藝康 (ECL) 2006 Q3 法說會逐字稿

Good afternoon and welcome to the Ecolab third quarter 2006 earnings release conference call.

At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS]

Now I'd like to turn the call over to Mr. Michael Monahan, Vice President of 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 Form 10-K under Item 1A, Risk Factors, and in our third quarter earnings release. A copy of our earnings release is available on Ecolab's Web site at ecolab.com/investor.

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 prior year numbers in our press release and this teleconference reflect those restated numbers. The restated numbers may be found in our 2005 Annual Report, Form 10-K, or on our Web site.

Starting with some highlights from the quarter. Ecolab once again delivered on its forecast as third quarter 2006 EPS rose 13% and was on the top end of our forecasted range. We continued to deliver strong organic sales growth with an increase of 8%.

The U.S. was up double digits. Institutional was particularly robust rising 13%. Pest and even Textile Care grew double digits while Professional Products, Food & Beverage, and Healthcare all saw strong growth.

Latin America also grew double digits and we saw strong growth in Asia Pacific and in Canada. We made further competitive gains in our business and strengthened our industry-leading position.

As expected, both gross and operating margins increased, driven by better execution, aggressive work to grow the business, and further progress on our pricing and cost-savings initiatives. Recent events, like the E. coli breakout in vegetables underscore, once again, the need for the effective cleaning and sanitizing solutions that Ecolab offers and reflects the long-term attraction of our markets.

We remain optimistic about our prospects for the rest of the year. We expect a good fourth quarter and continue to look for full-year EPS growth of 15 to 16%. In summary, we expect yet another terrific year for Ecolab and believe we are making the right investments to sustain attractive growth for the future.

Turning to the details, Ecolab's reported consolidated sales for the third quarter rose 10%. Looking at the components, volume and mix were up 6%, pricing was up 2%, currency added almost 2%, and the impact of acquisitions was not significant.

Sales for U.S. cleaning and sanitizing operations increased 10%. Institutional enjoyed an outstanding quarter as sales rose an exceptional 13%. Strong sales growth in its various end markets, including restaurant, healthcare, lodging and travel and significant competitive gains drove results.

We continue to improve market share as we add premium accounts that require training and service support for their cleaning and sanitizing programs. We continue to realize good momentum from our new programs, enhanced service, sales force technology, and training. We believe the outlook for Institutional remains very attractive for the balance of the year and we expect Institutional to show further superior growth into 2007.

As expected, Kay's sales growth slowed in the third quarter rising 2% as the division compared against the period last year which had strong distributor shipments. However, adjusting for that, Kay's business would have risen double digits in the third quarter 2006 as QSR led the growth.

Kay enjoyed good new account gains in the broader QSR market and fast casual restaurants. QSR's underlying business remains solid, with good ongoing demand from major existing and new fast food chain accounts.

The food retail business also grew nicely, as rollouts continued with major grocers. New products and programs continued to bolster Kay's results. We expect Kay's fourth quarter to rise double digits and yield yet another double-digit year in 2006.

Textile Care sales showed their strongest growth in some time, rising11% in the quarter. New account wins drove the gain as new products and solutions that help reduce customer's water and energy consumption provided key differentiation in the market. We look for further strong sales growth in the fourth quarter as Textile Care benefits from the account wins, improved pricing and new products.

Professional Products sales increased 9% in the third quarter as floorcare sales to distributors drove division growth. We continue to emphasize the retail, healthcare, and building service contractor segments as well as leverage the sales force impact by partnering with our Institutional division.

Differentiated products including a line of ultra-durable floor finishes that offer improved wear resistance and reduced maintenance continue to do well. We expect Professional Product's fourth quarter sales to show a modest performance as progress in corporate account, floorcare, and ultra-durable floor finish offerings continue to drive sales.

Third quarter sales for our Healthcare division increased 9%. Sales reflected expanded penetration within our existing base of group purchasing organizations and integrated delivery networks as well as double-digit growth in our skincare and solid instrument care products.

These new products have shown strong sales trends and will help further broaden our product offerings in skincare, central sterile, and medical device cleaning and disinfection. Looking ahead, fourth quarter 2006 Healthcare sales comparisons will be affected by a large distributor order in the fourth quarter 2005.

While reported sales growth for this year's fourth quarter will appear modest, sales growth, adjusted for the distributor order, is expected to be strong and reflect a solid end market demand for our healthcare products.

Food & Beverage increased 8% in the third quarter, led by strong performances in the dairy plant and meat and poultry segments. Excluding an acquisition, sales rose 7%.

Focused investment in the Sonova antimicrobial food service treatment line continues to provide solid growth in the meat and poultry market. This was bolstered by our recent acquisition of DuChem, a marketer of cleaning and sanitizing products for the mean and poultry industry, announced last month which added important service coverage and account relationships as well as $10 million in annual sales to this growing segment.

Corporate account wins, account penetration, pricing, and new products have contributed to very good dairy plant sales growth. The beverage and food businesses also saw good growth, reflecting new account sales and the strength of our corporate account relationships.

Recent concern regarding vegetable hygiene has created good interest from the industry, an increased movement towards improved sanitation standards. Developments like these underscore the ongoing need for premium solutions that Ecolab provides and show why we are well positioned for the continued growth. We expect continued sales momentum in the fourth quarter 2006 as we focus on new account acquisition and expansion of the Sonova platform.

Water Care sales rose 4% in the third quarter. We experienced double-digit growth in the food and beverage market as we leveraged cross-selling opportunities.

This more than offsets slow industrial markets. We expect our continued focus on leveraging our Circle the Customer strategy will help bolster growth for the full-year 2006.

Textile Care sales grew 2% comparing against a strong quarter last year. New product sales and increased pricing helped results.

Vehicle Care expects new market opportunities along with a larger and upgraded sales force to yield good sales growth in the fourth quarter. Sales for U.S. Other Services increased 10% in the third quarter. Pest Elimination sales continued to show very strong growth, rising 15%.

Business fundamentals remain solid. New account activity remains healthy, driven by good corporate account gains. Field sales associates also boosted results by driving noncontract service growth.

Programs tailored for specific markets, like limited service hospitality, 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 rose slightly in the third quarter. Our primary focus remains on the systems and process infrastructure investments that will drive competitive advantage and we're making good progress.

The new systems are being built now, will be implemented in the first half of 2007 and be operational midyear. We expect some additional costs during the implementation but look for improved results beginning once the new systems are in place.

Measured in fixed currencies, international sales increased 6%. Europe, Middle East, and Africa sales rose 5% in the third quarter at fixed currency rates. Excluding acquisitions and divestitures, sales grew 4%.

Good sales gains in northern and eastern Europe were offset by lackluster Germany, French, and Italian economies. Sales for our Europe's Institutional business showed moderate growth as new accounts, good sales through food service distributors, and strong gains in housekeeping more than offset soft consumption in the major countries and occupancy declines in central Europe.

Sales initiatives towards street accounts and an expanding program with food service distributors are working to offset the impact of the economies and reduced tourism. Food & Beverage reported a good gain as growth in beverage and dairy were offset by soft food sales.

Textile Care sales again showed strong growth. Good customer gains in sales of award-winning water and energy-conserving technology drove the higher sales.

Professional Product sales decline. Good gains with major customers and new programs were more than offset by consolidation among building service contractors and smaller accounts.

Healthcare sales increased, led by strong growth in contamination control and long-term care and sales of instrument, surface, and skin disinfection products. These helped to offset healthcare strikes in Germany which recently ended.

The European Pest Elimination business continued to show good growth in new contracts sales. Though this was offset by lower one-shot business and attrition.

We continue to improve market share in the U.K. We have also begun to roll out our MarketGuard program, which will help our Circle the Customer effort in the U.K. food retail market.

The French Pest Elimination operation also continues to make progress. Like the U.K., new contract growth is showing good trends and we have introduced new programs, including EcoPro for food and beverage.

In addition, we are developing a strengthened sales organization with more effective selling tools. We look for Europe's fourth quarter, fixed currency sales to show continued moderate growth as sales and product initiatives, along with more field, sales and surface associates, work to leverage a modest improvement in major European economies.

Asia Pacific sales grew 7% in fixed currencies as growth in Australia and east Asia drove results. When reported in U.S. dollars, sales increased 5%.

From a divisional perspective, Institutional's strong sales growth was driven by new products, including Wash 'n Walk, and by growth in the MarketGuard program for retail stores. We achieved important account wins in chain restaurants and hotels as well as food retail.

Food & Beverage reported a moderate increase, both the beverage and brewing sectors continue to show good growth. The Food & Beverage division overall has benefited from increased product penetration and new account gains. With good momentum throughout the region, we expect solid growth trends to continue in the fourth quarter for Asia Pacific region.

Third quarter sales for Ecolabs' Canadian operations grew a strong 9% in fixed currency and were up 18% in U.S. dollars. Institutional sales, measured in foxed currency, were strong resulting from corporate account gains and new product sales. Food & Beverage sales also improved.

Latin America reported another double-digit sales gain rising 13% at fixed exchange rates. When measured in U.S. dollars, sales rose 14%. Sales were good throughout the region.

Institutional growth was driven by new account gains, increased product penetration through the 360 Degrees of Protection program, increased training, as well as continued success with global accounts. Food & Beverage sales reflected strong demand in the beverage and brewing markets, as well as the benefits of new products.

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.

Turning to the expense side of the income statement, third quarter gross margins increased 30 basis points to 51.1%. We continue to benefit from pricing and cost savings initiatives. These more than offset continued delivered product cost increases.

Raw material costs are still generally on track with our expectations and the 2006 increase will be less than that experienced in 2005. We will stay aggressive in our pricing, cost reduction, and business simplification actions and expect gross margins to show year-over-year improvement in the fourth quarter.

SG&A expenses were 36.9% of net sales, equal to those of last year. SG&A ratio reflected the benefits of our pricing, cost savings initiatives, and leveraging our strong organic sales growth, which offset the investments we are making in the business, including those in systems, business efficiency, sales and service, R&D, and information technology.

Ecolab's U.S. Cleaning and Sanitizing segment operating income increased 15%, driven by higher sales, increased pricing, and improved cost efficiencies. These served to more than offset higher delivered product costs.

Operating income for U.S. Other Services increased 12%. Strong growth at Pest Elimination was offset by accelerated investments and slower than expected sales in GCS.

International fixed currency operating income increased 3%. Sales growth, pricing initiatives, and cost efficiencies were offset by higher delivered product costs and growth in efficiency investments.

Ecolab's third quarter consolidated tax rate was 35.1%, equal to the rate a year ago. We expect the effective tax rate will approximate 35% for the full-year 2006.

We repurchased 1.4 million shares during the third quarter under our share repurchase program, as we worked towards better leverage on our balance sheet. The net of this activity is that diluted net income per share for the third quarter was $0.43, up 13% over the $0.38 earned a year ago.

Looking at the balance sheet, Ecolab's total debt to total capitalization ended the quarter at 29%, down slightly from the 30% recorded a year ago. Net debt was 27%, up from 23% last year.

Depreciation was $60 million in the quarter, and amortization was $8 million. Capital spending for the quarter was $69 million.

That's a review of the third quarter. In summary, Ecolab delivered yet another double-digit EPS gain. Our strong performance was the result of excellent organic sales growth and competitive gains in our U.S., Canadian, Asia Pacific, and Latin American businesses.

Our gross and operating margins both rose in the quarter as leverage from our strong top line growth, cost saving actions and pricing offset higher delivered product costs. We also continued to make ongoing investments in our sales and service force and double-digit investments in our R&D, technology, and other key areas to sustain our future growth. It was another great performance and we're very proud of our associates who worked so very hard to make it happen.

Looking ahead to the fourth 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 other material events that may occur after the date of this webcast. The business outlook section should be considered in conjunction with the information in the forward-looking statements in our press release and our Form 10-K, which lists risk factors that may cause results to differ.

In the fourth quarter we look for U.S. operations to show continued solid momentum. We expect strong sales growth from Institutional, Kay, Pest Elimination, Textile Care, and steady gains from our other domestic businesses to deliver further attractive growth in the U.S.

We look for international sales to again be led by strong Latin America growth with moderate gains in Asia Pacific and Europe. We believe this will result in overall moderate fixed currency international growth.

Gross margins should show strong year-over-year improvement and we look for operating margins to also expand versus last year. As a result, we expect diluted earnings per share for the fourth quarter to be 33 to $0.34 and compare against the $0.27 earned last year. Please note that last year's EPS included a $0.01 charge due to the AGCA.

For the full-year, again raised our lower end our range by $0.01. We now look for earnings to be $1.42 to $1.43 per share representing a strong 15 to 16% increase over the $1.23 earned in 2005. Longer term, we continue to believe our financial objective for 15% EPS growth is appropriate and achievable.

We believe we have the right mix of market opportunity, people, and products and we will continue to use our earnings strength to make the right investments to drive superior growth.

That concludes our remarks. This conference call will be available for replay on our Web site through November 3rd.

Operator, please begin the question-and-answer period.

Thank you. [OPERATOR INSTRUCTIONS] Our first question does come from David Begleiter of Deutsche Bank. You may ask your question.

Thank you. Good afternoon, Michael.

Good morning, David.

Michael, on the Institutional business and the gains from Johnson Diversey, do you have anew estimate as to how much business you have captured and will capture going forward?

Well, previously, we said that we expected to get the majority of that business and I think we're well on the way to get that. We haven't announced any numbers and don't plan to, but as I say at this point, we think we're well on the way to getting the majority of that business.

And is that coming at a margin similar to your existing business?

Yes.

And just on GCS, can you quantify --

Hello?

Sir, we can go to the next question. Jeff Zekauskas of JPMorgan you may ask your question.

Good day, Mike.

Hey, Jeff, how are you?

Can you talk -- so the sales growth in Europe was relatively healthy and you said that profits were held back a little bit by new efficiency investments and higher delivered costs. Could you go into that a little bit and how long were those cost pressures persist?

Sure. The investments that we've made in international [inaudible] spread not only through Europe but also Latin America and Asia Pacific. These include investments such as increased sales force training in fast-growing areas like Latin America, major sales force growth in Asia Pacific and business efficiency investments in Europe's SKU reduction, Six Sigma recruitment and training and regional infrastructure in places like Latin America, too.

They also include systems projects to make everything like procurement, manufacturing, and distribution, sales, billing, et cetera, work together and that's the system work we've talked about in Europe.

In terms of how long they'll continue, the systems investments, those are always a couple years and as far as the sales force training people, that's going to be an ongoing cost, but we think that we'll see international margins improving. So these are some investments that we're making at this time simply because we have such good strength in North America to support this.

I see. I guess just lastly, Mike, why don't you guys just joint venture your water treatment chemical operation? That seems to be the one that grows a little bit slowly and it seems like you might be able to be assisted by someone else's sales force or technology or operating strength.

Well, one of the things that we're doing with Water Care is partnering with our Food & Beverage area because there's tremendous opportunities not only in the traditional HVAC treatment but also in the water affluent area. So that's one way we're building.

And the second thing is, we made an acquisition last year of Midland, which added to our business. So we're looking at that. We'll also look at other ways, acquisitions, et cetera, to grow the business, but at this point, certainly that's one option, but we're also looking at other ones like internal organic growth as well as acquisitions.

Okay. Thank you very much.

Michel Morin of Merrill Lynch you may ask your question.

Thank you. Hi, Mike.

Hey, Michel.

A couple of quick questions.

First on the Pesticide, if I got you, if I understood correctly, you grew 15%. That seems like that's the fastest growth rate you've seen in a very long time. Is there anything different that's happening there?

No, not really, I mean I think it was a good quarter for them. They had good, new contracts come in play and the retention was good.

So I think if we look across the board, it was just a very good quarter for them where everything worked. All the cylinders hit right.

And in terms of geographies, were there significant differences in terms of where the growth was coming from?

Not really, this was U.S. Pest.

Okay. And then you mentioned the Germany healthcare strikes, did that have any impact at all?

Well it certainly slowed sales for our Healthcare business over the last several months. Those strikes have ended so we're expecting to see some rebound in our Healthcare sales in Europe.

Okay. Great. Thanks, Mike.

Thank you.

Mark Gulley of Soleil Securities you may ask your question.

Hey, Mike. How you doing?

Good, Mark, how are you?

Three questions for you.

Clearly the volume growth in U.S. Institutional is doing very well but it doesn't seem to be moving the needle all that much in volume growth for the whole company. If I take a look at that, that's kind of running 4 to 5 to 6%.

Am I missing something when I look for the share gains at the expense of JDI to be showing up in volume growth for the whole company?

Well, if we look at our organic growth, it was up 8% for the quarter --

That's 2% price. I'm just looking at volume growth --

Yes, that's clearly been offset by the slower European sales. So if you just take North America, North America growth was 10%, so that's 8% organic. I mean that's, I think, pretty strong.

Okay. So it's showing up U.S. Institutional, obviously --

Yes, I think it's flowing through. I mean U.S. Institutional is roughly half of our U.S. business, it's growing at 13%, so I think you're seeing it flow through.

Right. Now I recall that they also were giving up on the U.S. healthcare side? Am I correct in that? And so therefore if I'm right, should you be seeing better sales growth there as well?

Yes, that's their sales in the healthcare market, so it's their sales of wear washing laundry, et cetera to that market. We're not significant players in the healthcare market as we define the division, which is selling cleaning and sanitizing products for disinfection in skincare products specifically for the hospital.

You show that in Institutional, then. Right? Okay.

Secondly, I missed what you said in terms of the professional sales gain when you were going through your review.

It was up 9%.

Thanks.

And then finally, it's sort of been touched on, on the water side. If Food & Beverage is up 10% and the overall division was up 4%, it sounds like your industrial side must be down significantly. If so, why?

Well, we didn't talk about industrial sales as a sector. I'm not tracking your question, Mark. Could you repeat it?

What I'm saying is in Water Care, it's kind of a summation of what I'll call small industrial sales and food and beverage.

Oh, I've got you.

So if water's up 4% and the Food & Beverage piece of that is up 10%, then something must be down significantly. I'm guessing it's a small industrial account inaudible].

You're right, the industrial accounts were off. I mean our focus clearly has been on the three markets that we talked about for a long time, it's the Food & Beverage accounts, it's the Textile Care accounts, and Institutional. That's where our focus is.

Okay. Got you. Thanks, Michael.

Bruce Simpson of William Blair & Company you may ask your question.

That's me, how you doing, Mike?

Hi, Bruce. How are you?

Very well. Thank you. One question just following up on Michel's about Pest. What's the balance now between what you call one-shot business and contract sales in the United States?

Oh, I don't have that number in front of me, Bruce. The majority is contract sales. I'm guessing it's like three quarters.

Is it trending more towards contract?

Contract has always been the largest part of it. One-shots are where a customer needs a specific treatment for a specific purpose.

So for example, if it's a large supercenter, they may have a bird problem where birds are flying into the building or something like that, so they may need a treatment where you need to put up the netting and stuff like this to prohibit -- or someone may have a seasonal invader like in the fall, you get the boxelder bugs or might get termites one-time.

So these are one-shot deals where you go in, you fix the problem and go on. They're not the consistent type of things like cockroach, mice, and rats.

Okay. Very good.

And then can you give us a little bit more color within the core Institutional business about trends across the spectrum of customers? So for example, what's better right now, hotels or restaurants? And within restaurants, are you doing more at kind of street level or at the big --

Frankly, it's pretty good across the board. I mean we've done pretty good with restaurants despite the relatively moderate growth of the industry. We've done pretty well there.

We've done pretty well in the lodging industry where things are pretty hot. So I'd say if you look across the board, we've done pretty good everywhere with Institutional and it really speaks to the strength of what Institutional's done and the investments we've made there in terms of new product and sales force training, technology for the people, et cetera. So it's been pretty good across the board.

And what about year-on-year sales growth rates for the TMs? Either across the whole firm or specifically within U.S. Institutional. Are we at 3, 4%?

Could you repeat your question?

What kind of year-on-year increase do you have in the territory manager sales force? Are we right at 3, 4%?

Headcount, it's about 5%.

And how about within the U.S. Institutional piece, is it consistent with that?

Yes, it'll be in that range.

Okay. And then lastly, just a going away question on GCS, can you give us the --

Actually, Institutional will be a little bit ahead of that.

Okay. On GCS, Mike, do you have an operating income loss in the quarter?

Yes, the operating loss, if we take out the investments and a bunch of one-timers is about the same as last year.

Is that about $3 million?

A couple million.

A couple million. Okay. Thanks, Mike.

Dmitry Silversteyn of Longbow Research you may ask your question.

Hi, Mike.

Hello, Dmitry.

A couple have been answered already, but let me follow-up on the last question on GCS. With all the investments that you're making, when will the division turn profitable or at least breakeven? Do you have a new target for us?

No, I don't. I mean maybe twice wrong, three times shy.

Right now, our focus is very clearly on getting the systems in place, which we've said we expect to be in place in mid-2007. Until then, we know we're going to run losses. After the systems are in place, we think things can get a whole lot better but we have not given a forecast for when we expect profitability.

Let me ask this a little bit differently than. You've gone through an accelerated investment program and your revenue growth has really dropped. Is that a coincidence, or is it just a reallocation of resources that are going to go back to try to drive business once the systems are in?

Exactly the latter. This is a major systems effort, which is taking the attention of top management people throughout the organization.

There's a lot of people involved in that and you're exactly right, that's where the focus has been. And again, as we said in the call, our focus is clearly on getting those systems in place and as soon as I think we get those done then we'll be able to turn our focus back to growing the business.

Very good.

And then just a follow-up on the Pest Elimination business in Europe, can you give us an idea of what their organic growth of the businesses that you've acquired is? You don't have to give us exact numbers, but at least directionally? And where are you in executing the strategy and making this a pan European business?

In terms of making it pan European right now it's in the U.K. and France. We're looking at acquisitions in organic growth in other countries, but nothing yet.

In terms of growth of those businesses, the focus in both of them has been to integrate them and to develop the standards of Pest Elimination processes, procedures, protocols we have here in the U.S. So as a result, that's been the bulk of the time.

We're seeing contract growth in double digits. New contract growth. That's going to lead to the revenue growth. But at this point, the revenue growth is in the mid single digits.

Okay. But that's still pretty respectable.

And the contract growth of double digits is going to start showing up in revenue growth at some point in the future?

Right, right. Exactly. They'll start to drag through. I mean we've still got a lot of work to do in making sure the protocols are right, reducing cancellations and things like that for the business.

We think it's making good progress and we're satisfied with where it's at. We'd just like to, obviously, get it growing a little faster and also get some further breadth to the European offering.

And leads me to my last question on this.

As you get into other countries in Europe, is there enough similarity in pesticides that are in procedures that are allowed to be used in different countries where there is some leverage to getting bigger, or is each country going to be basically an individual standalone business with its own requirements and particular market sophistications?

We don't think that's the real barrier right now. The concern that we've got is that there's simply that there's just not a lot of large entities to buy in the rest of Europe, so I don't think we're as worried about the regulation of the technology as it is just getting the right properties.

Is it just a question of buying? You can't greenfield anything yourself since there are no large competitors that you'll be going up against?

Well, if you can't buy it then you've got to greenfield.

Okay. All right. So that's still something that you're looking at.

Yep.

Thank you very much.

John McNulty of Credit Suisse you may ask your question.

Hi, Mike. Just a couple quick questions.

With regard to the new account wins, it sounded like there were a couple relatively big ones in the Textile area also in the U.S. Pest. I'm wondering if any of those have anything to do with some of the Johnson Diversey business dropped off and that you guys are actually kind of fulfilling the whole circle, the customer part, or if that's still yet to come?

No, they really weren't a player in Pest Elimination and they weren't a significant participant in the large Textile Care accounts that we're referring to there.

Okay.

And then with regard to acquisitions, I know -- or I believe, if I remember right in the first half of the year, there weren't a whole lot of them. You had talked about us seeing a ramp-up in the second half. We really haven't seen that much. Your debt levels are getting pretty low here.

Kind of what should we be thinking about for acquisitions going forward and could we see maybe a little bit more on the share repurchase side? I know that's normally a secondary thing for you, but given that you haven't found the acquisitions, when do we see that maybe pick up?

Well, the first thing is we made three acquisitions since June, Shield, Powles Hunt and DuChem and we get a few more that are on the burner and so I think you're going to see those fall in the fourth quarter.

Secondly, our net debt is up to 27% from 23% a year ago so we are getting some better leverage on the balance sheet. Clearly, we're not getting as many acquisitions as fast as we'd like to. That's been a frustration that Doug's expressed, but we're working hard at it and we're going to get more of them in.

In terms of leverage, I mean Steve's very focused on that. As you've seen the net debt has risen. Share repurchase has certainly been a factor in that, too, so I think we're going to get there. We've clearly made progress and there's more to be done.

Okay.

And then the last question is, with energy prices coming off, I know you guys have a lot of trucks on the road, that type of thing, you also some raw material exposure, although not nearly as much as the typical chemical company. I'm wondering if we should be expecting any real benefits in the fourth quarter on any of these areas?

No, I don't think you'll really notice much. It's not that big a factor.

Okay. Great. Thanks a lot.

Jeffrey Cianci of UBS you may ask your question.

I guess at GCS, I'm not going to hold my breath but on Professional Products, that was a problem area, was that Johnson Diversey?

Yes, Johnson's very strong there. They're number one in floorcare.

But your turnaround there, was that share gain back from them?

Well, we had some very strong distributor shipments in the quarter. We've said that we expected the fourth quarter to be modest, so I think we've made progress there but I don't think we're going to say that we've made any great incursions.

Okay. So the share gain from them, it's just really Institutional more than anything?

Oh, yes.

And then finally, international margin, we're making a little progress as the first down comp if I'm reading it year-over-year. Are you blaming economic weakness in France and Italy, or hasn't the model been changing to get a better margin? What do you foresee?

Regarding international margins?

Yes. Is it Europe?

No, it's, as we said, it's kind of across the board where we're making investments in Europe, Asia Pacific, and Latin America and the things that we referred to. Where in Latin America, there's been investments in more sales force training, in Asia Pacific, we're going to probably end up with close to double-digit increases in the sales and service force there.

In Europe, we're making big investments in SKU reduction, the systems work that we're doing. So there's a lot of investments are going on.

As we said, part of the reasons we're able to make those investments is because North America is strong so we're taking advantage of some of the strength we've got in North America to make some key investments in international.

Okay. I'm under the impression that Latin America and Asia had an ongoing high level of investment, you're saying it's even higher now?

In terms of--

[Inaudible] Asia.

Yes.

But Europe, the investment level in Europe is a real step up?

Yes absolutely --

You had earlier margin goals, I'm just kind of wondering how it all comes out. I mean Europe is typically lower margin than Latin America and Asia in the mix, right?

Well no, they're all around the same margin but what we've said is, we look for European margins to improve 300, 400 basis points. Well we're investing in the very things that will help those margins improve. So the systems work, the simplification work, the investments we're going to make in the sales and service training et cetera in Europe, those will be key in getting those margins that we've talked about and these are the investments we have to make now to get them.

It's been a long time since you talked about it. Back when they could have made a 12% margin, I don't think you're going to jump there from a 10% level for international.

Well right. You're not going to get there overnight, but see you've got to make the investments to get there and they'll come but right now we're in the investment mode and like I said, we can do that because we've got such strong North America results.

So I guess I won't get you to tell me if '07 can jump 100 basis points.

No, I don't think you'll get me to say that.

Okay. Thanks.

Robert Koort of Goldman Sachs you may ask your question.

Thank you. Good morning, Mike.

Hey, Bob.

Can you tell me if there's any quantifiable progress or mileposts on the effort, I think this was about a year ago that Doug started talking about more of a cost-focused culture in reducing the SKUs and doing some other things there that might have been a little different than in the past?

Oh yes, we're continuing to make progress on the SKU reduction. They're moving ahead. As you remember, they wanted to reduce by 50% and we've probably cut about 15% of them at this point.

We're starting to make some good progress there on the Lean Six Sigma stuff. We've got a rollout underway in Europe. They're identifying the projects and we'll start getting those underway. So I think all those things are on the road and starting to show results.

And how about the -- it seemed like there more an intensified focus on cross-selling. Obviously, continuously reinventing your sales approach and attack can numb the sales force so what's the next new wrinkle on the horizon to get those guys excited?

To get our sales force excited?

Yes.

They're always excited. I think it's continue to drive the Circle the Customer and the penetration. We've launched that 360 Degree program, which has proven very successful in Institutional.

We're bringing that around the globe for other regions to use and I think that will be very positive for us. But ultimately, I think you've got a huge opportunity in our markets and that's a great driver for our people.

Secondly, we've armed them with better training and technology that will support them. We've made some major investments, as you know, in terms of technology for not only the U.S., but also Europe, Latin America, and Asia Pacific in terms of technology. They'll make them more productive and efficient.

And the last thing is, the best thing for anybody is when you've had results like this year, all of our salespeople are very competitive and when you start to see some success like this, that just fuels their competitive streak and I think gives them great motivation. So there's nothing like being the best and knowing it.

Does that mean Fritze might unleash an earnings growth target in the future that's above 15%?

Well you know Steve's kind of conservative guy but you never know what may happen with him.

All right. Thank you.

Edward Yang of CIBC World Markets you may ask your question.

Hi, Mike. How are you?

Hey, Ed. Good.

Most of my questions have been answered, but on Cap Ex, what do you think is a good maintenance Cap Ex? It's grown over time, but it's dropped as a percentage of revenue. Is that the right metric to look at it, as a percentage of revenue? And what do you think is a good run rate going forward?

I think that we've looked at the 6, 7% of sales as a metric that you can use. It's not how we budget ourselves, but I think if you look over time, that's been a pretty good indicator.

The big driver, as you know, for Cap Ex is the merchandising equipment or basically the [dispensers] that all of our customers use. That's 60, 70% of our Cap Ex and that's the razors that sell the blades.

Occasionally we get some lumpy stuff like when we did the Schuman Center [up] plant or something like but generally, I think if you look at 6, 7%, that's probably a pretty good run rate.

Okay. Thank you, nice quarter.

[OPERATOR INSTRUCTIONS] Chris Shaw of UBS you may ask your question.

Hey, Mike. How you doing?

Hey, Chris, how are you?

All right.

I was wondering, you referred to the spinach E. coli breakout. Do you guys have a product for that kind of market for lettuce or anything like that?

As a matter of fact, we do. Ecolab actually has the only product that has been approved for use in reducing pathogens in processed water or product services.

So we've got some products there that are highly effective, Tsunami 100, Tsunami 200 and Vortex for the food processing plants and Victory for actually for use in restaurants for treating the water that's used to clean the food.

Have you gotten more inquiries since all this happened?

Yes, we have. In fact we've had a number of inquiries. While we can't discuss specific customer relationships, we've been in contact with a bunch of them and I think you'll be seeing some results from that soon.

Can you remind me, when, you guys had a good year so what quarter do you pay bonuses, is it quarterly or is it the end of the year is it first quarter?

Well, they're paid in March, but they're accrued through the year.

And just one last thing. On the business you're getting from JD, is there anything -- is there a big chain you won or anything like that that's worth mentioning or could be mentioned?

There's a few but we don't disclose customers.

All right. I didn't think so. All right. That's it. Thanks, Mike.

Rosemarie Morbelli of Ingalls Snyder you may ask your question.

Hi. Michael.

Hello, Rosemarie. How are you?

Going back to the Johnson Diversey business you are getting, I am assuming that a big chunk of that is behind the 13% increase on your Institutional business?

It's part of it.

If you take that out, are you growing more or less at the 7 to 8% that is kind of a long-term level, or did you do better even in the basic business? And why?

It was maybe a couple of points out of the13. I mean the bulk of the business there is being driven by not only the accounts we're picking up from JD, but also the accounts that we're picking up elsewhere.

But further, you can't get away from the fact that the programs they put in like 360 Degrees of Protection. The technology and training investments that we've done with our people have made them more productive and efficient, et cetera, is starting to show through in the numbers the Institutional's reporting.

So JD's a part of it, but I think the bulk of it is really the more, what I would call, organic work that we've done over the past few years and you're seeing the fruits of this year. We talk a lot about investments at Ecolab and here's a very good case of what happens when you've made those investments how they start to payoff.

One comment.

When JD got out the business was that, all right, you had about $150 million that you could put your arms around, and then you could also move over to some of their existing customers overseas who would want the same kind of service and from the same company both in the U.S. and overseas.

So could you touch about whether or not you are seeing a change in those accounts that you are getting here from JD? Are you beginning to talk about, well, servicing them elsewhere as well in the world?

Well, what we've always said is that's a long-term opportunity for us so we never expected to see much on the short-term.

Our focus remains clearly serving offer existing customers, taking on the new customers this year, making sure that they get set up right and serving them well. As soon as we get that done, which we're still in the process of doing, we'll start to turn our attention towards other areas.

Well, I meant, let's say that you pick up one chain and we don't have any names, but as you are selling them, I am not saying that overnight you will also be selling them in Europe or in Latin America, but is that part of the conversation, or is the conversation solely on the North American piece of the business?

No, we're always talking to clients, we're always talking about the strengths that Ecolab can offer them, the solutions we can offer them, and the value we can provide for them. So we're talking to the customers all the time about these very same things.

And on the 360 Degree Protection, you say you are making progress. Could you give us a feel for either a number of accounts or a dollar amount or a percentage as to where you are and where you think you can go? We know you started at zero.

Oh, in terms of how many accounts?

Yes, the size. Yes, it is growing, but is there something a little tangible, a little more tangible you can share with us?

I don't have the numbers in front of me, Rosemarie. I know that we've continued to make progress.

I think at the September meeting, Jim said there was something like 3% of the accounts were at [that] and we're going to make progress on it, but I don't have a number in front of me so I couldn't give you a good answer.

And then you talked about the weak economic trends in Europe. When, if I understand, are the companies probably actually Europe seems to be doing better and improving. Why the difference in tone, I guess?

Actually, there's been no change in what we've been saying about Europe for some time. As we've said for a long time that the reason we think Europe is a little slower than elsewhere is it's a combination of our business being concentrated in countries with soft economies. We have a less favorable portfolio of businesses and there's some cultural differences in the sales force.

There's not much we can do about the economy so we've been developing alternatives around them. But I think that if you look at Germany, France, Italy, they are showing recoveries right now, but those recoveries tend to be export-led, not as much consumption-led.

It's one of the things that we're working around, for example, the Institutional division in Europe. We are developing the food distributor program, which is new for Europe, even though it's been around the U.S. for a long time. We're also developing street programs for our European associates to try and offset that growth.

In terms of portfolio businesses, we've made acquisitions, as you've seen just this year in the healthcare area with Shield, and prior to that we've added the Pest Elimination business. So we're trying to add higher growth, higher profit businesses to Europe.

And in terms of the sales culture, we're doing a lot of training, we're doing a lot of different things and we'll be doing more in the future to try and bring the aggressive Ecolab culture, which has been successful elsewhere, and try and use that to help grow our European sales.

Well I am glad you recognize the difference in culture and while you may be trying to get the Ecolab aggressive culture overseas, I am really not convinced that you will actually be able to do it.

So let's say that you kind of hit a wall and those people just don't operate the way Americans operate, regardless of how much incentive you give them, because they have different ideas in terms of quality of life and so on, what is the plan if what you are doing now doesn't work? Or do you not have one yet?

I don't think it's been proven that it doesn't work, number one. Number two is, we're talking about making incremental improvement, we're not talking about an exact match between the thing.

We're talking about trying to make progress on that and I think we've got a lot of opportunity to do that. I don't think we're at the point of trying to say that we're already skipping over that and saying we haven't succeeded.

The other part of it is, is we talked about the portfolio businesses. One of the strengths that we've got for the U.S. is we've got a broad product portfolio that all of our people can offer and that's the Circle the Customer strategy. Up until we brought in Pest Elimination, Europe really didn't have a circle the customer opportunity because he didn't have businesses to circle the customer with.

So I know this is not as fast as many people would like it, certainly not as fast as we would like, but we're making a step by step progress to put the elements in place that will make Europe a successful business. We still have a ways to go, as we've said, and we're dedicated to making that happen.

Okay. Thanks and good luck.

Thanks, Rosemarie.

At this time, we show no further questions.

If there's no further questions, thank you very much for your time and have a great weekend.