw material costs, but I'm pretty confident that as the largest business in this space that we're getting very competitive raw material costs. I would suspect the smaller competitors are struggling with their cost structure more than Ecolab.

Have you seen price increases similar to yours, or, you know, even greater than that from your competitors?

Yeah, I understand they have a tendency to follow Ecolab given that we're number one in the space.

Okay. That's helpful. With regard to your balance sheet, you're obviously at this point I think you're below and actually well below kind of the leverage targets that you, I know you've outlined in the past.

Yep.

How low does it get before we see maybe a more aggressive share repurchase program? I know you want to save some powder for acquisitions, but until those come along, when can we maybe see an even more aggressive share repurchase plan?

Well it made it down to 31% that cap at year-end and it's now at what, 33. This is, it's really an issue of lumpy acquisition. We have a good robust pipeline, we continue to work that area very aggressively because it's a good part of our growth.

We already have the strong customer franchise that kind of bonded trust between Ecolab and the customer that allows us to provide those additional services, so we are at this point, kind of keeping the powder dry and I wouldn't expect that there's going to be a recap or a major share repurchase program. I doubt that that will be the answer.

Okay. And the last area, in terms of your guidance and what you're looking for, for the rest of the year, what are your euro expectations for that?

Yeah, it's around 1.20.

Great. Thanks a lot. I appreciate it.

Our next question comes from Bruce Simpson. Sir, you may ask your question.

Thank you. Hey, Steve, returning to GCS, can you tell us the profit impact in the quarter?

Meaning the loss in the quarter?

Yeah.

Yeah, we typically don't disclose that, but it's starting to get to a relatively low number. You know the rate that we were going at last year, kind of the loss of $15 million plus. Assume that we're cutting that in half.

Okay. And what's the run rate there now? In full-year revenue run rate.

Revenue run rate let's see here. About 135 million.

Okay. And then is there any way for us to quantify the contribution of cross-sell to the organic growth rate?

You know, it's so embedded in the business, I don't know how you would quantify that. It's a key part of our growth story. It's being able to bring the GCS into the customer account. It's being able to bring Pest Elimination to the Food and Beverage and quick service restaurant accounts and full-service. It's part of Ecolab. Starting with that trust foundation from our mainline businesses, whether it's Institutional, Food and Beverage, or Kay.

Okay. Steve, just one quick thing on international operating margins.

Yes.

It seems like the progress towards a 50 basis point year-over-year improvement might get stalled this year and I guess that's probably from sluggishness in Europe. Is that still kind of an accurate long-term target or does that depend upon stronger international growth?

It's clearly a good longer term target and we have, in a number of years, exceeded that target, so it's a target that we've been achieving and exceeding. This might be a year where we don't get there.

Okay. The last thing is just I wonder if the, is it true that the strength in the brewery market in Australia had anything to do with Monahan being there?

You know, the moment you started that, I knew where you were going. I will interrogate him upon his arrival here and find out and let you know.

Good.

Our next question comes from Jeff Zekauskas with JP Morgan. You may ask your question.

Hi. Actually this is Theresa Kolmonares for Jeff Zekauskas. Just a clarification. For U.S. Cleaning and Sanitizing, for Professional Products I don't think you actually gave the percentage of sales growth, and you did mention that with acquisition and divestitures there may have been a decrease. Could you have actual percentage numbers in both areas?

It's pretty flattish.

Whether it's the growth or excluding acquisitions and divestitures? Is that right? Hello?

Yes.

Sorry.

No, it's pretty close to flat.

Okay. That's basically it.

Yes.

Thank you.

Our next question comes from Jeffrey Cianci. You may ask your question.

Hey, Steve. Just looking at the time seasonality, if you will, international tends to be stronger income in the second half, and I'm just wondering if there's any mix shift going on this year, or trends over time, are you seeing better growth in Latin America than maybe Asia? Maybe there's a mix shift there? Is the pest control business higher margins? Is there anything you can describe scribe to maybe help us looking forward international mix and effect the margins?

I think the real story, Latin America that whole region of the world is really hopping and doing well, and so is our business. And yet Asia Pacific is doing pretty darn well also.

Kind of the story is the fact that Europe is growing a little bit slower and it's really kind of those central countries that we think that the business prospects in both Latin America and Asia Pacific are both pretty darn strong. There's some regions of Asia Pacific, you know, the Taiwans, the Chinas, et cetera that are really hopping.

Maybe more directly, is Europe lower margin than Asia and is Latin America the highest margin region?

No. They're relatively consistent.

All right. That's good. Thanks.

Once again, if you would like to ask a question, please press star one. Dmitry Silversteyn with Longbow Research, you may ask your question.

Good morning. Just going back to a question that was previously asked about quantifying some of the growth rates especially in the European businesses. Can you quantify for us or at least kind of rank for us what you mean by steady versus light versus modest growth?

In terms of the individual businesses?

Right. Yeah. I'm specifically talking about the, these are the qualifying words you used for describing the various businesses within the European and African and Middle Eastern portion of your international sales.

Are you talking, Dmitry, are you talking Institutional? Do you want to kind of go through some of them?

Yeah, well you talk about Institutional, Food and Beverage, Professional Products, Textiles, Healthcare, you used words like light, modest --

Yep. The ones that higher were really F&B and Professional and they were both pushing 5%.

Okay.

The Europe Institutional and Healthcare were more like 2% and Textile Care was about 1% as you can imagine, that's just a tough environment.

Sure. I understand. Okay.

Then switching gears to the domestic business, at Kay international you did tell us that it was going to be a little bit slower growth in the second quarter given the promotional activity in the first.

Right.

Do you expect the second half to get back to kind of the double-digit to low teens type of growth?

Yes.

Okay.

Yeah, there's, we basically said in the quarter it would have been double-digits but for those issues, so we expect it to the rebound and accelerate as the year closes.

Okay. Excellent. And then just an observation. Your international margins in the international business have gone up pretty respectably on year-over-year. Can you kind of give us an idea of what's been driving it given that the European business is pretty weak? Is it a mix shift issue or are you successful in taking costs out despite sluggish top line growth?

Launching new products and helping drive positive mix is, you know, kind of one of the really cool things about the Ecolab business model and we're working on that everywhere in the world.

Okay. So we should expect that to continue, maybe not at that pace, but certainly towards your goal of getting the business up to the domestic Cleaning and Sanitizing type of margins?

Well, or close, depending on where it is and what the structural issues are of that particular country or region.

Okay. I think you [inaudible] your guidance for 2005 was 36% for the year. Is that correct?

I think it was just slightly less than that. 35.8.

Okay. So it will be 36% for the second half of the year but it will average out to be less than that for the year?

You're right, it's 35.8 for the second half of the year.

35.8 for the second half of the year.

Yeah.

Okay. And then the final question, and this is just to catch up because I missed it, your depreciation and amortization for the quarter were?

Got it right here. Depreciation was 57 million, amortization was 9 million.

9 million. Okay. Great. Thank you very much.

You bet. Thanks, Dmitry.

Thank you. Our last question comes from Bob Koort with Goldman Sachs. Sir, you may ask your question.

Thanks. Good afternoon, Steve. Just curious, your commentary around share repurchase, I guess with the stock up 5% today hindsight is everything, but what would have led you to be more aggressive in the first quarter relative to the second quarter, and what will sort of prompt you in the second half?

You know, we're really not making a price call when we're repurchasing, Bob. Basically in the first quarter we were doing it around share reweighting. So we were going through the S&P reweighting and purchased a bunch of shares around that time and basically we were getting them in the hopper early in the year.

Gotcha. You had made a comment earlier about you thought your competitors were probably getting disadvantaged because of scale issues in terms of their ability to procure materials.

Sure hope so.

I wasn't sure I if heard your answer. Are those small guys raising prices as aggressively, less aggressively, or more aggressively than you?

Which of the 10,000 small competitors? It's kind of all over the map. It's just very clear that smaller competitors that aren't are going to have huge P&L problems. So I think they basically travel in concert with Ecolab's price increases.

Great. Thank you.

Sir, we do after question from Bruce Simpson with William Blair. You may ask your question.

Steve, just housekeeping. Could you give us the organic growth rate for either Institutional or for all of USC&S?

Institutional was 8%.

Thanks.

Okay. That concludes our second quarter conference call. Thank you, everyone, for participating in the call today.

I enjoyed discussing our results with you and hope this has been helpful. For your information, Mike Monahan will be making his return and will be back for the third quarter call. Have a great day.

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