藝康 (ECL) 2006 Q1 法說會逐字稿

Welcome to the Ecolab first quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS]. Now I would like to turn the call over to Mr. Michael Monahan, Vice President, External Relations. Sir, you may begin.

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 Form 10-K under item 1A, risk factors, and in our first quarter earnings release. A copy of our earnings release is available on Ecolab's website at Ecolab.com.

I'll begin with a review of the first quarter, today. Following that review, Doug Baker will add his remarks regarding recent market development. We will then open the call for your questions. Also, before we begin, I want to remind you that all of our financial results for all periods include the impact of expensing stock options. Please recall that as part of our adoption of the option expensing standard in the fourth quarter of 2005, we restated our historical results. All numbers in our press release and this teleconference reflect these restated numbers. The restated numbers may be found in our 2005 annual report, Form 10-K, or on our website.

Starting with some highlights from the quarter, Ecolab once again delivered on its forecast as first quarter 2006 EPS rose 11% and was in the middle of our forecasted range. We continue to deliver strong organic sales growth with an increase of 8%. U.S. institutional was particularly robust ,growing double digits. Latin America also grew double digits, and we saw good growth in Asia Pacific and Canada.

Gross margins showed sequential improvement, rising to equal last year's levels and reflecting our work on pricing, cost savings programs and new products. Operating margins improved, driven by better execution, aggressive work to grow the business, and further progress on our pricing and cost savings initiatives. We remain optimistic about our prospect for the rest of the year. We raised our estimates and narrowed the range for 2006 and now look for EPS growth in the 14 to 16% range. In summary it should be another terrific year for Ecolab.

Turning to the details, Ecolab's reported consolidated sales for the first quarter rose 5%. Looking at the components, volume and mix were up 6%, pricing was up 2%, acquisitions were a fraction, and currency reduced growth by 3%. Sales for U.S. cleaning and sanitizing operations increased 10%. Institutional kicked off 2006 with very strong growth of 11%. Significant competitive gains, sales growth in the various end market segments, including restaurant, lodging, and travel, continued pricing efforts, and improved account penetration through continued expansion of the 360 degrees of protection program benefited results.

The big news in the quarter was the change in the competitive landscape, and we will talk specifically about that development later in this call. Institutional is well positioned for continued growth for the rest of 2006. Our markets remain attractive, new products are doing well, and we've continued to invest to improve our industry-leading service capabilities. The recently completed roll out of our 360 advisor system, which provides tablet PCs to the institutional field sales organization, will further enhance our field productivity and legendary service in 2006 and beyond. This, combined with investments in sales headcount and new offerings to augment the successful 360 degrees of protection program positions institutional for further growth. We expect institutional to show strong second quarter gains and expect solid trends to continue for the balance of 2006.

K sales growth was strong in the first quarter as sales rose 9%. Quick service and food retail led the increase as K enjoyed good new account gains. Quick services underlying business remains solid, with ongoing demand from major existing and new fast-food 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 continued to bolster K's results. We expect a strong second quarter from K as it starts another great year of growth.

Textiles rose a very strong 8% benefiting from account wins and better pricing. Textile care continued to gain corporate and street accounts. In addition, improved pricing and new products have helped to drive sales. We believe these will continue to offset the mature markets and look for additional gains in the second quarter. Professional product sales declined 5% in the first quarter, as success with 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 our efforts on growing our corporate account business in the janitorial market with an emphasis on the retail, healthcare, and building service contractor segments as well as by leveraging the sales force impact by partnering with institutional.

Differentiated products, including 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 second quarter 2006 sales to show moderate growth as progress in corporate accounts and an emphasis on our retail and ultra durable floor finish offerings drive sales.

First quarter sales for our healthcare division rose 5%. Sales were unfavorably impacted by large distributor orders in the fourth quarter 2005 when sales rose 16%. Actual end user demand continued to grow double digits, rising 10% in the first quarter 2006. End user sales of instrument care solids as well as waterless skin care products continue to be robust. We are also continuing to achieve strong penetration within our existing base of group purchasing organizations and integrated delivery networks that are critical to healthcare sales and distribution.

We have seen increasing traction with our differentiated new product introductions which include Endura450 and set design multi. These new products have shown strong sales trends and will help further broaden our product offering in the operating room. The endoscopy and the GI lab areas and in the sterile process segment of the health care market. Looking ahead, we expect better growth in the second quarter as fundamental healthcare business outlook remains strong.

Water care sales rose 13% in the first quarter. We experienced solid growth in our focus markets, which are the food and beverage and institutional markets as we leveraged our lucrative cross-selling opportunities. These efforts were bolstered by expanded geographic coverage, market breadth, and product line obtained through Midland acquisition in January 2005. We've invested in training, productivity tools, and additional sales headcount. We expect that these actions will help deliver attractive growth for the full year 2006.

Food and beverage sales increased 9% in the first quarter. Focused investment in the Sanova antimicrobial foodservice treatment line continues to provide solid growth in the meat and poultry market. Ecolab continues its market leadership position in the meat and poultry industry in the U.S. and is committed to growing sales through broadening our antimicrobial offerings. Corporate account wins, account penetration, and new products have contributed to very good dairy plant sales growth.

The agri, food 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 and meat and poultry, as well as dairy, food, and beverage to continue to show further improvement in the second quarter of 2006 as we focus on new account acquisition and expansion of the Sanova platform.

Vehicle care sales grew 2% comparing against a strong quarter last year that included sales in anticipation of price increase. Volume improved due to new product sales and increased pricing, which offset slow market trends. With its focus on winning new business, upgrading its sales force, leveraging new products and utilizing our circular customer strategy, vehicle care expects improved sales growth in the second quarter.

U.S. other surfaces sales increased 9% in the first quarter. Pest Elimination sales continued to show strong growth, rising 12%. The business fundamentals are solid. New account activity remains strong driven by good corporate account gains in field sales. Field service associates also boosted results by driving non contract service growth. Programs tailored for specific markets, like the ongoing concerns regarding bedbugs, have provided better customer penetration and new growth opportunities for Pest Elimination. We expect Pest Elimination to continue its double-digit growth trend in 2006.

GCS sales continue to grow, rising 3%. We made good progress on the systems and process infrastructure investment, previously discussed that will bring the business into solid profitability and drive competitive advantage in 2007. Sales were softer than expected because we have experienced a longer sales cycle with large accounts. Because of GCS's smaller revenue base and fixed cost model the larger chain account sales have a more magnified effect on its bottom line. Customer interest continues to be good and the sales pipeline looks healthy. Key operating measures including customer satisfaction rating and technician's productivity, continue to show that we are delivering effectively.

The software upgrade to accelerate GCS's development and profitability which involves the integration of several systems into one and adding additional capabilities to support growth and improve profitability is underway and should be implemented in mid-2007. We remain confident in the GCS proposition, in our work to improve these operations, and in our prospects for profitable growth. Measured in management based fixed currency, international sales increased 5%. Europe, Middle East, Africa sales growth rate improved slightly, increasing to 4% in the first quarter at fixed currency rates.

When reported in U.S. dollars sales were down 5%. Good sales gains in eastern and northern Europe were offset by lackluster German and Italian economies. Europe's institutional sales growth also improved slightly as new accounts, good sales through foodservice distributors and continued good results from differentiated product in the core housekeeping and ware washing areas more than offset soft consumption. Institutional continues to drive new product introductions and develop its expanded sales and service headcount, which along with sales initiatives toward street accounts and an expanding program with foodservice distributors are working to offset the impact of slower economies and reduced tourism.

Food and beverage reported a modest gain as growth in beverage and dairy was offset by soft food sales. Textile care sales rose nicely. Good customer gains in sales of award winning water and energy conserving technology drove higher sales. Professional product sales also showed good growth, as teaming up with the institutional division sales people to gain new accounts as well as a comparison to a weak period a year ago drove the sales gain. Healthcare sales rose modestly as the benefits of new infection control products and growth in eastern Europe, Benelux and the U.K. were partially offset by continued consolidation of the hospitality market and healthcare strikes in Germany.

The European Pest Elimination business showed further growth and development. In the UK, new contracts for Pest Elimination rose double digits and we continue to gain market share. In addition, the U.K. has developed a good add-on sales business and the rollout of handheld computers for improved data capture, reporting and customer billing near completion. We have also begun to roll out our market guard program in the U.K. which will help our circle the customer effort in food retail. The French Pest Elimination operation also continues to move forward. Like the U.K., new contract growth is showing good trends, and we've introduced new programs, such as bird defense. . In addition we are developing a strengthened sales organization with more effective tools being developed.

We look for Europe's second quarter fixed currency sales to continue to show moderate growth as sales and product initiative along with more field sales and service associates work to offset modest improvement in major European economies. First quarter 2006 Asia Pacific sales grew 7% in fixed currencies , as growth in Australia and east Asia drove the results. When reported in U.S. dollars, sales increased 2%. From a divisional perspective, institutional sales were driven by new products, including wash and walk and by growth in the market guard program for retail 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.

East Asia continued strong sales growth especially in high potential countries such as China, Thailand, and Taiwan. Food and beverage also reported a healthy increase. Australia, New Zealand, and east Asia performed well. Both the beverage and brewing sectors continued to show good growth. The food and beverage division, overall, has benefited from increased product penetration from account gains.

With good momentum throughout the region, we expect the solid growth trends to continue in the second quarter for Asia Pacific region. First quarter sales for Ecolab's Canadian operations grew 6% in fixed currency and were up 13% in U.S. dollars. Institutional sales measured in fixed currency were strong, and food and beverage sales improved. Sales in Latin America increased 10% in fixed exchange rates. When measured in U.S. dollars, sales rose 19%. Results were excellent throughout the region. Institutional growth was driven by new account gains, increased product penetration as well as continued success with global accounts. Food and beverage sales reflected strong demand in the beverage and brewing market. Pest Elimination continued its outstanding performance throughout Latin America, recording another double-digit gain for the quarter. Overall, we expect healthy growth trends to continue in Latin America throughout 2006.

Turning to the expense side of the income statement, the first quarter 2006 gross margin showed sequential improvement, rising to 50.7%, which was equal with last year. This strength in performance reflected traction from our pricing and cost savings initiatives which offset continued raw material cost increases. We believe this margin recovery reflects a strong showing against the substantial hit we have taken over the past year from raw materials and shows the resilience of the business, given our rapid margin recovery. While we still expect raw materials costs to increase for 2006, we expect the year-on-year increase to be lower than that experienced in 2005. We will stay aggressive in our pricing, cost reduction, and business simplification actions and expect gross margins to continue to show year-over-year improvement through 2006.

S G and A expenses were 38.9% of sales, a decline of 80 basis points from last year's 39.7%. The SG&A ratio primarily improved due to our pricing and cost savings initiatives and leveraging our strong organic sales growth which more than offset the investments we are making in the business.

Ecolab's U.S. cleaning and sanitizing segment operating income increased 11% to 80 million. The benefits of the higher sales, increased pricing and cost efficiencies offset higher delivered product costs and investments in the business. Operating income for U.S. other services increased 6%. Continued strong growth at Pest Elimination and improvement at GCS were offset by the GCS systems investments and annualization against a favorable legal settlement for Pest Elimination last year. International fixed currency operating income increased 18%. Sales growth, pricing initiatives and cost efficiencies outpaced higher delivered product costs.

Ecolab's first quarter consolidated tax rate was 35.7%, compared with 35% a year ago. Last year's first quarter tax rate includes benefits of one-time items. Excluding those, the tax rate was 36.1%. We expect the effective income tax rate will be approximately 36% for the full year 2006. We repurchased two million shares in the first quarter under our share repurchase program. The net of this activity is diluted net income per share for the first quarter was $0.30, up 11% over the $0.27 earned a year ago.

Looking at the balance sheet, Ecolab's total debt to total capitalization ended the quarter at 30%, down from the 35% recorded a year ago. Net debt rose to 28% from 24% at year end. Depreciation was $57 million in the quarter, and amortization was $8 million. Capital spending for the quarter was $61 million. That's a review of the first quarter.

In summary, Ecolab delivered its fifth straight double-digit quarterly EPS gain, quite an achievement considering the difficult raw material environment in which we did it. Our strong performance was a result of excellent growth in our U.S., Asia Pacific, and Latin America businesses. Further, we improved our gross margin and SG&A ratios. Our domestic and international operating margins rose in the quarter as our cost savings actions and pricing offset rising raw material costs. We also continued to make ongoing investments in our sales and service force, R&D, and technology areas to sustain our future growth. It was a great performance that showed our resilience to unfavorable economies and markets and we are very proud of our associates who worked so hard to make that happen.

Looking to the second quarter of 2006, we begin by cautioning these statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of business acquisitions, divestitures, higher than anticipated raw material price increases or material events that may occur 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 Form 10-K which lists risk factors.

In the second quarter we look for our U.S. operations to show continued solid momentum. We expect strong sales growth from institutional and steady gains from our other domestic businesses to deliver solid sales growth in the U.S. We also look for another good sales performance from our international operations with growth again led by strong Latin America and Asia Pacific results and moderate gains in Europe. We believe this will result in an 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 flattish when translated into U.S. dollars. We look for diluted earnings per share for the second quarter to be within the $0.34 to $0.36 range and compare against a $0.31 earned last year.

For the full year we now look for earnings in the range of $1.40 to $1.43. We think this will achieve another strong year of earnings growth in 2006, and if we get additional earnings strength, we'll be able to use it to further invest in our business for the future. That completes my comments on the quarter.

I'll now turn this over to Doug Baker who has some comments regarding recent changes in the U.S. marketplace.

Thanks, Mike.

First, I feel very good about our start. We've got strong organic sales momentum. U.S. is growing at 10% organically, Europe, while still slow, is modestly better. Latin America is solid, and Asia Pacific is also moving in the right direction.

Second, our gross profit is shaping up. We were flat year on year. We're announcing positive momentum from our pricing and cost savings initiatives which are more than offsetting the raw material increases. And importantly, we're on the way to daylight, and we project positive year on year gross margin for the balance of the year. We also have continued solid SG&A management. We continue to make significant investments in the business, headcount, systems, R&D, and a large number of installs which I will touch on in a minute. All this is supported by cost savings and daily attention to cost control which is an important part of our management effort. So that wraps up the start of the year.

I also feel very good about the prospects for the balance of the year and beyond. Currently, our competitive environment has changed for the better. Johnson Diversey has discontinued service support on much of its U.S, ware washing and house business and it's sold its U.S. laundry business. We estimate the business impact to have been worth approximately $150 million to them prior to this change. Now, we view this as a positive for us, and as we look to what's happening, we already picking up significant business in the United States. It's going to create continued momentum for the years and importantly, beyond, it creates both immediate sales and importantly increased product penetration and circle the customer opportunities on an ongoing basis.

We also believe that our competitors moved creates enhanced opportunity globally as we now stand alone in our ability to offer service across all regions. While we are busy installing new customers we are also focused on making sure our existing customers get the attention they deserve and we continue to push new product ideas.

Finally I like the fact that our opportunities in skills line up well for the long term. We serve growth markets, we're the clear global leader but we still after low share and clear competitive advantage which bodes well poor the future. We've got both top line and margin expansion ahead of us and our initiatives, like circle the customer and anchor technology innovation focus to deliver our 15% EPS goal on a sustainable basis. Finally, M and A activity has heated back up and we project a very active second half in this area.

Net, we feel good about where we are and our prospect. We continue to make very good progress. We continue to deliver results and we continue to have significant up side potential. So with those comments, let me turn it pack to Mike who is going to open Q and A.

A note on an upcoming Ecolab event. We will hold a tour of our bath at the national restaurant association show in Chicago on May 22nd. We'll have more details in the next week. That concludes our remarks. This conference call will be available for replay on our website through May 5. Operator, please begin the question and answer period.

We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS]. One moment for the first question. Bob Koort of Goldman Sachs, you may ask your question.

First, can you talk about the investments in GCS and whether those are surprise what we should expect in terms of the profit expectations going forward. Then also you mentioned, Doug, more heated up acquisition environment as we go through the year. Is that more domestic or U.S., and do you think that then precludes ongoing share repurchase?

Start with the GCS. Investments in GCS are continuing pretty much on plan. We're seeing good results it's got more of a fixed cost base, first of all. And secondly, we're going after some big accounts. We continue to see good pipeline, and we expect to turn that over into sales soon, as for as the investments they're right on target.

Bob, regarding the M&A question, the activity is both outside U.S. and the U.S. We've got good target in Europe, Latin America, United States, all three regions. No, this won't have a dramatic shift on our planned repurchase activity. We feel we've got cash to continue to do what we've been doing in the past, and that's our focus.

Thank you.

Bruce Simpson of William Blair.

I wonder if I can pin you down on what you think is a likely rate of raw material increase, either what you saw in this quarter or throughout the year, comparing that against what we saw in 2005.

like we've said before Bruce I think we're looking at raw materials to rise at half the rate of last year. We said last year was up about 10. This year we're looking for somewhere around 5% growth.

Was that born out in the first quarter?

I think we're seeing raw materials come in consistent with our plan.

On a whole different front I wanted to ask, are you seeing impact in demand in your food manufacturing operations, as a result of avian flu, either in Asia or anywhere he, around if so has that translated into reduced demand from institutional clients?

I'll answer this is Doug. We've certainly seen a shift. Clearly there's been an impact on poultry consumption in some markets. We saw it earlier in Asia. There is a rebound. We've seen it in Europe and they've talked about it, but generally that's shift from poultry to other forms of protein. And we're pretty well diversified across the food chain. We have not seen dramatic impact on foodservice sales because this remains a bird disease, not a human disease, but there certainly is undue concern about poultry and does it show up in poultry consumption.

So maybe a little but not a lot in terms of reduced people going to hotels and eating at restaurants in Asia?

We did not see reduced consumption in the retail segments, foodservice, hotel, et cetera. We saw a shift in food and beverage consumption, poultry was hit, but it shifted to other forms of protein.

Thanks, Doug.

Mark Gulley of Soleil Securities.

I think you mentioned the business at risk at JD is $115 million. Did I get that right?

we estimated that the businesses impacted by their change in strategy was about 150 million.

150. 1-5-0?

Yes.

My follow-up question, how often of that business do you think you can convert from Ecolab from them given the fact you're both global players? Reasonable to expect you can get lion's share of that?

Sure, I'll take lion's share. What's our target? 100%, and I'm sure to be disappointed. That's our goal.

but seriously.

There's a lot of competitors out there but our aim is obviously we want to serve every customer in this market.

Secondly I'm intrigued by the M&A pickup that you think you might be able to convert to a closed deal second half of this year. What can you attributed this up keyed activity to?

These markets go in funny waves. As I talked about earlier, last year we really had a slow year in terms of M&A activity, not because of effort or desire -- it was simply a function of price. And for whatever reason -- our target, price expectations have moved more in line with what we're willing to pay, We continue to be disciplined, so if you're not going to be disciplined you're not going to control timing, because we choose to control price and we feel good about the stuff that's coming to fruition.

Thirdly I want to talk about something I've asked about before, that's Europe. There's no secret that the economies there are weak, though they're supposed to be getting if you were to talk a look at the non economically sensitive product, we'll take pest, for example, compare the growth rates in U.S. versus Europe. There's is much slower. What can you do to get growth rates in non-economically sensitive areas in Europe up to U.S. levels?

I don't know if there's -- the pest business, if you start looking at some of the underlying -- we've taken over businesses there. We're implementing our model, and we are changing the focus of those businesses on to what we know are the key underlying fundamentals, like contract growth.

And if you start looking at contract growth in those markets, particularly U.K., where we've been established for a period longer than France, you're starting to see growth mirror that of U.S. Now that's going to take a while to map itself on the top line. But I think we can start growing those businesses along there -- I'm not sure I buy that they're completely economically insensitive.

Laurence Alexander of Jefferies, you may ask your question.

First on pricing, given your updates and forecasts, what are your assumption for how much pricing will outpace raw materials?

as we've said, we expect pricing to be around 2% for the year so simply doing the math you can see we're looking for around 90 million in pricing. With raw materials, again, you do that, so we think that will get pricing in excess of our our raw material cost. Last year, we just about evened it, and this year, hopefully we'll get back our margins.

Second, with institutional, very attractive growth rate this quarter, do you think you can sustain 10% plus growth through the end of the year?

I think you're going see above average growth in that rate for institutional this year. There will be some pluses and minuses any 13-week period but we expect very strong institutional sales growth.

Finally, you expressed that you were more confident for getting the same margin expansion. Do you have a sence for where you are pushing to get margin to over the next two to three years as you catch up with raw materials and get the productivity benefits from the new IT systems? In terms of the margin growth it's always going to be higher no matter where we end up. We did take a hit on margins due to raw materials and as we look at the things we're doing in terms of pricing, cost savings actions, streamlining, the lean Six Sigma, process improvement center, we would hope to drove them higher but in terms of a target I think it's classic Ecolab. As soon as we hit a target we'll set a new one. For us it's continuing to move them back, back to where they were historically and hopefully better.

David Begleiter, of Deutsche Bank, you may ask your question.

Just on the pricing front, can you talk about how the stategy has changed, perhaps, without JD in the marketplace?

We had aggressive pricing goals which were driven by the fact that we've got raw material increases and real cost pressure on our business. And we continue to go out with those aggressive goals. We're talking to our customers as I've talked about in the past. We are in this business for the long haul. We have longstanding relationships with our customers, and so we're going to continue to push the pricing because we heed to and it's justified based on what's going on in the world in total. The same time, we aren't tying it to raw materials, we're not trying to get any one on one relationships, because we want sticky pricing, and we feel we've done a very good job there and like the long term impact on margins as a result of that.

Has it changed dramatically because of JD? I think if you went out and looked at what we're going do, it can't hurt that the -- it's not going to hurt our ability to get prices but we are going to go out and fundamentally change our philosophy of how we treat customers and how we go to market.

We try to partner with customers and treat them like a partner, so in terms of pricing, responsible pricing, we're not going to do anything that would be damaging to partnership relationship.

Just on the Johnson Diversey issue, the lack of the U.S. presence, has that had an impact yet in talks with potential customers?

Well, it's five weeks old, the announcement. These things come up when they come up. Certainly I had several meetings this week with large customers, and you don't sit at the table and talk about it explicitly, but it's there. This is something we're going to go leverage long term. We've got to keep driving the value and keep explaining to customers, which they inherently understand the value of having consistent service globally. We uniquely can offer it and we plan to leverage it by bringing advantage to customers.

Thank you.

John McNulty of Credit Suisse.

Two quick questions. The first one is, Europe with the economy getting a little better especially in Germany, which I believe is one of your stronger areas, I was surprised that Europe actually wasn't up a little bit more, especially with you guys really kind of starting to make a big push there. Can you give us some color on maybe why it didn't pick up quite as much and also what we should be expecting looking out at the rest of the year, given the fact it looks issuing should be a decent travel year for Europe, seeing a lot of International travelers coming into the area, and also you've got the world cup going on, what kind of growth we might see in Europe going forward?

Clearly we want to increase our sales growth in Europe and it's a prime peak. Generally the economic recovery in Germany probably isn't as obvious when you're sitting in Germany, but generally we take a little delay on these before you start seeing it it in our business, so I would say that would be completely normal. We continue to push there. We are all over the World Cup. By and large we don't see huge pots by big events in any legion. We're experienced in the Olympics and other things. Our plan is just to get sustainable growth. There's always these mitigating things. There's been healthcare strikes throughout Germany was adversely affected. To you they're talking about doctors walking out because of pay, so you always have minor hiccups. Our focus is doing what we do best,selling to more customers with more stock, and if we do that, our business grows.

on the new hire front can you give us an update as to what kind of salaries you saw in the first quarter, and also, if you expect to maybe ramp that up in order to grab some of the JD business or if you're pretty comfortable with what you got?

Yes, our first quarter was up year-on-year around 3.5 to 4%. Clearly it accelerated in the last half of the quarter. We aren't U.S. institutional adding head count to take on the new business. It's already been secured. And the new business we anticipate securing going forward, because very importantly, we want to make sure we not only can take care of the new business but we continue to take care of the existing business in the manner we have in the past.

Great. One last question. The $150 million of business that you think is out there to take from Johnson Diversey is that strictly U.S. or does include some for potentially multinationals shifting over from over in Europe or Asia, or what have you?

Limited to the U.S.

Chris Shaw of UBS, you may ask your question.

Good afternoon, guys. What are you attributing the weakness in professional product to? I guess that's outside of the floor care products. Why is it weak demand? I can't think of a good reason.

Well, you know, I'll take it. The professional product business in the U.S. We changed our strategy a couple years ago to shift our focus to floor care, and after the large segments in floor care. Prior to that, it was very dependent on kind of some street distribution and other distribution areas that we didn't feel were going to be long term, viable, we also didn't believe the growth market. That business, has continued decline, and it's outperformed in the markets that are most significant, it hasn't yet outperformed the other area. It will.

I like the way we're positioned. And if anything we've got great technology now, have changed and added a lot of sales fire power to this business and are going after this aggressively because it's a great sales opportunity for us. So I feel good about where the P P business is. I don't like the results, but I like the underlying fundamentals and what's going on, and it will turn into a growth business. We turned around a number of other businesses where we didn't like it, and this is on track to do as well as those, like textile care, vehicle care and the like.

The places you're transitioning away from, they're still profitable at this point, right?

Right around that business is on plus or minus. It's not a great profit business. The new stuff we're going after is what's going to drive the long-term profit accident.

Chris, when we look at that time new stuff we're going after we're showing good increases. Where we're moving away from is where we're showing the shortfall.

Can you give any indication of what the split between forecast that you're going after what sorts of residual? Is half --

I don't have a number Chris. I'm sorry, Chris, it's a good question.

not even general?

It's not -- you know what, we expect to grow this business this year.

All right.

How's that?

That's good. Next question on vehicle care. Does vehicle care participate at all in the circle the customer? I'm trying to think out -- if the customers there overlap much in the other areas.

There's a clear portion of the vehicle care business which is dedicated towards the traditional tunnel car washes that you know. But there's another position of the business that does intersect with circle the customer. Food distributors, food and beverage producers have trucks, we're cleaning them inside and out. It's a food safety issue. There's other technology. There are other avenues that we can go push. So there is an intersection.

Do you have any -- do the hotel chains or the restaurant chains have any sort of fleets vehicles you can work on as well?

No, not material. Foodservice distributors do.

That makes sense. Great.

John Roberts of Buckingham you may ask your question.

Good afternoon, guys.

hey, John.

the 150 million of Johnson Diversey sales, do you know if most of that went via Sysco and other distributors, or is it relatively easy for customers to switch?

Some of it was direct, a lot of it may have been shipped through distribution, but it would be like the business we ship through distribution, it was, by and large, contracted business with Johnson Diversey. Is it relatively easy, I think if we can make a case and convince the customer that we represent a good value, and we'll take care of them, they can convert. There's no impediments.

and that 150 million, how much is your business is in that exact market, that is the U.S., ware washing and housekeeping? It's not all of your institutional business that overlaps with this 150, is in the I'm asking you if there are 150, are you 500 million in that market or 300 million in that market?

It's a significant portion of our institutional business and the ware washing and housekeeping, what's excluded there but it's also laundry and call it 80%.

Okay. Lastly, if they're not going to have service any more wouldn't you expect them to compete much more on price? Because they'll still supply product without services? How do you deal with customers that may be getting your service and want buying some of their product at maybe a lower price?

One, I would say they were competing on price before, but it was price plus service. No, it's -- now it's price without service. And that's -- I would say it's not a unique position in the market. There are and always have been a number of offerings in the institutional market which were product without service. In every category we compete in. So our bet, and it always has been is that service is vital in this industry and that service actually adds value to the customer and improves their economic situation. It's not a cost, it's a benefit. And I still like that bet.

there's a lot of people that go through distributors. We've always competed against them. Just one more competitor in that group.

It doesn't represent, I think, a new thrust in the market that we've got to go contend with. Every distributor carries a full line of products that compete against ours, but they are without service.

Michel Morin of Merrill Lynch, you may ask your question.

Hi, guys, most of my questions have been answered. Let m e throw this one at you. When you look at the increase in raw material costs over the past year, and so far this year, how much of that is really related to demand strength, or is there a certain degree of speculation that we're seeing is perhaps in some other commodities out there?

I don't know how to appears that. All I know is the raw materials are up.

We think the big driver has been supply and demand. Input cost has had some bearing on it but the majority of it is a demand/supply equation. So we anticipate as supply comes on, price will soften a little bit.

Are there some supply constraints right now that you are seeing?

We're able to buy all the materials we need to support our growth. There's -- there certainly were supply constraints following the two hurricanes last year. Purely sizable ones. But, no, we don't have any huge acute choke points.

You mentioned supply coming on stream perhaps in the future.

I'm not the guy -- there's talk of new streams of supply coming on in a couple of the key categories, and I will enjoy it when it happens. We aren't betting on it.

Okay. Thank you.

PJ Juvekar of Citigroup, you may ask your question.

Several questions have been asked on Johnson Diversey. One more question this business you're expecting to get is that a one-time step-up in one year, or is that a slow share gain over several years?

I think there's going to be -- PJ, in think clearly we're going to have a very good year in terms of new customer activity this year. But as you know, our business develops very well over time. The exciting thing about increasing the sues mer base is certainly you get short term impact, but you also get long-term potential because we then start driving product penetration, both within the division, within institutional, and additionally starting to bring and introduce GCS, Ecosure, Water care, and the like. So I would say it has got some legs to it.

okay. And you mentioned increased hiring. Are you able to hire any displaced sales people from Johnson diversity?

Yes, it's not, you know, the prime plan. We have certainly hired, a handful or so. And, you know, they're open to talking to us no, doubt, but I don't know what else to say.

Okay. So, Doug, you look at this business, in the last maybe 18 months you've been growing earnings at 11, 12%, below your goal of 15%. As one of your competitor does, does that kick into higher gear. maybe 15 plus percent?

Yeah, I don't know, PJ, we were up 16% in '04, we were up 13% in '05. Our range right now is 14 to 16%. So I guess I would answer you that, and clearly the 13 was impacted by raw materials. We have an impact this year of raw materials. But in spite of it, we see moving to our 15% goal, and importantly we're doing it while investing. Our goal is to grow at 15% sustainably.

Great. Thank you.

[OPERATOR INSTRUCTIONS]. Jeffrey Zekauskas of JP Morgan, you may ask your question.

good day. I have two questions. Why is the rate of profit improvement faster in international than it is in the United States?

Primarily in Asia Pacific and Latin America it's due to scale, Jeff. We've made major investments in that area over the years and now as we're growing the business we'll get the scale and they will drive the earnings.

the second reason is that the raw material impact isn't evenly divided across the world regions. The U.S. sees the lion's share of that impact. That would be also a major reason.

Was there anything unusual? The incremental margins in international in order of magnitude were 25%.

I think part of it could be that in Europe the majority of their income occurs in the latter part of the year so you've got the benefit of some of the cost savings actions, the pricing actions, et cetera, on the smaller base having a disproportionate affect.

Secondly just a point of clarification on the distributor sales force issue in the United States. When a major customer is contemplating using Ecolabs higher value services with a direct sales force or using a distributor, order of magnitude, what's the price difference? That is how much of a premium do you sell your services in compensation for your direct sales support?

Well, first of all, the $150 million that we keep referring to is our estimate of the number of customers that Johnson Diversey was serving with a service model.

Yes.

So those customers had already opted for the service model. Now, do we represent a premium versus those? I don't know every pricing scenario for every one of those customers, but by and large we might. But it's not the type of premium that we represent versus a non service model. So versus a nonservice model, you can go buy pot and pan product on the market at a 40% discount to us. And you have been able to do that for 50 odd years. But we sell a lot of the product because at the end of the day, controlling consumption and controlling results is vital to our customers.

Thank you. That's very clear. Lastly, just to go back to international, if you had to look at the individual regions, Europe, Asia, and South America, in the quarter, where was the most rapid profit growth, or was it evenly split, or was it disproportionately in one area rather than another?

The two standout regions were Asia and Europe.

Okay. Thank you very much.

Our last question comes from Mark Gulley of Soleil Securities.

I wanted to follow up on that question asked earlier regarding 150, the base, the starting point. You have other things you can circle the customer with. Do you care to estimate the multiplier effect you might enjoy? Let's say you get this 150. So I multiply that times X to get the total potential down the road after you'll all done.

good question, Mark. Typically, and I'd expect these accounts to be in the mainstream, it would probably be 3X. You know, they spend as much on kitchen equipment repair as they spend on kitchen sanitation products, pest elimination wasn't be in that number. Ecosure audit, water care, water conditioning and water filtration wouldn't be in that number, and the like. So when we start looking at it generally as 3x.

3x. Good. That's what I was after. Thank you.

Anything else? You want to wrap up?

Operator, if there's no more questions --

at this time we have no further questions.

okay. Well, thanks, everyone, for participating on the call, and have a great weekend. Thank you.