藝康 (ECL) 2005 Q4 法說會逐字稿

Welcome to the Ecolab fourth quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS] This call is being recorded. If you have any objections you may disconnect at any time. Now I would like to turn the call over to Mr. Michael Monahan, Vice President, External Relations. Sir, you may begin.

Thank you, hello everyone, and thanks for joining us. 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 forms 10-K and 10-Q under the heading forward-looking statements and risk factors, and in our fourth quarter earnings release. A copy of our earnings release is available on Ecolab's website at Ecolab.com/investor.

To begin we are aware there has been some confusion among the media and some analysts regarding the impact of stock option expense on our numbers and consensus numbers. Certain reporting services have yet to post estimates on a consistent basis for option accounting. We advise caution when looking at the numbers to ensure they are on a consistent basis. In light of that, please note that all numbers unless otherwise noted in today's webcast reflect Ecolab's adoption of SFAS 123R., the new accounting standard for expensing stock options. We adopted this standard beginning in this quarter and restated prior period financial statements in transitioning to the new rules. To clear up the confusion I want to point out that Ecolab had a great year in 2005 despite unprecedented raw material cost challenges and fourth quarter results when adjusted for AJCA. and stock options did achieve consensus forecast. We are looking for another excellent year in 2006, and again we also believe that the consensus for 2001 is clearly in our stated range. So following the comments -- the following comments are intended to share the highlights and clear up any remaining confusion.

Starting with some highlights from the quarter, Ecolab once again delivered on its forecast as fourth quarter 2005 EPS rose more than 20% and was in the middle of our forecasted range. We continue to show improving organic sales growth as organic sales rose 7%, the best seen in several years. We achieved double-digit growth in our Asia Pacific, Latin America, and Canadian operations, and near double-digit sales growth in the U.S. Institution was particularly robust also growing double digits. The GCS turnaround continued as it delivered another quarter of solid sales growth and significantly improved profitability. It remains on track with our growth expectations.

Operating margins improved in all segments. The strong underlying growth in our sales and operating margins was driven by improved execution, aggressive work to grow our business, and further progress in our pricing and cost savings initiatives. We continued to make ongoing investments in sales force higher and training, new products, and technology. All of which will drive our future growth. These underscore our commitment to building for the long-term. And we did all that, double-digit growth and investments for the future, while taking an $0.18 per share hit during the year from higher raw material costs. We are very pleased with our 2005 results and remain optimistic about our prospects. We look for double-digit EPS growth again in 2006.

Turning to the details Ecolab's consolidated sales for the fourth quarter rose 6%. Looking at the components volume and mix were up 5%, pricing was up 2% net acquisitions was 0.5%, and currency reduced growth by 1%. Sales for U.S. cleaning and sanitizing operations increased 9%. Institutional enjoyed a very strong quarter as sales rose an outstanding 11%. The hurricanes obviously had limited impact on institutional sales in the quarter. Sales were above our 7 to 8% trend as competitive gains, solid sales growth in the various end market segments, including the restaurant, lodging, and travel markets, and improved account penetration through continued expansion of the 360 degrees of protection program benefited results. We also reflected comparison against the fourth quarter last year when we reduced sales incentives and promotions.

We continue to drive good growth in the generally moderate end markets through new products such as Oasis 146, an innovative food contact surface sanitizer which was just recognized with a Grand Prix award for cleaning products at the North America Foodservice awards. Our new products are strategically positioned to enhance our delivery of 360 degrees of protection program which provides foodservice 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.

As we move into 2006 institutional is well-positioned for continued good growth. Institutional will leverage investments in sales headcount, field automation, and new offerings to augment the successful 360 degrees of protection program. The recently completed roll-out of our 360 advisor system providing tablet PCs to the institutional field sales organization will further enhance our field productivity and legendary service in 2006. Institutional has also enjoyed increased momentum in a new EcoLogic line of environmentally friendly products and Wash 'N Walk the 2004 Grand Prix product winner continues to enjoy strong results. We expect institutional to show a good first quarter growth and expect solid trends to continue for the balance of 2006.

Kay sales increased 7% in the fourth quarter. Food retail and quick service led the gain. Kay enjoyed new account gains in the broader QSR market and fast casual restaurants and enjoyed improved field sales coverage. QSRs underlying business remains solid with good underlying demand from major existing and new fast food chains. These gains are partially offset by a decline in sales to the warehouse club segment in the quarter.

The food retail business continues to do very well. As we secured business with additional major grocers. New products and programs continue to bolster Kay's results. We believe these will lead to stronger growth for Kay in the first quarter and another good year in 2006. Textile care sales were up 5% in the quarter driven by growth within existing accounts and several new account gains. Textile care continues to pursue corporate and street accounts, improved pricing and new products to help drive sales. We believe these will continue to offset the difficulties of growing in a mature market and look for additional gains in the first quarter.

Professional product sales declined 7% in the fourth quarter as success in the new floor care product introductions and corporate account sales was offset by weaker distributor sales and a generally soft market for non-floor care products. 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. Differentiated products include Bright FX, a complete bundle of floor care products designed to lighten and brighten the appearance of floors for retail stores. As well as a line of ultra durable floor finishes that offer improved wear resistance and reduced maintenance continue to do well. We expect professional products first quarter, 2006, sales growth to show moderate growth as progress in corporate accounts and an emphasis on our retail and ultra durable floor finish offerings drive sales.

Fourth quarter sales for the healthcare division rose a strong 16% on strong distributor purchases. We continue to see robust 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 in late 2004. We also achieved better penetration within our existing base of group purchasing organizations and integrated delivery networks that are critical to healthcare sales and distribution. New product introductions include Endura 450, our waterless surgical scrub and septizyme multi, a multiple enzyme detergent for use in manual cleaning of endoscopes and other types of surgical instruments. These have shown strong sales trends and will be help further broaden our product offering in the operating room, the endoscopy and GI lab areas, and in the sale processing segments of the healthcare market.

Looking ahead we expect continued good growth in the first quarter as the fundamental healthcare business outlook remains strong. Reported water care sales rose 33% in the fourth quarter, excluding the results of the Midland Research Labs acquired in January, water care sales grew 3%. We experienced solid growth in our focus markets which are the food and beverage and institutional markets, as we utilize our lucrative cross-selling opportunities. These efforts were bolstered by the expanded geographic coverage, market breadth, and product line attained through the Midland acquisition. These benefits were somewhat offset by impact from hurricanes which hurt the sugar crops in the south.

We are investing in training, productivity tools, and additional sales headcount. We completed the integration of the Midland business including the transfer of operations to Ecolab manufacturing and have engaged the Midland associates in our Circle the Customers sales strategy. We expect these actions to deliver further growth in the first quarter and for the full year 2006. Food and beverage sales increased 4% in the fourth quarter. The Sanova antimicrobial food surface treatment line continues to provide solid growth in the meat and poultry market. Ecolab is the market leader in the meats and poultry industry in the U.S. and continues to broaden its antimicrobial offerings in this critical area. Dairy plant sales growth was also very good, reflecting corporate account wins along with better penetration of accounts with existing accounts as well as new products. The food, soft drink, and beverage businesses also saw good growth reflecting new sales and the strength of our corporate account relationships. We expect the leveraging of our market leadership in meat and poultry as well as the dairy, food, and beverage to continue and show further gains in the first quarter of 2006 as we focus on customer retention, new account acquisition and expansion of the Sanova platform.

Vehicle care sales grew 9% in the quarter. The robust sales growth was driven by increased market share in the conveyor business, the result of upgraded sales force and strong new product sales. Sales of Rain-X on line continued to show good gains and exceed expectations. Rain-X on line is an all weather [protectant] for conveyor and in bay car washes which adds an innovative and differentiated surface treatment that repels water and delivers a high shine and protection to cars. With its focus on securing new business, upgrading the sales force, leveraging new products and our Circle the Customer relationships, vehicle care expects to deliver solid sales growth in the first quarter of 2006.

U.S. other services sales increased 10% in the fourth quarter. Pest elimination sales continue to show good growth rising 11% in the fourth quarter. The business fundamentals are solid for pest elimination. New account activity remains strong driven by robust corporate account gains and field sales actions. Programs tailored for specific markets like the ongoing concerns regarding bed bugs 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 first quarter of 2006 and continue its double-digit growth.

GCS continued to show improvement in its operations and fundamentals. In the fourth quarter GCS sales increased a healthy 8% and the operating loss continued to shrink declining to a third of that recorded in last year's third quarter. GCS also continues to show good results in key operating areas including high customer satisfaction ratings and better technician productivity. In addition GCS has added corporate account 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. Unit Tracks, a database for customers that documents the equipment in their operations and provides complete repair history so they can better manage their expenses has enjoyed a very favorable response from chain customers. We are also selectively investing in other areas that will provide differentiation, scalability, and enhanced profitability. With its broad coverage GCS' offering chains of highly differentiated and we believe compelling offering that includes greater cost and quality control as well as database information management to manage their costs and benchmark them for improved operating efficiency in a category that was previously viewed by the chains as uncontrolled expenditures at the local level. The GCS business fundamentals are on the right track as we look for further year-over-year improvement in the first quarter.

Measured in our management based fixed currencies international sales increased 5%. Excluding acquisitions and divestitures international sales also increased 5%. Europe, Middle East, and Africa sales rose 3% in the fourth quarter at fixed currency rates. As good gains by, in the eastern and northern Europe were offset by lackluster economies in the major central countries. Europe's institutional sales rose modestly as lower consumption primarily in Germany was offset by new accounts, new sales channels, and continued good results from new housekeeping and warewashing products. Institutional continues to drive new product introductions and develop its expanded sales and service headcount. Which along with sales initiatives towards street accounts and expanding program with foodservice distributors are working to offset the impact of slower economies and reduce tourism spending.

Food and beverage showed improved growth as good chemical and equipment sales led the quarter. Food and beverage volume was better across the board despite the tough market conditions. Account wins more than offset plant consolidation and slower demand. Textile care sales rose slightly. Consolidating markets were offset with new distribution channels and strong sales of water and energy systems. Professional product sales declined as growth in sales to the healthcare industry and machine sales gains were not enough to offset lower consumption in Germany, France, and Italy. Healthcare sales rose modestly as the benefits of new infection control products and growth in Eastern Europe, France Benelux and the U.K. were partially offset by continuing consolidation in the hospital market. European pest elimination business continues to make good progress. The U.K. continues to show new contract growth. Customer retention is improving and we are gaining market share. In addition, the U.K. has developed a good add on sales business and the roll-out of the hand-held computers for improved data capture, reporting, and customer billing should be complete by the end of the first quarter.

The French pest elimination operation continues to move forward. Like the U.K. before it, service protocols are being upgraded and strengthened sales organization with more effective tools is being developed. We look for Europe's first quarter fixed currency sales to continue to show modest improvement as the sales and product initiatives along with more field sales and service associates work to offset soft major European economies. Fourth quarter 2005 Asia Pacific sales grew 10% in fixed currencies as growth in Australia and east Asia drove the results. When reported in U.S. dollars sales increased 9%.

From a divisional perspective, institutional sales showed strong growth of 10%. Results were driven by new products including Wash 'N Walk and by growth in the MarketGuard program for grocery stores. We achieved important account wins in the chain of restaurants and hotels as well as food retail markets and benefited from a focus on independent restaurant accounts. East Asia continued its strong sales growth especially in high potential countries such as China, Thailand, and Taiwan. Australia results were also very strong benefiting from equipment and distributor sales. Food and Beverage also reported a healthy increase in Australia and East Asia. Both the beverage and brewery sectors 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 first quarter, 2006, for the Asia Pacific region.

Fourth quarter sales for Ecolab's Canadian operations grew 11% in fixed currency and were up 16% in U.S. dollars. Institutional sales measured in fixed currencies were strong and food and beverage sales showed solid growth. Professional products, healthcare, Kay, and pest elimination all reported strong gains. Sales in Latin America were up 13% in fixed currencies and 24% when measured in U.S. dollars. Excluding acquisitions, Latin America sales rose 12% in fixed currencies. Results were excellent throughout the region. Institutional reported double-digit growth driven by new account gains, as well as global account successes both during the quarter and the past year. Accelerating foods retail segment growth throughout the region and strong tourism markets in countries such as the Caribbean and Central America also drove the excellent results.

The robust food and beverage performance was driven by very strong equipment sales and continued demand in the beverage and brewery markets. Pest elimination continues -- pardon me, pest elimination results were again outstanding throughout Latin America recording another strong double-digit gain for the quarter. Overall, we expect Latin Americas healthy growth trends to continue in 2006.

Turning the expense side of the income statement the fourth quarter 2005 gross margin was 49.4%. This compares to last year's 50.2%. The 80 basis point decline from last year was primarily due to higher delivered product costs. However, the year on year gross margin comparison improved from the third quarter and reflected improved traction of our ongoing price increases and cost saving actions. This is especially impressive since the quarter was hit by incremental costs stemming from the hurricanes. While we expect raw material costs to increase through 2006 we expect the year on year increase to be lower than bad experience in 2005. We were able to nearly offset raw material cost increases with pricing in 2005. We will stay aggressive on our pricing, cost reduction, and business simplification actions in 2006, and expect gross margins to improve for 2006.

SG&A expenses were 38.5% of net sales, a decline of 220 basis points from last year's 40.7%, when Ecolab accelerated investments in the sales force, R&D, and information technology. Excluding the year-over-year impact from stock option expensing, the ratio fell 150 basis points from last year. The SG&A ratio improved primarily due to our pricing initiatives, leveraging our strong organic sales growth, aggressive cost savings programs and favorable general and administrative costs compared to the fourth quarter of 2004 which included costs related to the GCS centralization. We continued to invest in our sales and service force headcount and significantly increased investments in our R&D and information systems as well as other growth areas.

As previously mentioned Ecolab adopted SFAS 123R, the new standard for expensing stock options in the fourth quarter. Option expense in the fourth quarter, 2005, was $0.04 per share. It was expensed in the relevant category depending on the employees’ responsibility. The bulk of the cost was in SG&A. We expect the impact from this accounting rule to be about $0.10 per share for the full year 2006, similar to 2005, with the quarterly distribution weighted more towards the fourth quarter where options are issued. As part of the transition to the new standard Ecolab has posted restated financial history on Ecolab's website at www.ecolab.com/investor. We will update this information when we file our 10-K, adding fourth quarter 2005 data, segment profits and conforming the restated information to the final 2005 balance sheet and cash flow classifications.

Ecolab's U.S. cleaning and sanitizing segment operating income increased 25% to $50 million. Excluding the effects of option expensing, cleaning and sanitizing operating income rose 12% as the benefits of the higher sales, cost efficiencies and increased pricing and favorable G&A costs were partially offset by higher delivered product costs. Operating income for U.S. other services increased 181%. Excluding the effects of option expensing, other services operating income rose 93% as both pest elimination and GCS showed strong profit improvement. As noted GCS again significantly narrowed its loss compared with the year ago period benefiting from its higher volume and improved operational efficiencies.

International fixed currency operating income increased 14%. Excluding the effects of option expensing international operating income rose 7% as sales growth, pricing initiatives, and cost efficiencies offset higher delivered product costs, business mix, and investments. Ecolab's fourth quarter tax rate was 38.2% compared with 36.6% a year ago. The increase primarily reflects tax expense from the repatriation of foreign earnings under the American Jobs Creation Act. Excluding the effects of AJCA., the fourth quarter tax rate would have been 35.5%. We expect the effective income tax rate will be approximately 36% for 2005 -- 2006.

We repurchased 2.4 million shares during the fourth quarter under our share repurchase program. For the full year we repurchased 6 million shares. The net of this activity is that diluted net income per share for the fourth quarter was $0.27, up 23%. Excluding the $0.01 tax charge for cash repatriated under the AJCA, EPS would have been $0.28 per share a 27% increase over the $0.22 earned a year ago. Looking at the balance sheet, Ecolab's total debt to total capitalization ended the quarter at 31%, equal to the 31% recorded a year ago. Depreciation was 54 million in the quarter and amortization was 8 million. Capital spending for the quarter was 75 million.

That's a review of the fourth quarter P&L. In summary Ecolab delivered its fourth straight double-digit quarterly EPS gain, quite an accomplishment considering raw material costs of $0.06 per share in the fourth quarter and $0.18 per share in the full year. Our strong performance was a result of excellent growth in our U.S., Canadian, Asia Pacific and Latin American businesses coupled with good margin improvement from both our domestic and international operations.

As important as the earnings we delivered for the quarter and full year 2005 we also once again made important investments in our business to sustain our growth into the future. Our consolidated operating margins rose handsomely in the quarter as our cost savings actions and pricing offset raw material costs, option expense was lower and we compared to a quarter in which we had invested heavily last year. We also continued to make major investments 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 very tough environment. It was a great performance that showed our resilience to unfavorable economies and markets and we are very proud of the associates who worked so hard to make it happen.

Looking ahead to the first quarter of 2006 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 events that may cover after the date of this webcast. The business outlook section should be considered in conjunction with the information on forward-looking statements in our press release and periodic reports, which lists factors that may cause results to differ. In the first quarter we look for our U.S. businesses to show continued solid momentum. We expect strong sales growth from institutional and steady gains from other domestic businesses to deliver solid sales growth in the U.S.

We also look for better overall sales performances from our international businesses with the gains again led by strong performances from Latin America and Asia Pacific regions and modest gains in Europe. We believe this will result in overall steady international growth in fixed currencies. However, due to the relative strength of the dollar against our major currencies we expect a negative impact from currency and international sales to be flat when translated into U.S. dollars. As a result we look for diluted earnings per share for the first quarter to be within the $0.29 to $0.31 range and compare against the $0.27 earned last year. For the full year we look for earnings in the range of $1.38 to $1.42. That concludes my remarks. This conference call will be available for the replay on our website through February 24. Operator, please begin the question and answer period.

[OPERATOR INSTRUCTIONS] Our first question comes from David Begleiter.

Hello, Mike.

Hello, David, how are you doing?

Excellent. Mike, the above trend line growth in institutional, can that be maintained, at least in Q1 if not for the first half of next year?

Well, as you know we think that the trend line growth for institution over the long time is a 6 to 8% range so we are clearly above that. I think that if we look at the first quarter, sometimes the stars align and some things happen the right way. The second thing as you recall last year we compared against the period in which we had reduced some incentives and promotions. So in answer to your question I'm not sure that we will be able to maintain it as high as it is now but I think we will certainly be above the trend line for the first quarter.

Excellent. Mike, in Europe, what were the '05 European operating margins versus the prior year?

Margins for Europe were about flat for the year.

And expectations for '06, any improvement?

Yes, we look for them to rise in '06.

Just on GCS what was the actual operating loss in 2005?

About 7 million.

And the forecast for '06?

For '06 we are going to certainly improve on that profitability for GCS.

Will Q4, the back half be profitable or break even?

Well, in Q4, as you know GCS did a heck of a year this year as we have kind of outlined for you. They grew sales. They improved their corporate account relationships. They improved tech productivity. They improved their centralization. The Unit Tracks rolled out which is going to be a major point of differentiation for them. So they did a [Expletive] of a job in 2005. And the answer is, a shorter answer, is yes, we did hit a breakeven run rate in the fourth quarter. For 2006 it's clearly on the road to improved profitability. However, because we think that GCS is an excellent business, one that's going to be very important to us in the future, we are electing to take some investments in 2006 that we think will benefit us in building the scalability of the business. So if we look at it on a purely business operations profitability basis, it will be profitable in 2006. When we include some of the investments that we will be making that might offset it.

But net/net it will lose money but less than in 2005?

Yes.

Thank you very much.

Our next question comes from Laurence Alexander with Jefferies.

Mike, first question is what's your view on how working capital might evolve over the next 12 to months? Particularly as you make progress reducing your SKUs?

Well, it's certainly going to improve in the sense that we will be reducing inventories in other areas so we would clearly look for better efficiencies on working capital going forward.

But net/net given your raw material outlook do you see working capital as a source of cash?

Laurence, it's hard to say. Haven't really thought through that one. Let me do some thinking on that.

Okay. Now can you address other cost savings opportunities that you might have, particularly in Europe over the next 12 to 18 months?

Well, one of the main areas that we are going to go back through is the supply chain where we are looking at not only raw material sourcing. One thing you mentioned is SKU reduction. We are looking at a range of things throughout the supply change. We are looking at better information among our various plants that will help us be more efficient in our production and warehousing, et cetera. So kind of optimizing the logistics function for us as we go through Europe. So we are not definitely short on projects for Europe nor the U.S. for that matter. And we expect to make a lot of progress over the next two, three years.

And how has your thinking evolved on uses of cash? Your net debt is extremely low and within a couple of years you could be net debt free? Any thoughts in terms of priorities on either acquisitions, buybacks, dividends, how would you rate those?

Well, first of all it is a lovely problem to have and to worry about that one, but in terms of cash uses, clearly acquisitions remains number one. When we look at our acquisition pipeline we have a robust pipeline. We may not have been able to close many in 2005 but that has more to do with our price discipline and simply the ability to bring many of these privately-held companies to the table and get them signed. It can be a longer process when you're dealing with these smaller privately-held companies. So we have a robust pipeline. We expect to be more active this year in closing deals and that remains our first use of cash.

As you know and you've heard many time the second use of cash is going to be neutralizing shares and third if we have additional cash remaining we will be looking at other ways to improve shareholder value. One thing to point out as you know is we did pay off $75 million in debt that matured in January. So we have used some of that cash already and we will be using additional cash through the year for other corporate purposes.

Thank you.

Thank you.

Jeffrey Zekauskas with JP Morgan, you may ask your question.

Good afternoon, Mike. I guess in the water care area you said that your revenues were up 3%. I think Nalco's revenues in this area from pricing increases alone were up maybe about 6% in the quarter. So did volumes decline there and what happened to profitability?

Profitability for water care improved during the year but in terms of the sales, and I think that it's more a reflection of the fact that we made a major acquisition for--.

No, I'm excluding that, that is just the water care--.

What I am saying is we made a major acquisition and a smaller division like that that we to apply resources integrating that business so during something like that you may take an eye off the ball towards sales as you are doing your integration.

Okay. So in general what you are hoping for is better pricing and better volumes in that area next year?

Yes. The other thing, Jeff, is that as I mentioned we did get hit by the sugar business which is a good part of Midland so that took something off from the hurricanes. If you look back at the third quarter we were up 8%. So I think we are in pretty good shape. That business, we are looking for clearly better growth. In 2006 it was growing double digits. In 2004, the acquisition of Midland was a factor. And again as we said the impact from the hurricanes hurt us. So as we look to 2006 we are looking for far better growth and expect that we will be seeing some very good numbers out of water care in 2006.

Just as point of clarification you were talking about your revenue growth in international in '06. Did you say that you thought for the first quarter it would be flat because of negative currencies?

That's right. What we are saying is we think we will continue to show solid growth out of international but because of currencies it may offset that.

And your interest expense for the quarter was 9 million, down a couple from the third quarter. Is that a representative number going forward or is there something unusual?

Well that can reflects the cash we took back on the AJCA, as I've mentioned we used up some of that for repaying debt. I think you will probably see debt probably at or up a little bit.

So the 9, 9ish million is a good number to use for a quarterly interest rate, then?

Yes, I think we will be looking at the 9, 10, maybe up towards 11 as we get to year end. Again we are using the cash, we expect to be applying the cash this year. And as I said some has been applied we expect to using additional amounts in acquisitions et cetera, going forward.

Lastly you've made a lot of progress bringing your tax rate down. Do you think will you make further progress in '06?

Yes, I mean clearly we look for further progress, Jeff. Right now we are saying that we think it will be kind of flattish at 36 but you can be sure that our tax folks are working to reduce it but at this point I'm not sure how much benefit we will get.

Okay. Thank you very much.

Bruce Simpson with William Blair.

Mike,.

Hey, Bruce, how are you doing?

Good. What was the year-over-year increase in the sales force territory managers for the full company and then if you can further detail sort of where the majority of those people were hired, whether it was institutional or elsewhere?

Well, we show we are up 5% for the year.

And most of that going into institutional?

It's spread across the business pretty much as would you expect. I think you will see institutional would be up 3, 4% again, they are benefiting a lot from the productivity gains. From the laptops that they are picking up. You will probably see more in the international side, Asia Pacific and Latin America where they are showing very strong growth along with our businesses. Also like healthcare, pest elimination, other ones. So it pretty much follows I think the divisions and where it doesn't I think there are some other facts like say institutional where they have big productivity gains coming from some of the technology.

So that 5% growth is for 2005?

Correct.

What do you expect for 2006, what's bundled into the guidance you gave us?

The same, 4 to 5%.

And then last thing Mike, is just on GCS, can you talk about where we are in terms of a run rate there? Is it at the point in reliability that you have begun to aggressively cross sell that into institutional and other divisions and what kind of sales expectation do you have that bundled into your '06 guidance?

As I said before we hit the targets that we wanted for 2005. We reached the break even run rate at year end and for 2006 as I said we are on the path for profitability out of the business. But because we think that it's such a terrific business for us long-term and because we think there's great potential we want to make some investments that will enable us to be -- to scale the business up better. I mean clearly we are in a number of markets in the U.S. We think we need to do more expansion there. So we want to do some things that will help us as we go forward. So again from a business profitability position we think we are in great shape and we are improving the profitability. But we are going to use some of that to make some investments in the service systems and infrastructure that will enable us to grow this business faster and grow the profits as well.

What about specifically on the top line there? Can you give us an update of where, what sort of run rate you ended the quarter at and what kind of top line growth you might expect for that in the year ahead?

We ended up the quarter at 8% for the quarter but as we are looking to 2006 we are looking for high single, low double-digit growth.

For the year as a whole?

Yes.

Okay. Thanks, Mike.

Our next question comes from Robert Ottenstein with Morgan Stanley.

Nice quarter. Can you give us a sense on the restaurant side and the hotel side in the U.S., how fast those markets are growing now?

Hotels are doing great. As you've seen Marriott just reported some very strong results yesterday or today. So hotels are going great guns. Restaurants if you look at some of the foot traffic it's been kind of okay, nothing really great and we look for kind of the same environment in 2006. So I think as we look across our markets we are feeling pretty good about them and in particular our ability to continue to outperform those markets.

Would you say in combination they're growing kind of 4 to 5% now or higher than that or?

Well, I mean, you've got sections of it like say the lodging industry is probably growing its demand at a 3 to 4% rate and its RevPAR higher, in terms of restaurant foot traffic it's probably not quite as robust.

You guys are growing more than double the market rates?

Oh, yes, sometimes three time faster than the market. Again, I think that's part of the things -- the investments we've made in terms of the technology for our people to make it more productive, the training that we've done for our people, some of the things we did a couple of years ago in terms of concentrating their territories et cetera for better geographic coverage. There's a lot of things that we have been doing that I think are showing up.

You are clearly gaining share and raising prices at the same time which is great. Are you worried about any kind of pushback here or some of your competitors trying to take advantage of that to regain share.

Well, we are trying to be smart about the whole thing. Clearly we are cognizant of what the competitive environment is like but the other side is we are also very cognizant of the fact that we have got business partners of which we have enjoyed great relationships over the years so we want to make sure that we are respect respectful of those relationships and nurture those relationships going ahead.

I'm sorry if you mentioned this already but what was GCSs loss in the fourth quarter or did it break even?

It was about 7 million. We hit the run rate.

It was a $7 million loss in the fourth quarter alone?

Well, no, for the year. I'm sorry, it was about a $2 million loss for the quarter. Okay. And the break even run rate at the end of the fourth quarter.

Okay. Break even at the end of the quarter. That's going to ramp up very nicely over the next couple of years, then?

Right, exactly. Again, as we said for 2006 we will be using some of those profits to make some investments in the scalability of the business but, yes, I think it's absolutely on the right track and exactly where we thought it should be and where it's going.

When do you think it can get to the Corporate margin?

Four, five years, maybe, we'll see. Part of it is going to depend on the opportunities we have got going forward. Clearly we know we have got to walk and chew gum. We have got to grow the business and profits. But at the same time we also know we want to be able to expand the business, too, so, we will take a look and hopefully over the next four, five years we will be there.

Thank you very much.

Chris Shaw with UBS, you may ask your question.

Hey, Mike, how you doing? Got a couple of questions. Can you just remind me how much of your sales is from distributors?

Well, we say maybe 20% of our products are sold through distributors, and about 80% direct but when you come to delivery it's a different deal because we are pretty agnostic about how it gets delivered to the customer it's probably 50/50.

Do you see any chance, Germany is your biggest market I guess, in Europe, do you think -- could you guys benefit at all from the World Cup being there this year or would that be just to slight to move the needle anywhere?

Well, typically you have big events like the Olympics or the World Cup, et cetera, you do get a little pop in that particular country but generally it doesn't hurt but it isn't any particularly noticeable impact on results.

Okay. In your '06 forecast is there any currency forecast in there or are you just using today's rate?

Well, now, what we are expecting is that currency will be pretty close. I mean I think for the full year we are saying it might cost us a couple cents but not a big factor.

Okay. I guess it's more a bit of a theoretical question. Given I guess you said $0.18 in EPS for raw materials this year, and I know you guys like to reinvest when you are doing very well. What would you have done with all that if you hadn't had the raw material pressure? Would you have had enough areas to reinvest in with all that money you would have had? Because I know you like to restrain growth to a certain level and then reinvest, would you be able to put all that money back into the business?

Well, we hope to get tested in 2006 on that.

All right. I will take that answer. Actually one last thing. In GCS, did you, are you satisfied with it to the point where you could start adding on more smaller, and I guess bolt-on pieces to it and feel like you can get them in pretty quickly? Or do you think you are right sized already?

Hey, Chris, perfect timing Doug Baker just poked his head in the door here. So I'll let him take that one.

I don't know if I heard the question. It was what, GCS?

Yes, are you guys satisfied with the size right now or the way it's set up where you could quick do some bolt-ons and add more size to that or are you going to wait a little while for something like that?

Well, look, we feel very good about the progress we made last year. What we are looking at in '06 on GCS is frankly accelerating some investments that I think we foresaw more in '07 or out because we feel pretty bullish. So '06 is going to be a year where we, if you, will finalize our infrastructure and after that we are going to be much very much on the gas in terms of filling out the national profile.

Thanks a lot guys.

Mark Gulley with Soleil Securities.

A couple of questions. First of all you talked about healthcare in the U.S., a sales boost from distributor sales. Is there a risk that those distributor sales can be kind of lumpy and you might miss some of that going forward? Therefore the sales in the quarter were overstated.

Yes, that could be. That's one of the things we said is that clearly we saw a benefit in the fourth quarter and we might see a little pull back in the first as a result, but we look at the healthcare business as one that should grow double digits. We are very excited about that going forward so there may be like a shift this quarter, but no way indicates that that business is not a good one.

Focus my other two questions on Europe. A lot of discussion on the call on GCS, but frankly it's a very small portion of your sales. Europe is about 30%. First of all in terms of the economies first, were you saying that the central countries in Europe, Italy, France, and Germany were down for you in the fourth quarter?

Yes, Germany and Italy were the main areas of weakness for us. France wasn't too bad.

Okay. I know the economies remain soft. There's some discussion that maybe this time finally Germany is picking up. Are you seeing that and is that baked into the kind of outlook you have given us for Europe for '06?

Hey, Mark, this is Doug. I think as we look at '06 in Europe, we don't have any particularly bullish forecast for the German or central Europe economies. I think we feel it's not going down any more but we don't expect a dramatic pick up driven by economic growth there. It's going to be more on our shoulders to go out and get the business. We expect to have a better year in Europe in '06 than we did in '05.

Let me direct my final question to you, Doug. In terms of Europe it is a big piece of the pie, 30% thereabouts, one of the things we've talked about is the fact that the Circle the Customer, Circle the Globe strategy has worked great in the U.S. and elsewhere, but if you don't have anything to circle with in Europe, you don't have the cross-selling you need it's kind of tough to employ that strategy. Are you getting traction in cross-selling so that Circle the Customer strategy does indeed work in Europe in '06 and going forward?

Actually, Mark, we've got -- look, we don't have a kitchen equipment repair business, but as you know we've been busy building a pest business over there and now have very strong beachheads in both U.K. and France and candidly those businesses are starting to accelerate as we start leveraging our existing relationships. But outside that, we do have a substantial professional products business which can leverage the institutional. We have water business now up north in U.K. and some other areas. And we just put in place a new corporate position which is designed to drive CTC on a global basis. I would say I think Europe is going to pick up in part because of CTC opportunities and they absolutely do exist there.

Michel Morin with Merrill Lynch.

Hi, Mike, quick question on -- I just wanted to clarify, I think there was an earlier question on the margin in France you said -- sorry, in Europe, you said it was flat. Was that for the full year or for the quarter, for the last quarter?

The comment related to the full year. For the quarter it was up slightly.

And then you talked about the productivity gains from the tablet or the technology roll-out and you showcased the tablets at the analyst day. I was wondering if you could update us on the status of that roll-out, is that fully implemented or are you still going through that implementation and what inning are we in right now as it pertains to that implementation.

Well, the roll-out is done. I think that in terms of seeing the benefits from it we are in the first inning. They've got them. We've seen some results in some trial areas, which has been very encouraging for us but I think they are just starting to use them and we are starting to see some of the benefits from them. So I think that's something that's going to accrue not only this year but in future years as we add more capabilities to those. What it does for us is it really automates a lot of administrative work that they had to do so it frees more time for selling but also makes it more effective when they are with the account because they will have more tools to work with the account.

Thanks.

Thank you.

Daniel Mon with Citigroup, you may ask your question.

Good afternoon, this is PJ Juvekar. A quick question, Doug, maybe you can talk about it, what kind of pricing negotiations are taking place with some of your major customers, McDonalds, you don't have to name anything but you got 2% price increases for '05 which is not much, with cost going up I think you said $0.18 impact from raw materials, what sort of price increases do you expect in '06?

Yes, PJ, I'd make a couple of points, one it's 2% on a global business across all of our businesses and obviously not all our businesses are affected equally in terms of raw materials. Right? They are affecting if you want the soap business in particular in North America has gotten more than its fair share particularly last year because the dollar was relatively weak which story may change as we go forward. Price increases, look we are, how about this, fair administers, we are out there look for pricing throughout our customer groups. I would say the approach we are taking I think Michael alluded on an earlier call, I'd call it a wise approach. We want sticky pricing. We aren't going out and trying to base it on any one raw material or the price of a barrel of oil or a BTU. What we are doing is trying to drive improved and enhanced profitability in accounts which includes pricing but also mix changes and other changes. We expect to have further improvement in our pricing in '06 versus '05 and pricing isn't a tool that we plan to give up going forward.

Next question is Rosemarie Morbelli with Ingalls and Snyder.

Hi, where do you stand, Doug, in your progress regarding the elimination or the reduction of SKUs? Your goal was to get it down by about 50%. Have you made a lot of progress this year?

We made some. We are pretty early in this, Rosemarie. Our number one focus corporately is going to remain growth. And if there is a mantra out there it is continuing to step on the gas on organic growth because we know it is the number one driver of our earnings. That is our number one focus.

With that said I think we've had conversations, there are leverage opportunities within this business that we're also going to get after concurrently and one of them is simplification of the line. Because I think it's going to enhance our growth long-term as we simplify the selling process and everything else. Where are we? We have certain categories candidly where we're done and we've been through it and we are taking it kind of by region, by category, meaning hand soap in a given region and trying to go through the line and cut it out but we are very early in this process. This isn't going to be a linear thing from a cost reduction standpoint. You have got to get over a critical mass hurdle where you can start cutting shifts, right, or reducing the need for public warehousing before you see significant cost reduction but we really do feel very good about our roadmap on getting after simplification.

And then regarding acquisition, Michael said that you had a lot on the pipeline in '05 but before, because of pricing mostly or this is how I understood it, only one really came through. Could you talk about the areas you are looking at? Mike also said you expected to close a few in '06 so areas and then if you close some in '06 is it that the overall price has come down in the marketplace or are you willing to pay more?

We absolutely did allude to that. We do have a robust pipeline. If you want to control time you are not going to control price and we are committed to controlling multiples in what we pay for these deals. I guess what we have seen is the customers on our list expectations and our willingness are coming more in line as time passes. No, I don't think we are changing our outlook on returns or what we are looking for from deals. But the list remains fairly intact surprisingly. It's not like you are being brought by other people and so a little patience here I think works in our favor.

What areas are we chasing? The areas that I think we've talked about consistently. A lot of it is doubling down on businesses that we are excited about long-term, things like healthcare, expanding Pest globally, water where there's technology, and then the bolt-on acquisitions that have been so successful for us historically.

A thing I would like to add, Rosemarie, is if you look back on the history of our acquisitions we've had very few that we've had to divest. And I think that speaks to the discipline that we have used in the purchases. So maybe we don't buy quite as many or as fast as others would like, but on the other hand we haven't had that many turkeys either.

I didn't mean to roughly your feathers, it was just a question, Michael. Regarding the Warehouse Club you mentioned that Kay had a little problem, didn't do too well in the Warehouse Club. Any particular reason? Is that business going to turnaround or are you going to sell more or is it something that you have lost for one reason or another, at least a portion of it?

No, Rosemarie actually that business is doing very well. If you look at what's moving. Really it was a changeover in line and moving to a line that Kay felt was going to support the customers needs even greater. It was really a one time issue. Frankly, that business is growing quite nicely.

Okay. Thanks.

Bruce Simpson with William Blair, you may ask your question.

Hey, Doug, how has the bird flu epidemic impacted Ecolab either in terms of sales or in incremental expenses? And is there anything in your 2006 forecast that embodies that?

Today, certainly bird flu has affected the poultry business in certain markets because it's affected that industry. If you go throughout Asia there has been wholesale slaughter of animals throughout different countries. Certainly there is some effect there. It's not a material effect so it hasn't made our press reports or anything else. What's the forecast going forward? I don't think we have built into our plan any significant avian flu pandemic or anything else. It's a very difficult thing to go predict and I would consider that a very unusual event and one that we don't know how to forecast for. We do know how to prepare for it and we've certainly spent money and I think have a very robust plan in the event it happens.

Is it impacting your F&B business in Asia negatively?

It's got -- I would say it's got some negative impacts in certain markets and positive in others as people take proactive stances on health. But certainly it's hurt some poultry consumption in some of those markets so they shift to another protein so you see a pop in another side of the business. I don't think -- it's hard for us to go through and determine that we've had a big negative or positive impact from it as of yet.

Hey, Bruce, for the quarter, actually food and beverage in Asia was up nicely.

Okay. Thanks.

Amy Zing with Goldman Sachs, you may ask your question.

Hello, I have two questions. First, Mike, can you provide some update on your raw materials outlook for '06 and second can you provide more color on your gross margin trend going forward? Or do you guys expect some moderate improvement of gross margin year-over-year '06 or at least some sequential growth in terms of gross margin?

Okay. In terms of the raw material outlook what we've said and I think we are sticking to the comments is we expect raw materials in 2006 to rise again but not quite as much as 2005. 20005 as you know, they are up about 10% so we are looking for something maybe half that in 2006. In terms of margins, as you also may recall we started to get the impact of raw materials in the first quarter of last year and really got the full effect in the second, third, and fourth quarters. So I think as we look to the first quarter, 2006 as indicated by our forecast we are looking for gross margins to be generally close to last year's, and then hopefully start showing better progress as we go through the year. For the full year we look for gross margins in 2006 to be up over last year.

Okay. Thank you.

Jeffrey Zekauskas with JP Morgan, you may ask your question.

Just two last questions. When you report your earnings in your 10-K, will all of the numbers be adjusted for SFAS 123R?

Yes, they will.

Second question is, you talked about the raw material hit of $0.06 in the quarter and $0.18 for the year. Is that net of pricing or -- that is, were you hit by $0.06 or was that offset by some amount of pricing or entirely offset in the quarter.

No, that was the raw material hit.

So that is your prices were up $0.02 and then there was, I guess an additional, call it 1.5% hit from raw materials. So you are not recouping your raw materials yet, is that what you are saying?

What we said is for the year our pricing about offset our raw material cost. The pricing about offset those raw material costs.

So that means there was no raw materials hit in the quarter net?

Correct, net of pricing.

Net of pricing. Okay. Thank you very much.

Mr. Monahan, I would now like to turn the call back over to you.

Thanks everyone for your attention. Again we think it was a terrific quarter. We appreciate your assistance in working through the issue with the FAS option expensing and attention to that on the consensus numbers. Thanks again for your attention and have a good day.