藝康 (ECL) 2005 Q3 法說會逐字稿

Welcome to the Ecolab third quarter 2005 earnings release conference call. At this time, all participants are in a listen-only mode. After the presentation, with we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] This conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to turn the call over to Michael Monahan, Vice President, External Relations. Sir, you may begin.

Thank you, and hello everyone. Thanks for joining us.

This webcast teleconference includes estimates of future performance. These are forward-looking statements and actual result could differ materially from those projected. Some of the factors that could cause actual results to differ are described in the section of our most recent Forms 10-K and 10-Q, under the heading 'Forward-looking Statements and Risk Factors' and in our third quarter earnings release. A copy of our earnings release is available on Ecolab's Website at Ecolab.com/Investor.

Starting with some highlights from the quarter, Ecolab once again delivered on its forecast, as third quarter 2005 EPS rose double-digits, to hit the top end of our $0.39 to $0.40 forecast range. Institutional continued to show strong underlying growth. And the rest of Ecolab's businesses achieved accelerated organic gains over the second quarter.

By region, we saw solid sales growth in North America, Latin America, and Asia-Pacific, with modestly improved gains in Europe, against tough economies. Our businesses executed well, working aggressively to grow the business, and making further progress on our pricing and cost savings initiatives. The GCS turn-around continued in full effect, as GCS delivered another quarter of solid sales growth, and sharply improved profitability. It is on-track and its outlook remains strong.

Consolidated operating margins held strong, equal to last year, at near 15%, despite a tough cost environment. We have taken and continue to take effective actions, to achieve attractive growth this year. Further, we continue to make ongoing investments in our sales force hiring and training, new products, and technologies, which will drive our future growth, and these underscore our commitment to building for the long term. We remain optimistic about our prospects and look for a full year 2005 earnings within the $1.33 to $1.35 range.

Turning to the details, Ecolab's consolidated sales for the third quarter rose 7%. Looking at the components, volume and mix were up 4%, pricing was up 2%, and net acquisitions and currency, were each about 0.5%. Sales for U.S. cleaning and sanitizing operations also increased 7%, excluding acquisitions and divestitures, sales grew 6%.

As previously discussed, there was some pre-buying in the second quarter by U.S. institutional customers, in anticipation of the busy July 4 holiday. The reversal of the pre-buying activity, along with reduced promotions, resulted in sales rising 5% for institutional in the third quarter. Underlying growth for institutional remains in the 6 to 7% range for the two quarters. The hurricanes Katrina and Rita, had limited impact on institutional sales in the quarter. Sales to the various institutional and market segments including the restaurants, lodging, and travel markets, continue to show good growth. Institutional showed strong gains in corporate accounts, street business, and in better account penetration.

We continue to generate good growth momentum from our new products and programs launched in 2004, as well as an acceleration from 2005 programs. These new programs include the 360 Degrees of Protection program which provides Food, service and hospitality customers, with a comprehensive program combining the full range of Ecolab products and services, to deliver enhanced food safety and improved operating efficiency.

We have also seen strong gains by OASIS 146, an innovative food contact sanitizer, which is easier to use, and provides higher efficacy over a broader application range. Institutional has also increased momentum in the new ecologic line of environmentally-friendly products. Institutional has remained diligent in addressing the higher cost environment, implementing comprehensive cost savings initiatives, and pricing in the quarter.

Looking ahead, the strong product line, improved marketing program, and enhanced field sales force all bode well for Institutional. We will continue to leverage these through aggressive selling and a focus on improving our customer service, and sales force productivity. As a result, we expect Institutional to show strong sales growth in the fourth quarter, as the division caps off another great year of growth.

As expected, K sales growth accelerated in the third quarter, as sales rose 12%. QSR, along with warehouse club sales, led the growth. K enjoyed good new account gains in the broader QSR market and fast casual restaurants, and enjoyed more effective field sales coverage. QSR's underlying business remains solid, with good ongoing demand from major existing and new fast-food chain accounts.

The Food retail business also continues to do very well, as rollouts continued with major grocers, and new chains were signed up. New products and programs continue to bolster K's results. We expect on the strong fourth quarter from K, as it winds up another great year of growth.

Textile care sales were flat in the quarter, reflecting a soft market in annualization against a major new customer rollout last year. Textile continues to pursue corporate and street accounts, improve pricing, and new products to drive sales. We believe these will offset the mature market, and we look for modest gains in the fourth quarter.

Professional Product sales grew modestly in the third quarter, as new product introductions and growth in corporate account sales, were offset by slower distributor sales. We continue to focus on growing our corporate accounts business in the janitorial market. With an emphasis on the retail, health care, 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 on retail stores, as well as a line of ultra-durable floor finishes, that offer improved wear resistance and reduced maintenance. We expect Professional Products fourth quarter quarter sales to grow to improve slightly, as corporate account wins in our key market segments, and an emphasis on our retail and ultra-durable floor finish offerings drive sales.

Third quarter sales for our Healthcare division rose a strong 13%. We continue to see strong sales of instrument care solids, as well as waterless and anti-bacterial skin care products. These sales have been fueled by group purchasing organization contracts signed late last year.

We also achieved better penetration within existing group purchasing organizations and integrated delivery networks, that are important to the health care sales and distribution. New product introductions include ENDURE 450, our new waterless surgical scrub, and new Asepti-zyme Multi, a multiple-enzyme detergent for use in manual cleaning of endoscopes, and other types of surgical instruments. These will help further broaden our product offering in the operating room, the endoscopy and GI lab areas, and the sterile processing segments of the Healthcare market.

Looking ahead, we expect further though more moderate growth in the fourth quarter, as the division compares against a strong period last year, that benefited from increased demand for hand sanitation products, driven by flu concerns. Nonetheless, our hygiene opportunities within the Healthcare business remain strong, and we continue to expect robust growth from the business in the years ahead. Reported Water care sales rose 41% in the third quarter, excluding the results of Midland Research Labs acquired in January, Water care sales grew 8%.

We experienced solid growth in our focused markets, which are the Food and Beverage, Commercial, and Institutional markets, and as we utilized our lucrative cross-selling opportunities. Further these efforts were bolstered by the expanded geographic coverage, market breadth, and product line, attained through the Midland acquisition. We are investing in training, productivity tools, and additional sales head count.

We completed the integration of the Midland business, and have fully engaged the Midland associates in our circle-the-customer sales strategy. We expect these to help Water care continue its good momentum, and show strong growth again in the fourth quarter.

Food and Beverage sales increased 7% in the third quarter. Excluding the results from Alcide, which was acquired in July 2004, F&B sales increased 5%. The outside acquisition continues to provide strong growth with meat and poultry customers, within an excellent performance by the Sanova antimicrobial food service treatment line. Ecolab continues its market leadership to the meat and poultry industry in the U.S., and is broadening its antimicrobial offerings.

Dairy plant sales growth was very good reflecting corporate account wins, along with better penetration of accounts with existing and new products like Ultrasil and WPA-1000, to service our cheese customers. The Food, soft drink, and beverage businesses also saw good growth, reflecting new sales and the strength of our corporate account relationships. Looking to the fourth quarter, Food and beverage with a strengthened offering in the meat and poultry market, expects to continue to show further gains, as it focuses on customer retention, new account acquisition, and expansion of the Sanova 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 upgraded sales force, and strong gains in the detail market. Vehicle Care introduced Rain-X Online in the second quarter, and has seen very positive response from the market, and strong sales. Rain-X Online is an all-weather protectant for conveyor and in-bay car washes, which adds an innovative and differentiated surface protectant, that repels water and delivers a high-shine protection to cars. By the way, it is something all your cars need, so make sure you get it in your next wash. With its focus on securing new business, upgrading the sales force, leveraging new products, and focusing on chain accounts, Vehicle Care expects to deliver solid sales growth in the fourth quarter.

U.S. other services sales increased 10% in the third quarter. Pest Elimination sales continued to show good growth, rising 12% in the third quarter. The business fundamentals are solid for Pest Elimination. New account activity remains strong, driven by good results from strong corporate account gains, and field sales actions.

Programs tailored for specific markets, like the bed bug program, and new interior rodent traps, have provided better customer penetration, and new growth opportunities for Pest Elimination. We expect Pest Elimination to show continued good sales gains in the fourth quarter of 2005, as it winds up another year of double digit growth.

Continuing its very positive trend, GCS reported another quarter of steady improvement in its operations and fundamentals. In the third quarter, GCS sales increased a healthy 8%. The operating loss continued to shrink, declining by more than half year-over-year, and showing sharp sequential improvement. GCS continues to show a strong performance in key areas, including customer satisfaction ratings, technician productivity, and line profitability.

In addition, GCS has added corporate accounts business in the quarter. And the sales pipeline looks very promising. We remain encouraged by the improving operations. The 100% customer call-back program, to assure repair satisfaction, continues to show good results. And the GPS navigation system has been yielding productivity and efficiency benefits.

Unitrax, a database for our customers, that documents the equipment in their operations, and provides a complete repair history, so they can better manage their expenses, has enjoyed a very favorable response from chain customers. We're also selectively investing in other areas that will provide differentiation, scaleability, and enhanced profitability. We are effectively addressing the chain customer's desire 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 manage their costs, and benchmark them for improved operating efficiency. The GCS business fundamentals are on the right track, and we look for further improvement in the fourth quarter and 2006.

Measured in fixed currencies, International sales increased 5%. Excluding acquisitions and divestitures, international sales and fixed currencies grew 4%. When measured in U.S. dollars, international sales, excluding acquisitions and divestitures, increased 6%. Europe, Middle East, and Africa sales rose 3% in the third quarter at fixed currency rate. As good gains in eastern and northern Europe were offset by lackluster economies in the major 8 countries.

Europe's institutional sales rose modestly as lower consumption, in primarily Germany, France and Italy, was offset by new accounts, new sales channels, and continued good results from new housekeeping and warewashing products. Institutional continues to drive new production introduction,s and developed its expanded sales and service head count, which along with sales initiatives towards street accounts, and an expanding program with Food service distributors, worked to offset the impact of slower economies and reduced tourism spending.

Food and Beverage sales showed a steady growth rate, as good chemical sales more than offset lower equipment sales in the quarter. Food and Beverage volume was better across the board despite the tough market conditions, account wins in Eastern Europe and the U.K., which benefited from new product introductions, and more than offset plant consolidation and the effects of pressure of major grocery discounters had on food manufacturers. Textile Care sales rose slightly, consolidating markets were offset by new distribution channels.

Professional Product sales rose moderately as growth in the business with the Healthcare industry, and Machine sales leading the quarter. Healthcare sales rose modestly as the benefit of new infection control products, a significant contract win, and good trends in both the U.K. and Eastern Europe, were partially offset by lower German results.

European Pest Elimination business continues to make good progress. The U.K. business continues to add 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 good add-on sales, and the roll-out of the hand-held computers for improved data capture, reporting, and customer billing should be complete by year-end.

The French Pest Elimination business continues to move forward, and we are developing the right organization and culture, to generate consistent long-term growth. And introducing targeted marketing programs. Like the U.K. before it, service protocols are being upgraded, and a strengthened sales organization with more effective tools is being developed. We look for Europe's fourth quarter fixed currency sales to continue to show modest real growth, as the sales and service initiatives, along with more field sales and service associates, work to offset major European economies.

Third quarter 2005 Asia-Pacific sales grew 7% in local currencies, as growth in Australia and East Asia drove the results. When reporting in U.S. dollars, sales increased 10%.

From a divisional perspective, Institutional sales showed solid growth of 6%. East Asia continued to have strong sales growth, especially in high potential countries, such as China, Thailand, and Taiwan. Australia results were very strong, driven primarily by equipment sales. Regional results were driven by new products, including WASH ‘N WALK, and by growth in the MarketGuard program for the grocery stores.

We achieved important account wins in chain restaurants and hotels, as well as food retail markets, and benefited from a focus on independent restaurant accounts. Food and Beverage also showed good growth, as Australia and East Asia performed very well. Both the Beverage and Brewery sections continued to show good growth, particularly in Australia. The F&B division overall has benefited from increased product penetration and account gains. With good momentum throughout the region, we expect solid growth trends to continue in the fourth quarter for the Asia-Pacific region.

Third quarter sales for Ecolab's Canadian operations grew 7% in local currencies, and were up 16% in U.S. dollars. Institutional sales measured in fixed currencies increased modestly. Food and Beverage sales showed solid growth, and Professional Products, Healthcare, K, Vehicle Care, and Pest Elimination, all reported strong gains.

Sales in Latin America were up 17% in the local currencies, and increased 28% when reported in U.S. dollars. Results were strong throughout the region. Institutional growth was driven by new account gains, and solid account penetration. Institutional continues to benefit from new account gains in the past year, strong tourism markets in Mexico and Central America, and growth in the food retail market, as investment in the region continues to be strong.

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. Overall, we expect healthy growth trends to continue in Latin America and in the fourth quarter.

Turning to the expense side of the income statement, the third quarter 2005 gross margin was 50.9%. This rose 10 basis points sequentially from the second quarter, and compares to last year's unusually strong 52.3%. The decline from last year's high level, was due primarily to higher delivered product costs. These were nearly offset by our ongoing price increases and cost savings actions. And we saw a pickup in the third quarter pricing relative to the first half.

However, the quarter was also hit by incremental costs stemming from the hurricanes, as well as an unfavorable business mix, and a one-time inventory correction. The impact of the hurricanes on raw material costs has increased the headwinds we already faced. That is just one more issue we will be handling, as we stay aggressive on our pricing, cost reductions, and business simplification actions.

SG&A expenses were 36.1% of net sales, a decline of 150 basis points from last year. SG&A expense improved primarily due to sales leverage, pricing, aggressive cost savings programs, and favorable general and administrative costs c compared to the third quarter 2004, which included costs related to the GCS centralization. We continue to invest in our sales and service force head count, and significantly increased investments in our R&D, information systems, and other growth areas.

Ecolab's U.S. Cleaning and Sanitizing operating income increased 6% to $91 million, as the benefits of the higher sales, cost efficiencies, increased pricing, and favorable G&A costs, were offset by higher delivered product costs. Operating income for U.S. other services increased 81%, as both Pest Elimination and GCS showed strong profit improvement.

As noted GCS again significantly narrowed its loss, compared to both the second quarter and year-ago period, benefiting from the higher volume and improved operational efficiencies. International fixed currency operating income declined 2%, as sales growth, pricing initiatives, and cost efficiencies, were more than offset by higher delivered product costs, business mix, and investments.

Ecolab's third quarter consolidated tax rate declined 40 basis points to 35.2% from 35.6% a year ago, primarily reflecting income tax savings efforts, international mix, and tax rate changes, offset by year-over-year reduction in one-time benefits. Before one-time benefits, the effective income tax rate estimate for the full year 2005 is 35.7%, compared with 36.9% last year. Also note this forecast does not include any tax charges resulting from a possible repatriation under the Jobs Creation Act.

We did not repurchase shares during the third quarter, as you may recall, we repurchased shares, primarily to offset those issued under the employee benefit programs. Year-to-date in 2005, we have repurchased 3.6 million shares, and are currently ahead of our option exercise activity in 2005. We will evaluate further repurchases this year as appropriate. The note of this activity is that diluted net income per share for the third quarter reached the top end of our forecasted $0.39 to $0.40 range, up 11% to $0.40, and compared to $0.36 earned a year ago.

Looking at the balance sheet, Ecolab's total debt to total capitalization ended the quarter at 30%, down from 32% last year. And the 31% recorded at December 31, 2004. Depreciation was 56 million in the quarter, and amortization was 8 million. Capital spending for the quarter was 64 million. That's a review of the third quarter P&L.

In summary, Institutional saw continued good underlying sales growth in the quarter, and the remaining businesses achieved accelerated organic growth over the second quarter rates. Consolidated operating margins held a strong at 14.7%, comparable to last year, despite continued rising raw material costs, mix, and one-time items that affected gross margins in the quarter. We were successful in our pricing, cost savings, and simplification efforts, and we continue to invest in our sales and service force, R&D, and technology areas, to sustain our future growth. Ecolab once again delivered double-digit EPS growth, and strengthened its future in a tough environment. It was a great performance, and we are very proud of our associates, who worked so hard to make it happen.

Looking ahead to the fourth 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 pricing 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 forward-looking statements in our press release and periodic reports, which lists the factors that may cause results to differ.

In the fourth quarter, we looked for our U.S. businesses to show further solid momentum. We expect strong sales growth from Institutional, and steady gains from our other domestic businesses. We also look for better overall sales performances from our international businesses, with the gains led again by Latin America and Asia-Pacific regions.

As a result, we look for diluted earnings per share, for the fourth quarter to be within the $0.31 to $0.33 range. And compare against the $0.27 earned last year. This raises the lower end of our full-year estimate by $.01 to a new range of $1.33 to $1.35.

Clearly, while the recent hurricanes did not significantly affect our third quarter sales, they further increased our raw material costs for the fourth quarter. We are taking additional actions to offset these extra costs, but it is a moving target that has created more work for us in our selling, pricing, and cost reduction actions to achieve our range. In our judgment, the increase in the low end of the range, reflects improved confidence in our ability to deliver the year, despite the challenges.

However, it also should be noted that the cost changes due to the hurricane, will also clearly make it more of a challenge to reach the top end of the range. As a result, we remain comfortable with the Consensus estimate of $1.34 for 2005.

Ecolab plans to adopt SFAS 123-R, the new standard for expensing stock options, no later than the beginning of 2006 as required. The previous forecast for the fourth quarter and full-year 2005, do not include any impact from this accounting rule change. As part of the transition to the new standard, Ecolab expects to restate its earnings history in-line with a pro forma amounts, historically disclosed in Ecolab's financial statement. Ecolab expects to present these restated results on Ecolab's Website at www.Ecolab .com/Investor as part of this change. That concludes my remarks. This conference call will be available for replay on our website through November 4.

Operator, please begin the question and answer period.

Thank you. We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Mark Gulley of Banc of America Securities.

Hey, Mark.

How are you doing? A question for you. First of all the #2 player in this business has had some issues recently. Can you attribute any of your modestly accelerating volume growth to issues of that #2 player?

Well, we clearly believe that we've picked up market share in the year, and you know, and I think as you've seen, and historical results from JohnsonDiversey, that we've outperformed them, so the share that we're picking up from JohnsonDiversey, as well as other competitors has continued into the third quarter.

As a follow-up, your SG&A ratio was quite low as you noted, down 150 bips year-over-year. You gave a laundry list of reasons why it was, but can you focus in a little bit more, was it lower losses in GCS, or did you throttle it back on sales force additions in the quarter?

No, we very clearly did not throttle back on any of our investments. Our head count for year-over-year is up 3%, and we think we're still on-target for a 4 to 5% organic increase in our head count.

We're continuing to make double digit increases in our R&D and technology areas, and other growth areas as well. So we are very much committed to the investments that we're making.

I think more than anything, it reflects one, as you mentioned, that we did have a charge last year on GCS, but also, I think it reflects the cost savings actions that we've been taking this year. We've talked a bit about those at the Investor meeting, Steve talked about the Fuel the Future actions, Doug talked about the simplification actions that we're taking, and I think you're seeing the results of those come in this quarter.

Thanks Mike.

The next question comes from Mr. David Begleiter of Deutsche Bank. You may ask your question.

Thank you. Hello, Mike.

Hey, David.

Mike, on the pricing, two things. First, are you seeing competitive support on these pricing actions? And how much of this do you keep, if and when raw material do roll-over going forward?

Yes, we are seeing pricing in the market. You know, probably coming around a little slower than expected, but pricing around the market is coming along as well. I'm sorry, what was the second question?

How much of the pricing do you keep if raw materials ever do roll-over?

Well, I think historically, Ecolab's kept pricing, I don't think we've ever really decreased pricing at any time.

And Mike, one more thing. Just on the cost savings, is this a multi-year effort do you think, to structurally improve your efficiency and productivity, and your cost structure?

Absolutely. I don't think there is any end to this, as we go forward, our focus is to continue to improve our processes and efficiencies, and simplification of the business, so I don't think there is any stop.

The result of this year's cost savings has not been one or two big items, it has been actually I think over 100 different projects, there are small projects, they focus on various processes, and every time you turn over a rock, you find something else that we can try and improve the efficiency in.

So for us it is much more directed at the efficiency and simplification, than just pure cost reductions, because those are the things that really give you long-term savings. So the lean, the Six Sigma, the things that we've been undertaking, should be ongoing cost savings efforts for us.

Do you maintain margins, or do you actually increase them long-term, as a result of these efforts?

We look to improve them.

Okay. Thank you, Mike.

Our next question comes from Mr. Alex Goldman of Morgan Stanley.

Hi, Mike.

Hi, Alex. How are you?

Good. Quick question for you. Can you quantify the raw materials impact that you've seeing in the third quarter, as well as what you're seeing for the fourth quarter, and I guess the first half of '06?

Are you saying year-over-year, or sequential?

Whichever way you guys look at it.

Well, year-over-year, they were up about 20 million.

That's in the third quarter?

Yes.

And do you see that escalating in the fourth quarter?

Yes. Because of the hurricanes. We also tend to view that as there may be, clearly costs are going to continue to rise into 2006, but there may be just a little bit of excess bubble there in the fourth quarter.

And that 20 million, is that annualized, or that's truly an incremental, you know, quarter-o-quarter?

No, that's quarter -- that's year-over-year.

Right. Okay. But that's not annualized? That's the hit to the quarter itself?

Correct. What we've said before is we look for our raws to be up around 10% for the year, which based on our buy is in the 70 million, $75 million range.

And how long do you think it would take for you guys to offset the fourth quarter hit?

You mean when we'd get the margin back on that?

Right.

Well, we've stepped up our pricing as a result of this, and as you know, pricing tends to lag, so I think you're probably looking to get our margin back in 2006.

Okay. And going back to somebody else's question.

And the other thing I would add, you know, as you noticed our operating margin, we held it versus last year, so if you're talking about growth, it is one thing, but you know, Ecolab is looking at this, as you know, we always focus on operating income. And so we're driving the margins at both the cost -- cost of goods and SG&A levels to make sure that we're maintaining our operating margin.

Okay. And could you also clarify exactly, you know, when we get to the period when your key raw materials start subsiding, how exactly do you guys plan to maintain your prices in that environment?

Well, you know, we're not selling a commodity product. We're selling a service. So what we continue to focus on is the service that we provide the customers. And remember, that is the TM calling on the restaurant every month, advising the customer on how to reduce of the cos.

I mean this goes back to that whole cost pie, where our products are less than 5% of the cleaning costs of any customer, so the 95% is elsewhere. As long as we continue to add value to that customer, in showing them new ways to reduce their costs around their whole picture, we're continuing to show them the value that we add, and therefore the service value of Ecolab is very apparent to them.

And that's why we've been able to I think, to maintain our pricing whenever you have had raw materials declines.

And can you give a little more granularity about market share shifts over the past year or so, by your major geographies?

Nobody has really got great data on that, Alex. There is no [SAMI] data that we can point to. Most of our stuff is based on our own estimates. I think that as you look at the public data on ourselves and our competitors, you can see the direction it is moving.

And you guys are probably gaining, I mean what is happening in Europe and Asia?

In terms of what, market share?

Market share.

Well, again, if you look at the data, I think we've been outpacing our competition in all our geographies.

Great. Thank you so much.

Our next question comes from Mr. Laurence Alexander of Jefferies. You may ask your question.

You mentioned that inventory correction adjustments had an impact on the quarter. Can you quantify that?

Less than half a cent.

And in Europe, how much was the headwind from investments -- I mean new investments and the unfavorable business mix, and can you elaborate on the unfavorable business mix, and how that might evolve over the next couple of quarters?

In Europe? Europe was actually okay.

Okay. And you mentioned there were new investments in Europe. That was part of the pressure on the international margin.

Well, in Europe, I mean we were making some investments in technology there, but it was more in the Asia-Pacific and Latin America areas, where we had -- honestly, Laurence, it ends up being a list of sundry items, but it was where we had some greater equipment sales in some areas, as you know equipment ends up supporting our product flow, so we had some greater equipment sales in some areas.

Pest elimination -- in Latin America, we had some Pest Elimination work where we had some differences in the cost there, so it ends up being a lot of accumulation of smaller items in various areas, Asia-Pacific and Latin America.

And finally, with GCS, is that, you know, is there a chance that you will be at breakeven before the end of the year, or is the end of the year still the target?

As we've said, we expect to be at breakeven rate before year-end, and we're still committed to that, and we believe it will be profitable in 2006, so we think we're absolutely on-plan with what we've been talking about for the last several quarters.

Thank you.

Our next question comes from Mr. John McNulty of Credit Suisse First Boston.

Hey, Mike.

Hey, John.

When we look at your balance sheet right now, we're seeing a debt to cap that is basically the lowest you've been in, I don't know, five or six years at least. I know Steve Fritze has said in the past, that he is actually comfortable with an even higher leverage ratio than what you've seen in the past, so I'm wondering, when do we either start to see either the acquisition pipeline firm up and pick up a little bit for you, or see you take more of an aggressive stance on share repurchases?

As we've always said, regarding cash, the first application is to acquisition, second is to new share neutralization, and the third is always going to be towards enhancing shareholder value, however that's best done at the time.

And the acquisition pipeline, it is not that we have been avoiding them. It is simply as you know, they tend to be lumpy, and you know, unfortunately, we have not been able to snag the acquisitions that we want at the prices we want. In part because, we do exert a great deal of price discipline in the process.

So again, acquisitions we would like to have more of them, but we just don't right now. As we look at the leverage and the cash on the Company, we're evaluating our options, and I think you know Ecolab, our commitment to shareholder value is very strong, and as we look forward, we will make the right decisions on what we need to do.

And then a quick question, on the Institutional side, you were saying basically, in terms of guidance for the fourth quarter, you were looking toward what you called strong growth. I mean is this back to growth in the upper-single digits area, and recovering a little bit from what we saw earlier this quarter where were you hurt on some earlier pre-buying. What do you mean by strong growth?

I think you will see double-digit growth out of Institutional in the fourth quarter, in part because it has got an easy comparison. I think the underlying business as we said, is in the 6 to 7% range, but remember that the fourth quarter last year, it was reduced sales effort on the part of Institutional, so it is going to have an easy comparison.

Great. Thanks a lot.

The next question comes from Mr. Bruce Simpson of William Blair. You may ask your question.

Hi, Mike.

Hey, Bruce.

I would like to run out and get some of that Rain-X. Where can I get that?

You're probably one of the few guys that is driving, so we need it. Get out there and buy some.

Hey, I wanted to ask a little bit more about -- get some more detail on the cost issues. Have you seen cost pressures continue to escalate from the second to the third quarter? Are core input prices higher than they were, or are they the same level? And if so, how much of that is like post-Katrina? If you can elaborate on what particular product categories are high?

I think that as you've probably seen, post-Katrina, everything soared substantially and it was pretty much across the board, although our purchasing guy points out actually corrugated went down, but other than that, everything practically we've got has gone up.

As I said before, we do think there is a little post-hurricane bubble in the price increase. We do continue to think they will go up. But there may be a little extra right now. So clearly, we got a little hit in the third, and we will get another little hit in the fourth quarter, just post-Katrina.

But we think this is something that we are going to be able to handle, as we mentioned in the call. We've stepped up our pricing. We've stepped our cost reduction efforts. And it is going to be a classic Ecolab approach to this, which is yes, you got a problem, but you got to handle it.

So I know in the second quarter, I think you said it was roughly even trade-off from higher input prices, and the aggregate of the customer price rises you had pushed through, and then I think the words that you used this time, you said price rises were nearly offset, so can you give us some color about how -- is that, for example, are things trending in your favor, or would you have had more than offset, but for the fact of Katrina, and where should the fourth quarter be let's say relative to the second or third quarter, and your ability to offset higher raws?

Well, what we said is that the cost increases, the delivered product cost increases were nearly offset, by the pricing and cost savings efforts that we had. So it was about, you know, close on a dollar-to-dollar basis.

Clearly, though, we haven't picked up the margin again. Regarding the fourth quarter, what we've said is we look for the gross margins to approximate those of last year. And then as we go into 2006, we expect to climb back against margins again.

Okay. And then just on GCS, what is driving profitability there? Is it leverage, against unit volume growth? Or is it particular specific cost savings initiatives? And if so, can you share where that's going, and what is the run rate in that business?

Well, there are three factors, I mean one is, we're not spending as much, because we have got the bulk of the work done. We're always doing something but you got the bulk of the work done, so you got less expenditure.

Secondly, you've got sales coming along, so we're selling more accounts, and third is the bigger one is the productivity improvements on the technicians.

What does the run rate at GCS right now, Mike?

GCS is running around 30 mill.

And is the majority of the sales growth you're getting there from cross-selling into existing accounts of other divisions? Or is it from new Ecolab customers?

Hey, Bruce, the 30 mill is the quarter, so it is running at about 120 annualized.

Yes.

And I'm sorry, your question was?

The question was, the sales growth that you're getting out of GCS, is that primarily from cross sale, is that from other Ecolab customers of other Ecolab divisions, or is it firms that are new to Ecolab?

It is both. I mean it is sales that we're getting through cross-selling but also their own direct sales efforts. So I think, you know, since Ecolab does business with, you know, virtually all the restaurants and hotels to some degree or another, I mean they're all names familiar to us.

Okay. Thanks, Mike.

Thank you.

Our next question comes from Mr. Jeffrey Zekauskas of J.P. Morgan. You may ask your question.

Hi, good morning, Mike.

Hi, Jeff.

There I was looking at sort of my historical model on Ecolab, and I think your SG&A decreased sequentially by about 20 million in the quarter. And I think if you look back through 10 years of history, the third quarter SG&A has always been flat, or you know, up by a significant amount.

And your SG&A went up I guess 8% in the first quarter, 10% in the second, it is up 2.5 in the third, so I mean it looks like there are some costs that are missing in the third quarter, that you booked in the first and the second. Can you just talk about this sequential SG&A pattern?

Well, if we look at SG&A historically, second quarter to third quarter, there is not much change. I think that this year, as we've talked about, you have certainly the benefit of some cost savings actions that we haven't had before.

So this is a permanent change then?

Yes, I think -- well, if you look at SG&A going back several years, SG&A is on a general decline for Ecolab.

So I think as you look forward, you will continue to have SG&A, you know, in these area, I can't say it is going to be down at this level every quarter, but certainly we've benefited by SG&A declining over the last several years. In part due to structure, and in part due to cost savings of our business.

So this isn't an allocation issue, but you know, your net cost savings went up 20 million sequentially? Is that what you're saying?

The net went up 20 million?

Yes, if were you at 440 on roughly the same level of sales in the second quarter, and you're at 420, roughly in the third quarter, your SG&A went down 20 million, and your sales were flat, I was just wondering how you did that?

Well, part of it is foreign exchange, part of it is the cost savings that we've talked about.

I guess the last question, how much did GCS lose last year?

For the full year?

Yes.

Around 15 million.

Okay. Thank you very much.

Thank you.

The next question comes from Mr. Bob Koort of Goldman Sachs. You may ask your question.

Thanks, good morning, Mike.

Hey, Bob.

Just curious, Fritze had talked during the meeting last month, about getting some acceleration in the pricing trends. I was wondering if he didn't put through any additional price hikes, given how long it takes to roll those through your existing contract base, do we keep going up at 2%, do we go up faster than that for a couple of quarters, do we start to slow down in a couple of quarters, can you give me some sense how it flows through?

We expect pricing to continue to have a larger impact on our sales as we go forward. So the net effect of pricing should continue to rise. I mean, we stepped up pricing on a post-Katrina basis, so you know, again, you can only -- well, you're increasing your prices typically when the contract is due, so as the contracts come around, we're going out and getting that pricing.

And can you talk a bit about how your sales guys are getting compensated for that GCS sell-through?

Well, are you talking about the GCS sales people, or the circle-the-customer sales?

No, the CTC guy.

Well, we've set up two forms for Circle-the-customer. One is on the corporate account basis. When the corporate account people have 20% of the their bonus based on their ability to generate Circle-the-customer sales.

And then secondly, on a field basis, there is a compensation for the sales people that are doing referrals for GCS. So we've got two forms, they're admittedly our first efforts towards those, I think you will continue to see us evolve and develop those as we go forward, so far we've had some initial good success with those, and we want to tweak those models, to get them better going forward.

You can comment, I sensed maybe two or three years ago and maybe it was inaccurate, but there was a willingness to consider doing maybe a little more step-out type acquisitions. I got the sense from last month there is greater intensity in sticking to the knitting, so if you're going to spend your capital going forward, is there a chance we find another division for this business for the company, or do you think it is going to continue to be smaller bolt-on deals?

First of all in terms of size, we have never said that we're limited in terms of size. We said that we would certainly entertain larger deals, but it is just that, you know, as that old bell curve, there aren't a lot of big ones out there, so the bulk of the types of businesses that we look at in our space tend to be smaller companies.

In terms of going far afield, I think that Doug has made it pretty clear that he is a believer in Circle-the-customer, and focused on that, so I wouldn't anticipate us stepping out to do the third leg kind of acquisition, where we're buying something completely different.

Great. Thanks, Mike.

Thank you.

The next question comes from Mr. John Roberts of Buckingham Research. You may ask your question.

Good afternoon, Mike.

Hey, John.

Mike, that 20 million cost increase, what's that on a percentage basis year-over-year, third quarter to third quarter?

Which 20 million.

Raw material costs were up 20 million.

And I'm sorry, what was the rest of the question?

On a percentage basis.

On a percentage. We said costs for the full-year would be up about 10%.

Up 10%. Got it. And the other U.S. businesses, the Pest Elimination and GCS combined, the income has been going up 3 to 5 million quarter-over-quarter, so third quarter versus third quarter a year ago, and as we get into early next year, and you start to anniversary the big gains that we've had in incoming this segment, do we maintain that sort of absolute, I'm sure the percentage gains are going to start to slow, just the base gets bigger, but will the absolute gains continue to run near that rate?

You mean the 4 to 5 million bucks per quarter?

Each quarter this year has been up 3 to 5 million versus the previous year quarter in that segment.

I haven't gone back to look at that, John. Clearly we're going to continue to get increases through Pest Elimination, as it grows its business, and GCS as it flips to profitability. I mean I haven't tried to look at what the specific dollar impact would be.

But the absolute rate of progress should stay sort of on-track?

Well, for GCS returning to profitability, yes, and for Pest Elimination continuing its profitability, yes.

Thank you.

The next question comes from Mr. P.J. Juvekar of Citigroup. You may ask your question.

This is Daniel [Mond] in for PJ.

Hi, Daniel.

In your absence on the last call Steve had mentioned that the 600 new sales people that were hired for 2004, could have been partly responsible for the strong sales growth in the second quarter. With the slower growth in the third quarter, has the contribution of these sales people been a little slow to develop?

No, I don't think so at all. I think if you look at the sales increase, as we mentioned, the impact was primarily due to two things, which is the calendar impact, and the reduced promotions at Institutional this quarter, and the absence of Alside. If you take those two things out of the equation, our business -- the rest of the divisions actually accelerated, and Institutional on an underlying basis continues to grows at the same 6 to 7% rate, so there really was in my mind no slow down to our ongoing or comparable sales second quarter to third quarter.

And as far as the sales force goes, no we think we're getting good productivity gains out of the people, and they're coming on well.

Are they all starting to contribute?

Well, we've always said it takes at least a year for those folks to really get up to speed. I mean the first six months or so, they're basically following somebody around to learn what the business is about.

The second six months then they're kind of being mother hen as they first go out there, so it is the first year before they really get on their own and probably like, you know, in your business whenever you hire an analyst, the first year you kind of just learn the ropes, and second and third year, they start to really add the juice and value to something. So for us, yes, first year we start to get productivity, but you get the real benefit the second and third year out.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] The next question comes from Ms. Rosemarie Morbelli of Ingalls & Snyder. You may ask your question.

Hi, Michael.

Hi, Rosemarie, how are you?

Okay. Regarding the last year's GCS, they were up 50 million in '04. What are they going to reach in '05, best guess?

Well, actually they will be ahead of what our expectation was this year. They will lose about 6 million, so it is actually better than we expected this year.

So they will lose 6 million?

Yes, 6, 7 million.

And if we look at that, then you had a benefit of about 6 to 7 million versus last year, and yet as John pointed out, the other services improve 3 to 4 million every quarter. So I guess the margin on Pest is also improving, as you go along?

Pest is doing very well.

Okay. You mentioned that you had a tax benefit this year. How much was it? How much did it benefit the bottom line? And where did it come from?

About half a million bucks.

I'm sorry?

About a half a million dollars. It is from a state tax refund.

Okay. And going back to a question regarding Jeff's question regarding SG&A, I was also very puzzled. If this is a new level, why are we going up almost 20 million in the fourth quarter? With lower revenues expectations.

It is primarily due to foreign exchange. A piece of it is due to foreign exchange comparison to last year.

But I am looking at it sequentially. You said 420 was a good level, for this level of revenues, so this level of revenues will be down more or less based on your guidance, 20 million or so, Q4 versus Q3 of this year, and SG&A, if we are looking at the 38% of sales that you mentioned as well, will be up 20 million. So there is something missing there. Have I lost you, Michael?

It is in part due to the Euro. It is in part due to the cost savings efforts. It is in part due to some one-time things that went in the favor versus a year ago. So it is miscellaneous stuff. I'm not sure, you know, that there is much more to the story than that.

But I was looking at it sequentially.

You know, I understand you are, and that's what I'm trying to respond to. I mean to the extent that people are concerned that we're trying to starve the business, all I can tell you, if you look at the fundamentals that we look at, in terms of sales and service for us, head count, we're continuing to be on-plan with the 4 to 5% we talked about.

We're making double-digit increases in our R&D and technology spending and elsewhere. I mean we continue to invest big-time in the business, for the long term.

Okay. Could you talk a little bit on how you are selling into the Healthcare area? Is it via distributors? Is it your own direct sales force? And do you do it differently when you go into a hospital or a nursing home? Could you give us a better feel for that particular business, as well as its size today?

We're using the GPOs, we have business with all seven of the major GPOs, we're dealing with all the major IDNs, and utilizing those to get our distribution, and then we have a direct sales force that goes into hospitals to sell-through those.

And is this the same way you are operating with nursing homes?

Yes. We've been selling to nursing homes for a long time, in terms of our Institutional business, our Laundry business, Pest Elimination business. But in terms of the Healthcare products, we're selling through the same distribution organization that we would for the Healthcare.

What is the size of the Healthcare business nowadays?

It is in 45 to $50 million range in the U.S., and it is about double that that in Europe.

Those two numbers are annually?

Correct.

And is it at the 45 to 50 million in the U.S., is it profitable?

Yes.

Okay. One last question, if given the increasing costs of fuel for heating, for driving, everybody and his cousin is raising prices, and eventually, the consumer is going to see it, I don't quite understand why the government doesn't think so, but then I am not an economist, do you still think that in '06, you can have a 10% topline growth?

We haven't forecast anything for 2006. It is too preliminary at this point. There is not much I can say. All I can tell you Ecolab will once again, we will look for consistent double-digit growth into next year. We haven't set a forecast yet, in terms of revenues or EPS. Right now, you can look at where our current trends are, and you know, one might want to use those for an expectation into next year, but again, we don't even have formal budgets for next year to even comment on.

If you look back, do you have a feel for how you did, I don't have the numbers here, in a recessionary environment in the past?

If you look back into 2001, '02, '03, I think that was, if you will, the stress test for the industries that we're in. If you remember, after 2001 and into 2002, the occupancy levels of hotels were extremely low. Restaurant sales were slow. As people were very cautious about going out, et cetera. And yet in 2002, 2003, we showed double-digit growth.

So I think if you look back to those years, you are going to get a good indication of how we'll do in tough economic times. And again, I would look at that and say that was probably, you know, like the 100-year flood for our type of industry.

Okay. I was looking for reassurance, I got it. Thanks, Mike.

Thank you, Rosemarie.

The next question comes from Mr. Bruce Simpson of William Blair. You may ask your question.

Hey, Mike. Just a quick follow-up, would you say that there -- is there any way to quantify the benefit you think you received from the July 4th promotion? And do you think that the July 4th promotion, and the lesser promotional activities in the third quarter, were the exact reason for the sequential dip in organic growth in U.S. C&S, or is there more to it than that?

Definitely. We went back and looked at that, and I don't have the dollars in front of me Bruce, but we went back and looked at that and adjusted for the number of days in the month, and the calendar as well, and it was very clear to us, and we're absolutely convinced that the underlying business trends are at the 6 to 7% rate, so we're very convinced it had that impact.

The Fourth of July bit itself was around 3 million bucks on its own. So when we look at the numbers, we're very convinced that that was the reason, and the trend of the business remains solid.

You say 6 to 6, you're talking about organic growth all across U.S. C&S?

No, for Institutional.

And you mentioned also less in promotional activity. What is beyond that?

Well, again, like any company, any sales and marketing company, you have various incentives, promotions, activities, et cetera, that occur throughout a quarter and throughout a year, and the timing of which you would institute these can vary from time to time, and it just happened that in this quarter we had less.

That wasn't sort of deliberate, in order to maintain margin, or is it just they tend to be the same period in each year, or is that something that was discretionary to the quarter?

If you have more of them, they tend to drive margin up. So it is more of a timing issue.

Okay.

I will now turn the call back over to Mr. Michael Monahan. Sir?

Well, thank you, everyone. I appreciate your time and attention. And have a very good day. Thank you.