藝康 (ECL) 2006 Q4 法說會逐字稿

Good afternoon. Welcome to the Ecolab fourth 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] This call is being recorded, and if you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Michael Monahan, Vice President, [Eternal] Relations. Sir, you may begin.

Hello, everyone. And thanks for joining us. I'm guessing we'll be around for a long time here. 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 section of our most recent Form 10-K under item 1A, risk factors, and in our fourth quarter earnings release. A copy of our earnings release is available on Ecolab's website at Ecolab.com/investor. Before we begin, I would like to mention that Doug Baker, Ecolab's CEO, will be joining us today for our Q&A session, which will follow the review of the quarter.

Starting with some highlights from the quarter, Ecolab once again delivered on its forecast, as fourth quarter 2006 EPS soared 26% and was on the top end of our forecasted range. Even adjusting for the AJCA charge last year, EPS was up an outstanding 21%. We continued to deliver strong organic sales growth with an increase of 8%. The U.S. was up an exceptional 11%. Institutional was particularly robust, rising 14%. Pest, Kay, and Textile Care all grew double-digits, while Food & Beverage and Water Care saw strong growth. Latin America also continued to grow double-digits, and we saw further strong growth in Canada. We made additional competitive gains in our business and strengthened our industry-leading position. As expected, both gross and operating margins showed sharp increases, driven by better execution, aggressive work to grow the business, and further progress on our pricing and cost saving initiatives. Our returns on capital improved, with ROIC up 90 basis points. We're optimistic about our prospects for the new year, and look for the first quarter and full-year EPS to show continued double-digit growth. In summary, we expect yet another terrific year for Ecolab, and believe we're making the right investments to sustain attractive growth for the future.

Turning to the details, Ecolab's reported consolidated sales for the fourth quarter rose 11%. Looking at the components, volume and mix were up 6%, pricing was up 2%, currency added 2%, and the impact of acquisitions was slightly less than 1%. Sales for U.S. Cleaning and Sanitizing operations increased a very strong 11%. Institutional enjoyed another outstanding quarter, as sales rose an exceptional 14%. Sales growth continued to be strong into its various end market segments, including restaurant, healthcare, lodging and travel, and benefited from significant competitive gains. We continue to improve market share as we leverage Ecolab's industry-leading products, service, and training support to deliver high-quality Cleaning and Sanitizing program to our customers. We also continued to realize good momentum from our new programs, like the 360 Degrees of Protection program, new products, enhanced service, salesforce technology, and the training investments we have made over the last several years. We believe the outlook for Institutional remains very attractive, and we expect Institutional to show continued superior growth into 2007.

Kay's fourth quarter sales growth was strong, rising 14% as the division compared against a weak sales period last year. Kay enjoyed good new account gains in the broader QSR market and fast casual restaurants, and benefited from more effective field sales coverage. QSR's underlying business remains solid, with good, ongoing demand from major existing and new fast food chain accounts. The Food and Retail business also grew as rollouts continued with major grocers. New products and programs continue to bolster Kay's results. We expect a double-digit first quarter from Kay, and another year of double-digit growth in 2007. Textile Care sales rose an outstanding 20%, reporting another terrific quarter. Textile Care continues to benefit from investments made over the past several years in its salesforce, customer programs, and marketing focus. New account gains once again drove the increase, as new products and solutions that help reduce customers' water and energy consumption provide a key differentiation in the market. We look for further sales growth as Textile Care continues to benefit from account wins, improved pricing, and new products to yield good gains in the first quarter.

Before we discuss Professional Products, please note that beginning in the first quarter of 2007, sales of our Professional Products will be reported as part of the Institutional division. This will reflect the internal change as the Professional Products salesforce has now merged with Institutional salesforce. Both are now selling the Institutional products line. This action has substantially bolstered the sales presence for Institution -- for Professional Products in the hospitality, healthcare, government, and education markets, as we leverage the more than 3,400-person strong Institutional salesforce, consolidate Ecolab's hard surface cleaning for those markets into one division, and eliminate overlap at major floor care accounts that both divisions called on before.

In the fourth quarter, Professional Products reported sales were affected by the salesforce merger process and where those sales were created. While reported Professional Product sales decreased 11% in the fourth quarter, Professional Products pro forma sales, adjusting for the internal merger, were about flat. Fourth quarter sales for the healthcare division increased a modest 2%. However, when adjusted for the large distributor order in the fourth quarter 2005, sales growth was 12%, reflecting the solid end-market demand for our healthcare products. 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 and central sterile medical device cleaning and disinfection. Looking ahead, first quarter 2007 healthcare sales should show much stronger reported sales growth, reflecting solid end-market demand for our healthcare products and more normal shipping patterns.

Food and Beverage increased 9% in the fourth quarter, led by strong performances in the dairy plant and meat and poultry segments. Excluding our acquisition of DuChem, sales rose 6%. Focused investment in the Sanova antimicrobial food surface treatment line continues to provide solid growth in the meat and poultry market. Corporate account wins, account penetration, pricing, and new products have contributed to 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. We expect continued sales momentum in the first quarter of 2007, as we focus on new account acquisition and expansion of the antimicrobial platform. Water Care sales rose 9% in the fourth 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 drive further growth in 2007.

Vehicle care sales grew 6%. New product sales and increased pricing led results. Vehicle care expects new market opportunities, along with a larger and upgraded salesforce to yield good sales growth in the first quarter of 2007. Sales for our U.S. Other Services increased 10% in the fourth quarter. Pest Elimination sales continue to show very strong growth, rising 14%. Business fundamentals remains solid. New account activity remains healthy, driven by good corporate account gains. Field service associates also boosted results by driving noncontract service growth. Programs tailored for specific markets, like limited service hospitality, have provided better Circle the Customer penetration and new growth opportunities for Pest Elimination. We expect these trends will enable Pest Elimination to show continued double-digit growth in the first quarter and strong growth for the full year.

GCS sales rose slightly in the fourth quarter. Our primary focus remains on the systems and process infrastructure investments that will drive competitive advantage, and they continue to make good progress. The new systems have been built. They are currently being tested and will be implemented during the next few months, and be operational midyear. We expect some additional costs during the implementation, but look for improved results once the new systems are in place.

Measured in fixed currencies, international sales increased 7%. Europe, Middle East, and Africa sales rose 6% in the fourth quarter at fixed currency rates. Excluding acquisitions and divestitures, sales grew 5%. Sales for Europe's Institutional business showed moderate growth, as new accounts, good sales through Foodservice distributors, and strong gains in housekeeping more than offset soft consumption in the catering accounts for manufacturers. Sales initiatives toward street accounts and an expanding program with Foodservice distributors are working to offset the impact of slower markets. Food and Beverage sales increased modestly, as growth in beverage, agri, and pharmaco's, offset soft food and dairy sales. Professional Product sales also showed modest growth. Good gains with major customers and new programs were partly offset by consolidation among building service contractors and smaller accounts. As in the U.S., Europe's Professional Products business will also be reported in Institutional beginning in the first quarter, reflecting the organizational change.

Healthcare sales increased sharply, led by our recent acquisition, strong growth in contamination control and long-term care, and sales of instrument, surface and skin disinfection products. Textile Care sales again showed strong growth. Good customer gains, and sales of award-winning water and energy conserving technology drove the higher sales. European Pest Elimination business continued to show good growth in new contract sales and in improving one-shot business. We continue to increase market share in the UK. The French Pest Elimination operation also continues to make progress. Like the UK, new contract growth is showing good trends. In addition, we are developing a strengthened sales organization and investing in programs that will deliver better growth. We look for Europe's first quarter fixed currency sales to show continued moderate growth.

Asia Pacific sales grew 3% in fixed currencies as growth in Australia and East Asia were offset by Japan. When reported in U.S. dollars, sales also increased 3%. From a divisional perspective, Institutional sales gains were driven by new products, including Wash 'n Walk, and by growth in MarketGuard 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. Food and Beverage sales were off slightly due to lower sales in Japan. Both the beverage and brewery sectors continue to show good growth in most of the region. The Food and Beverage division overall has benefited from increased product penetration and account gains. With a strengthened management team in place and a focus on improving operating fundamentals, we expect Asia Pacific to begin showing better growth trends in the first quarter.

Fourth quarter sales for Ecolab's Canadian operations grew a strong 9% in fixed currency, and were up 14% in U.S. dollars. Institutional sales were robust, benefiting from corporate account gains, accelerated street growth, and new product sales. Food and Beverage sales also improved, while Pest Elimination grew double-digits. Latin America reported an outstanding performance, with sales rising a superb 20% at fixed currency rates. When measured in U.S. dollars, sales rose 22%. Sales were excellent throughout the region, and all divisions rose double-digits. 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 and 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, fourth quarter gross margins increased 100 basis points to 50.4%. We continue to benefit from pricing and cost savings initiatives. These more than offset continued delivered product cost increases. Raw material costs are generally on track with our expectations. We will stay on top of our pricing, cost reductions, and business simplification actions, and expect gross margins to show further year-over-year improvement in the first quarter. SG&A expenses were 39% of sales, up 50 basis points from last year. The SG&A ratio reflected salesforce hiring and training, incentive compensation, as well as investments in R&D, business efficiency, and information technology. These were partially offset by cost savings initiatives and leveraging our strong organic sales growth.

Ecolab's U.S. Cleaning and Sanitizing segment operating income increased an outstanding 30%, driven by higher sales, improved cost efficiencies, and better pricing, which more than offset higher delivered product costs and investments in the business. Operating income for U.S. Other Services increased 11%, as strong growth at Pest Elimination was partially offset by accelerated investments and slow sales growth from GCS. International fixed currency operating income increased 5%. Sales growth, pricing and cost efficiencies were partially offset by higher delivered product costs and growth in efficiency investments.

Ecolab's fourth quarter consolidated tax rate was 34.9%, down 335 basis points from a year ago. The lower rate primarily reflected the higher tax expense in 2005, related to the repatriation of funds as part of the AJCA, as well as benefits of the newly enacted R&D credits in the U.S. and reduced statutory income tax rates overseas. Please note that excluding the benefit of the international rate reduction and the new R&D credit, fourth quarter 2006 EPS would still have been $0.34. We expect the effective income tax rate for 2007 will approximate 35%. We repurchased 0.6 million shares during the fourth quarter under our share repurchase program, as we work toward better leverage on our balance sheet. For the full year 2006, we repurchased 6.9 million shares. The net of this activity is that diluted net income per share for the fourth quarter was $0.34, up $0.26 -- 26% over the $0.27 earned a year ago. Adjusted for the AJCA charge last year, EPS rose 21%.

Looking at the balance sheet, Ecolab's total debt to total capital was 39% at year end compared with the 31% reported at year end 2005. This reflects the impact of the 300 million in Euro notes we issued in December 2006, and the effects of FAS 158, Employer's Accounting For Defined Benefit Pension and Other Post-Retirement Plans. The Euro notes accounted for approximately 10 percentage points of the increase, while FAS 158 accounted for approximately 2 percentage points of the increase. However, please recall the Euro notes replaced an existing Euro note that matured February 7, 2007. Pro forma, adjusting for the Euro note that matured last week and including the effects of FAS 158, our total debt to total capital today stands around 29%. Depreciation was $58 million in the quarter and amortization was $8 million. Capital spending for the quarter was $79 million. That's a review of the fourth quarter.

In summary, Ecolab delivered yet another double-digit EPS gain. Our strong performance was a result of excellent organic sales growth and competitive gains in our U.S., Canadian, and Latin American businesses. Our gross and operating margins both rose in the quarter, as leverage from our strong top line growth and cost savings actions 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 are very proud of our associates who worked so hard to make this happen.

Looking ahead to the first quarter of 2007, 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 on forward-looking statements in our press release and our Form 10-K, which lists risk factors that may cause results to differ.

In the first quarter, we look for our U.S. operations to show continued solid momentum. We expect strong sales growth from Institutional, Kay, Pest Elimination, and steady gains from our other domestic businesses, to deliver further superior growth in the U.S. We look for international sales to again be led by strong Latin America growth, with improved sales in Asia Pacific and moderate increases in Europe. We believe this will result in overall moderate, fixed currency international growth. Gross margin should show strong year-over-year improvement and rise above 51% to compare favorably with the 50.7% reported last year. Selling, general and administrative expenses are expected to be similar to last year, at around 39%. We believe these trends will drive operating margins to expand versus last year. Interest expense should be around $12 million. We expect the effective tax rate in the quarter will be approximately 35%.

Overall, currency translation is expected to benefit first quarter earnings. As a result, we expect diluted earnings per share for the first quarter to be $0.33 to $0.35, and compare against the $0.30 earned last year. Please note that this estimated effective tax rate does not reflect the impact of discreet events that, if and when they occur, are recognized in the appropriate period. Additionally, the adoption of FIN 48 could increase variation in our quarterly tax rate. For the full year, we look for another strong year of double-digit growth, with earnings in the range of $1.62 and $1.65 per share. And now, here's Doug Baker to make a few comments.

Well, good afternoon. It's great to be here. Mike ran through a number of the details of the quarter. I just wanted to offer my perspective on the year. And quickly, I feel terrific about the results, and probably even more importantly, about our future. '06 was another great year. We achieved strong organic sales momentum, which has been one of our key priorities. U.S. organic growth was up, and was double-digit for the year. Latin America had solid double-digit. Asia Pacific is in good shape and getting stronger, and we like the momentum we're building there. Europe is still too slow, but it is modestly better. And I believe we are on the right issues, as well. Gross profit improved, as we forecast it would. It was up in the third quarter, fourth quarter, and for the full year. Clearly, this is driven as pricing and cost savings were more than able to offset the raw material increases, which we again saw in '06. We continued to have solid SG&A management. We are making significant investments to enable us to do even a better job of taking sales dollars and translating them into EPS. And the investments we made were supported by cost savings and good cost control. As a result, we improved our capital returns too.

We made several good acquisitions in '06 that are going to help our business. That said, the last couple of years have not produced the results from acquisitions that we are looking for. But it's really a result of us sticking to our financial discipline. We remain active, focused on this area, and making acquisitions, the right ones at the right price, remains a high priority for the Company. The competitive environment is better. As expect, we picked up what we call the lion's share of the business that JD exited. It gives us continued momentum for this year and beyond, as it creates not only the immediate opportunity that taking over the business did, but also the enhanced Circle the Customer opportunity that exists in these customers, as well. So all in all, we are very proud of what we were able to accomplish in '06.

Now, certainly, there are areas in the business that could use improvement, and we also know that we have some work ahead of us. And frankly, we consider this good news. We're going to plan to stay very aggressive in the U.S. and Latin America and maintain and build upon the momentum we've generated there. We know we've got to continue to step up the pace, particularly in Asia Pacific and Europe, and we have the plans in place to do it. And we've also got to stay on pace in the key investment areas for our Company to continue to build its future growth capacity. One, GCS. We announced that we accelerated the platform move in '06. It was originally planned for '07. Sitting here, I'm delighted we did it, because we're much further along. But we've got to translate that good work into money, and we plan to see that beginning in the summer of '07.

We need to continue our focus on simplification of product line and processes to drive efficiency and create more leverage to make sure that we have the lean and efficient operations we need to continue to translate sales dollars into EPS. And we can't forget about the core investments that are critical to the Company. We have focused a lot of our energy on making sure that our Institutional F&B, Kay and Pest businesses are getting the types of investments and the type of energy they need to accelerate growth in those businesses. They represent great growth engines still, and we've been doing that successfully. We've got to maintain it. Net, we feel good. We've got the right priorities, we've got the right people. I believe we are on task, and we are showing results.

I also feel terrific about our prospects for '07, and I like the fact that our opportunities and skills line up well for the long-term. We are in the right markets. They are growth markets, and they have solid macro trends behind them. We're the clear global leader, but we still have low share. We chase an estimated $40 billion market, and we're only selling $5 billion. We've got both top line and margin expansion ahead of us that puts us in a good position to deliver what we call an engine that can deliver a sustainable 15% year-in, year-out. We're in excellent financial shape, good returns. We've got the flexibility to fund our growth further. We'll use any excess balance sheet capacity for share repurchase to return more cash to shareholders, should we have it. We remain committed to investing in our business to drive superior growth in the future in sales, service, R&D, systems, acquisitions, and other key drivers for our business. Net, feel very good about our progress. Feel even better about our future. And we're continuing to stay focused on the things that drive shareholder growth. So with that, I'm going to turn it back to Mike, who has got some closing comments before Q&A.

Thanks, Doug. As a final note, while it's still early, we have had some inquiries regarding the timing of our NRA event. We plan to hold a tour of our booth at the National Restaurant Association Show in Chicago on May 21. We'll have more details on the event as we get closer. That concludes our remarks. This conference call will be available for replay on our website through February 23rd. Operator, would you please begin the question-and-answer period?

[OPERATOR INSTRUCTIONS] Bruce Simpson, William Blair.

Doug, I was a little surprised in your very closing remarks there, that you referred to 15% year-in and year-out. And it seems like in the past you guys have kind of said, well, 13 to 15 is the goal. Is that the establishment of a new, higher goal? Or does that reflect more confidence?

Bruce, I think we have consistently said that our financial targets are 15% EPS, 20% return on beginning equity, and maintaining an A-rated balance sheet, or investment grade. And that's always been our goal. I think what we've talked in the past is we've not been willing to sacrifice what we feel is long-term growth in difficult years. So say we did 13% in 2005 when we were facing the raw material headwinds. We could have done 15%, but it would have meant that we wouldn't have made the investments we felt were critical to driving sustained growth in '06, '07 and beyond. So I guess our mark of success is going to be have a business that we can deliver 15% ideally every year. That's our goal. But it's going to be done when we can do it sustainably, i.e., while making the investments we know are important to driving growth long-term. So no change.

Okay. And can you just elaborate on JD? As you said in your remarks, you think you took the lion's share in that business. Any way to quantify either the impact in this quarter, or more importantly, the annualized amount that you think you have taken away?

We always get a little hesitant to start claiming how much a given customer is worth. We haven't done that in the past. I have said on record that we thought lion's share was going to equal about two-thirds of the $150 million. So, I guess I will repeat that number. All that business, clearly, isn't on in terms of a going run rate. But more importantly, Bruce, I guess the way we look at it, is that $150 million, or the 100-approximate million that we took on is worth probably 4 to 5X when we start at looking at Circle the Customer opportunity. So we think this is an engine for us for several years to go.

Thanks.

Michel Morin, Merrill Lynch.

I think, Doug, you mentioned in your remarks that Europe is still too slow, but is doing modestly better. What does it take to do a lot better?

Well, Michel, if we look back, we've owned Europe outright for a little over five years. And the first five years were a terrific success for us financially. And what we're really focused on is taking it to the next level. And there's not one single answer. So what I'd probably illustrate is a lot of the work that we've done in North America, we are now replicating in Europe. And that's getting back and making sure we've got the fundamentals in place, in terms of how we align ourselves from general manager down to territory manager, do we have the right metrics at the territory manager at the field level, do we have the right measurement, do we have compensation aligned. And we are along this path. But we know this work translates into accelerated organic sales, which is a number one driver of profit for us. And so it's really getting on those issues. We've made a lot of changes in terms of leadership in the last 15 months. I feel very good about the leadership team that we have in place in Europe. And their focus is much more on customers and driving growth, and accelerating organic growth in particular.

Just wanted to add to that, Michel, if you look at what we've done in Institutional over the last several years, textile care, Latin America, Food and Beverage. All those businesses are ones in which we undertook exactly what Doug's talking about, in terms of a very fundamental approach to improving the business. I think you're seeing the results of those today.

All right. Thank you.

Mark Gulley, Soleil Securities.

A couple of questions, if I can. First of all, Doug, the reorganization, tucking Professional into Institutional, how much of that is something you've thought about for a long time? And how much of it is directed towards the next layer of share gains from --?

Well, we have contemplated it for a while. The reason that we chose to do it now, was a lot of the work that needed to be done to make this effective has been done. Getting back even to the answer previously on the work that we've done in Institutional and the rest, and getting focus in everything else. We earlier split healthcare from Professional Products, we've got Institutional right and got their sales organizations focused in the right markets. And it is done, because we believe we can accelerate growth by combining these businesses. Now instead of having 90 people sell in large categories, we've got several thousand able to sell in large categories. So we are on a share mission in a number of those businesses. But it's focused on our markets.

Secondly, in terms of the extraordinarily good volume growth here recently, if I just take $100 million, the opportunity that you've already taken from JD, and divide it by your sales base, I come up with 2 percentage points. Is that a rough idea of the overage in top line growth that you're enjoying now, that you may not see, maybe in a year from now, or so?

Well, we've always said that Institutional is kind of a 7%, 8%, 9% type growth business.

Right.

So I think you're looking at several points of their growth in the current quarter being the competitive gains we got from the market.

To wrap up, Doug, we've talked about this before, the possibility getting more aggressive on the balance sheet on the capital structure, given the fact that acquisitions don't seem to be coming in at the pace that you would like to see. What are the odds for getting more aggressive on the capital structure here?

Well, I -- Mark, I think you've seen that we -- our uses of cash -- we don't see any big fundamental change in the way we plan to use cash. But year on year, as opportunities present themselves, we will make minor adjustments. Clearly, we bought more shares last year as a result of not having the acquisition. But we know what our acquisition target sheets look like. They're rich. The acquisitions will come. And in times when they're not, we will buy more shares. But it's really not a strategic change in our outlook.

Thank you.

Edward Yang, CIBC World Markets.

It seems like your earnings quality is particularly high right now, because you've taking gains from better pricing, share gains, and raw materials, and you've reinvested that fairly aggressively in overseas markets or in other emerging areas where the benefits may be realized more longer term. Doug, do you think this is a fair characterization of the current situation at Ecolabs?

Yes, I do, Ed. I think there's -- I think we've done -- the team did a great job in '05 and '06 managing through frankly pretty sizable headwinds and generating very good profit. And we are working hard to invest it where we think we're going to get out-sized return going forward. So it is in emerging markets, and we're doing a number of things there. It's making sure that we've got the right management team in terms of quantity, as well as quality in place in a number of the international and other growth markets. And we're pounding money into things that we like in terms of driving efficiency long-term, as well. So I think that's exactly how we're looking at it right now.

And could you update us on your current price premium versus your nonservice competitors? And why do you think it's so difficult for your competitors to replicate a similar service offering? You would think that more people would try to replicate the model, given the attractive returns you're earning?

I would -- I guess the price premium I don't think has changed demonstrably over the last few years versus those who offer, if you will, kind of the no-service approach. The reason that it's -- I think our approach is so resilient is, in fact, our approach delivers lower end use cost when you take the total cost of any of the processes that we're touching. And with energy being more expensive, and frankly, labor markets not really loosening much, particularly at the levels that we're dealing with, that our story is even more viable today than it was in the past. Why don't people replicate it? I think there's a bit of a trick -- or a conundrum here. You can't really go hire people in advance of the business. And it's hard to go get the business without the people, because you're asking customers to take a big bet. And I would point out, we've got to, and we continue to focus on making sure our people present a huge advantage and deliver great value to our customers. As long as we continue to do that, it is a very important competitive barrier for us.

Thank you.

Laurence Alexander, Jefferies.

First, just a question on productivity. Would you mind giving us your two to three year outlook for two metrics? One would be sales per employee, particularly outside the U.S. And then also for sales for the growth CapEx that you're putting in, I mean, for the dispenser equipment that you need to put in at the customers?

Laurence, I'm sorry, this is Doug. The second question kind of got -- our machine garbled there.

What I would like is a little bit more granularity on is what levers you might feel you have to improve your ratio of sales to the amount of growth CapEx you need to put in place, the different equipment and so forth?

Yes. First, sales productivity. We have had a fairly steady track record of increasing productivity per head. Certainly, it's going to differ by business, and differ somewhat geographically, given the state of the business. Last year, I think productivity per head was up around 4 points. Half of that would have been pricing when you average our pricing over a global basis. And we would expect to continue to see productivity per head increase as we move forward. And it's driven by a number of things. Frankly, making sure that we've got the fundamentals right, and that we've got people focused on the things that will deliver the best growth. We're investing in technology in the field. We invested in it because we thought it would help us and enable us to get more productivity and more focus on sales, and that's, in fact, what it's doing.

In terms of merchandising equipment and capital, yes, I'm fairly bullish that we will get better leverage out of the merchandising equipment capital for a couple of reasons. When we talk about simplification and I give examples about our product line, if you start looking at our equipment product line, it is clearly overly complex. We are working on simplifying it so we get better leverage. We are looking at ways to globalize the offering because we have a number of duplicate dispensers around the world. So as a result, we're not buying electronic boards as efficiently as we could. We're not assembling as efficiently as we could. So even if we didn't change a number of pieces going out, we know that we can lower the cost per unit fairly substantially. So that's clearly one of our focuses, as well, because we do believe there's money there, and it will help us both on the P&L and also on a return basis.

Just as a follow-up, can you address with GCS how much of a headwind it was for the entire year in '06 and what you see for '07, '08?

Yes. I think GCS was roughly, probably $0.04 headwind last year. If you translate it into EPS, about $15 million. Now year on year, it'd probably have been more like $0.01 negative year on year, '06 to '05. We expect it to be modestly accretive this year, because we have continued heavy up investments in the first half, offset in the second half as we start realizing the benefits from the investment. Our expectation is leaving the year roughly at break-even. And our expectation -- that's on a run rate, not on an -- not from the year. And our expectation is to start making money in '08.

Wonderful. Thank you.

Robert Koort, Goldman Sachs.

This is Amy Zhang sitting in for Bob. A couple of questions. First, I think in the prepared remarks, you mentioned the potential turnaround at GCS starting from the summer. I was wondering whether we will see this turnaround be accretive to margins since that time?

Yes, the turnaround, as predicted, when it occurs, it will also help margins, absolutely.

Okay. What would be the magnitude of the margin increase due to the turnaround?

For the total corporation?

No, from GCS?

Oh, well, put it this way. If you go -- where are we right now, like running at a negative 9, 10?

Right.

Right. We expect, as I said, hopefully at a run rate close to zero, and starting to make money next year.

2008.

In 2008.

Okay. And then the second question related to the international business margins for this quarter. I saw a little bit light there. I was wondering, except for Europe, which remained a little bit weak, and then any other things really drop the margin?

We clearly made -- and I think Ed got to this in his question. We pounded investments internationally. Because we want to make sure that we are driving the types of behavior and focus that we need to get the sustained organic acceleration that we want. And so I would say that's really the story. It's a 13-week period.

Okay. And then my final question would be, was the Europe -- with the European economy have starting to picking up. And then obviously, Ecolab has implemented pretty good strategies in that region -- I mean, strategic initiatives in that region. When shall we expect a more visible turnaround in Europe going forward?

Amy, we tend not to take -- to use the economy as an excuse. And I guess on the other side, we don't use it usually as big wind. We think we create our own wind. I guess what we are seeing, is a lot of the economic growth in Europe is being driven by exports. It's not necessarily in the markets we are in. The markets we serve, we think are going to be just fine in '07. And what's going to be driven in the improvement is going to be driven by our behavior and by our work in the field.

And then the consumer spending, in Europe is still pretty slow, or already show some pickup?

Yes. I don't see -- we don't -- I just say it's kind of a nonstory for us, economically in Europe. We don't see the situation worsening. I don't think it's a real driver of our business issues, nor will it be the real driver of our business turnaround.

Okay. Thank you.

David Begleiter, Deutsche Bank.

This is actually [Jason Minor] sitting in for David today. Thought I lost you there for a second. Just quickly wondering, with Professional Products, you said it was down 11%, but flat pro forma for some of this merging into Institutional. Was there a complementary positive impact on Institutional sales?

Yes, there was maybe0.5 point.

0.5 point. That's helpful, thank you. And can you give us a sense of how much room you think there might be for pricing improvement in Institutional in '07?

Well, I guess we don't expect to have the same level of pricing in '07 as the markets changed. Our pricing view, and I think we talked about this at length in '05 and '06, is really over the long-term. And our plan is, of course, to continue and seek pricing, particularly where we have contracts we don't believe fairly reflect the value that we're providing and/or the costs that we're applying. But I guess Jason, our view on this is we're continuing to drive profit growth by accelerating organic sales, accelerating product penetration, pricing where it's justified and where we can get it, and cost savings and leaning out our operations. And that's the formula. I think if you get overly stilted, and we run out on some major initiative to go try to command price here near-term because of some supposed market imbalance, it's really a problem for us long-term. And it's not how we're going to operate.

Understood. Thank you. And just a follow-up on some of your comments about labor. Can you tell us how turnover is among your U.S. field staff, and if you're coming up against any hiring constraints or trouble finding new people?

We're fortunate that, one, our turnover remains low, particularly for the industries that we serve, and also if you look at like competitors. And we haven't seen any change, really, in turnover at all. In terms of attracting talent, we're blessed. I think we've helped create this. We've got a great story. And so we have not had a problem attracting talent. We're a growth business in growth markets. We like to promote from within. We invest in our people, we invest in training. These factors go a long way to being able to drive and find talent.

We're rated third-best manufacturing company to work for, for the last couple of years. So I think it's viewed as a good place to be if you're in sales. And obviously, as the lead dog in the industry, you're going to have better opportunities with a company with a broad product line like Ecolabs. So it's been god.

Very good. Thank you.

John Roberts, Buckingham Research.

The Wall Street Journal a few weeks back ran a story on Proctor & Gamble's institutional business. And I don't recall them being a significant competitor, but is there something newsworthy in them doing that? Is anything changing, maybe because of JD's activities that they're in the news with the story on that?

I read the article, as well. I will also say we've seen the same article in roughly four other publications over the last 15 months under different bylines. So it's a little bit -- it's clearly one of their PR pieces. Here's what I would say. P&G is a great company. They train great people, by the way. But anyway. They are -- I think they're a great company. They've been in this business for decades. They go through various stages of aggressiveness. Certainly, they've read and saw that JD made a strategic change in their U.S. market. And I'm sure they're looking at how to capitalize on this. From our direct contact, I don't -- we don't see big changes in the last recent years over what they've been doing. We respect them, we watch them, we like competition. So, I don't know what else to say. The accounts highlighted there were Cincinnati accounts.

Right. Then secondly, is there a secondary effect related to JD's actions a year ago, in that rather than just gaining some of the JD business, they must be more aggressively going after some of the smaller competitor business that's out there, that maybe they compete better against now with the distribution model against those accounts, and maybe are driving some of the small competition out? I don't know that. I'm just asking whether or not there's a secondary effect beyond just directly looking at JD business.

It's an interesting question, John. I guess I don't have any evidence to support that. But they are going to get their -=- they are going to have to focus somewhere to go create and drive growth. We -- in respects to JD, they made a relatively big move in the U.S. But they are still our largest global competitor. We still take them very seriously. We are still aggressively pursuing all accounts, including those that they have today, globally. And I guess we don't know how else to operate. And whatever their movement, we are still going to go compete aggressively in the market, be it P&G, JD, or any other competitor.

Thank you.

Jeff Zekauskas, JPMorgan.

Did operating income in Europe grow this quarter?

Yes. Year on year?

Yes.

Yes, yes, it did.

As did margins.

As did margins. So, because, what you said was that Latin America was up, I think, double-digits, and Canada was strong. I think, Asia was up as well. So even with that, you were able to lift things a little bit?

[inaudible] I know where you're going. Let me grab some -- yes, Europe was up -- I'm sorry, I'm getting my -- oh, I'm sorry, year on year. Asia Pacific was down year on year.

I see.

Was I think what you're looking for.

Second thing is, have you guys factored in the cut in the tax rate in the Netherlands yet? Is that something that will hit you this year or next year to improve your tax rate?

We mentioned that. That was one of the factors in the fourth quarter rate.

Okay. And then lastly, did you say that Professional Products and their offshore operations will go into the U.S. going forward?

It's the U.S. or North American Professional Products is being managed together with Institutional in North America, so that we can better leverage our U.S. salesforce to drive sales gains in the product categories that Professional Products used to uniquely sell.

And similarly, Jeff, in Europe, Professional Products will be reported into Europe's Institutional business.

Ah, into Europe's Institutional Business. Thank you very much.

Dmitry Silversteyn, Longbow Research.

A couple of questions, most have been answered. Can you give us a 30,000-foot overview of what the business conditions are like across North America and globally for your markets? My concern is -- or the reason for my question, I guess, is we're seeing pockets of weakness obviously related to the housing market, it's no secret. And I was wondering, it's not clear to me whether or not that has any impact on you, or if it may have an impact down the line, but not yet. Can you speak a little bit on that, as far as what you see your market conditions, or business conditions like in 2007?

Yes, well, first of all, the housing market doesn't really have an effect on our business, though it does affect many others. I guess as we view '07, we see our end use markets in very similar shape as they were in '06. Room demand in the U.S. is going to be about what it was -- it's going to be up like it was in '06. The Foodservice business feels to us like it's going to be maybe even a little better in '07 than '06, because, remember, you had the gas impact there. So barring some huge run-up in oil. And, I guess, even if we have it, it will probably be equal. So I don't -- Dmitry, we look at our end use markets in '07 to be really kind of not the story.

Okay. So I guess as long as consumer confidence is up, and then consumers are spending, on whether it's hotels or what not, your business is fairly insulated from what's going on in the broader industrial market, then?

Yes, and I would also say '06 wasn't a banner year for our end use market. So it's not like we've got this big base we're comparing against. In fact, some of our end use markets had really struggled, and in spite of that, we prospered. So if anything, I think '07 is at least as good from an end use market standpoint as '06.

And I think, Dmitry, as you know, if you look at the end market drivers, as Doug mentioned, like room demand and foot traffic, et cetera, they don't swing that much from good to bad over long periods of time. So any movements there are fairly minor, gradual. And I think that for us, it's once again, it's not so much where the market's going, as much as what we're doing in those markets.

Very good. Secondly, switching gears on GCS business. You talked about accelerating investment again impact the profitability in the fourth quarter. You hope that this is going to start to pay back in the second half of '07. I think I'm recalling correctly, that that was the same guidance you gave at the beginning of '06 when you provided the fourth quarter '05 story. And actually, if I go back in my notes, it was somewhat similar to what you talked about in '05. So I guess my question is, are you -- is the investments that you keep accelerating into this business, is it an evolution? In other words, were you not going to make these investments as you head into the year, and then during the year you find out that you need to make these investments? Is that why you're making them? And if that's the case, how confident are you that '07 is the year, after trying to fix GCS for three years, that GCS is going to turn profitable toward the end of the year?

Well, Dmitry, here's what I would -- here's my recollection. '05, we made fairly significant improvement in GCS year on year, and we got a lot of traction. And as a result, we decided at the end of '05 to accelerate the investment that previously had been planned for '07. And so there was one change. It was that change. And we did accelerate the investment and we made it in '06. We are implementing those, if you will, the products of those investments in the first half of '07, which was always the plan. And we foresee seeing the benefits of those investments midyear in '07.

Now with that said, clearly this is one of those, I can -- you can make a case on either side of that. I'm bullish, and I think we're doing the right thing on GCS. It's a risk-reward equation. It's a significant growth opportunity for the Company. Today, the types of investments we're making are in the range of 2% of OI, but it's got huge, upward potential. And as a Company, we've got to be willing to make these types of investments that have long-term sustainable growth. And we're making it. I remain confident, optimistic, choose your word, about GCS. And I think we've been very frank and forthcoming about where it is, and I understand the question. So our job is to turn this thing into an operating income story, which is what our aim is.

I think the other good news is that we're able to do all this, make these investments in a year in which we delivered 16% EPS growth. So it's a strong story for us to be able to invest in the businesses that will generate growth in the future, while still delivering great growth in the current year.

That's a good point, Mike. But I guess where I'm coming from on this, is three years of investments, and the business is going to be marginally profitable as you exit '07. You're going to have to have two or three years of fairly robust, if not more, profit growth to justify these types of investments. One thing Ecolab has been good at besides making acquisitions and integrating them, is realizing when they're barking up the wrong tree and exiting businesses, as you've done over the past couple of years. So I guess from that point of view, what do you -- is there a point in this process where you have to step back and evaluate if you are perhaps going down a path that doesn't have a happy ending?

This is Doug, I'll take it. One, I was the dog barking up some trees that stopped barking and sold some businesses. So we're not afraid to do that. It's just not how we see GCS situation. I'll also say some of the Company experiences, it took us six odd years to make any money in Pest when we started in it. But I would say we're very happy that we saw it through, because it's now over 20 years old and a very profitable business. So this is one of those balancing acts. If somebody is going to paint the scenario, and I wake up in 2010, and we're not making any money, yes, we're not going to stay with this thing forever. But at this point in time, we believe we see the path, we've got a very good team on it, and we're focused on it. I would also just point out, it's 2% of OI. We're going to make these types of bets. And I agree with you, there's a time where you start to feel you're throwing good money after bad. I don't feel we're anywhere near that point in GCS right now.

Thank you very much, Rick [inaudible]. Quick question, just as a summary. In 2006, how much capital did you spend on acquisitions all told? Approximately?

About 80 to 100.

80 to 100?

Oh, $75 million.

$75 million. Okay, great. And to follow that up, you talked about acquisition pace and not living up to your expectations. And you have financial discipline obviously that you are applying to your pipeline of deals that you are evaluating. Is there something fundamental with the market, whether or not people are looking for -- thinking their businesses are worth more than you think they are. Is there something happening where maybe the market is changing a little bit, and you're kind of running into the law of large numbers, if you will? Or is it just a normal year to year fluctuation and deal flow?

Well I think there's a change. Clearly, expectations always get inflated overall when there's a lot of money, and people hear about big premiums and big multiples being paid. And that affects even little guys. I'd say what we see is, the companies that we have conversations with and then end up not consummating the deal, aren't being picked up by other people, necessarily. So it's not like we're losing a bunch of these deals. So I think, I guess our watch word is we think this, too, shall -- will pass.

Okay.

So, if anything, it's we don't like some of the multiples, and we're willing to pay for what we think are great businesses, if they're small. Big multiples don't scare us, necessarily. But if they're big, that's not the game we're going to go play.

I understand. Thank you, Doug.

Rosemarie Morbelli, Ingalls & Snyder.

Unless I missed it, I don't believe you talked about Vehicle Care. Could you elaborate as to what is going on there, since that is kind of the next, or the second GCS?

We did talk to it, Rosemarie, it was up 6% in the quarter.

And what is happening in terms of profitability for that business?

Rosemarie, this is Doug. GCS -- or excuse me, Vehicle Care actually has had a very strong operating income performance for, I think, each of the last three years. And this year, profit is up 421.83%.

Okay, well we are dealing with a small business -- ?

But you know what, as a business, it's got a very decent OI margin.

Okay. What is its total revenue for the year?

It's around 70.

Yes.

$70 million?

$70 million, roughly, yes.

Okay. You talked about Asia Pacific having only a modest increase. And that, of course, includes Japan, which you said was down. So I am assuming that the rest of Asia Pacific is up. It is a small business. Could you give us a better feel for how much Japan was down, the reason for it, and what was happening elsewhere?

Japan was down, [inaudible] very low single-digits year on year on the top line. In Japan, we're outperforming the competitors we have there, where we can see the sales numbers. And a lot -- I mean, honestly, the trends we've seen in Japan are -- we've got a rebounding Institutional business, an F&B business doing well in some segments and under pressure in others, through consolidation and some other things going on in the Japanese market. I guess, we remain bullish and expect to have a growth year in Japan in '07.

All right. You also talked, Doug, about working on business simplification. And I know I keep asking about the number of SKUs that you have eliminated. I don't know what the percentage is today. But let's assume that it takes you a couple of years to get where you want to be in terms of business simplification? What will the impact be on the gross margin? Or will the gross margin remain where it is, but you will benefit on the SG&A? Could you give us a better feel for the end result from that simplification?

Rosemarie, I'd say, one, it's going to show up both in gross margin and in SG&A. And it's going to show up differently in different businesses. Probably the simplest way to talk about is it will show up in our operating income margin, and therefore, net income margin. And the reason I say that is, it's really how we have to look at the business now. Because you've got a mix of businesses that really are fundamentally different when you look at the P&L structure. And our expectation is that we will continue to drive organic sales, M&A, and leverage, particularly in the OI margin level. And that's where you'll see it. And it is going to take -- this is a story that unveils itself over years, not over several quarters. Right? We're not going to go on a full stop, get the whole salesforce focused on cutting SKUs. We're going to do this by rolling out new programs, eliminating old programs, migrating people to something positive, i.e., new. Not getting in a situation where all we're doing is talking to customers about what we aren't going to sell them any more. Which is a fast way to cut SKUs, but unfortunately, we don't think it's a profitable way to do it. So this takes time. But I guess the good news for you is, we're on it. And we believe there's more leverage there. And we want to do this in concert with our growth initiatives.

But wouldn't that translate into just about the same number of SKUs, and therefore, where would the simplification be?

I'm sorry, I didn't -- .

If you eliminate some programs and products at the same time as you are rolling out new ones, where is the simplification where just replacing one by another?

No, well, I'm going to have to replace -- the new one is going to replace two and three.

Okay. And that should translate in what, in a 200 basis point improvement at the operating margin level? Is that a good number? I don't know.

I understand the question. I'm not comfortable going out and stating exactly how many margin points it's going to be worth. What I guess I would use to illustrate this, Rosemarie, is in spite of significant raw material headwind for the last two years, we increased our operating income margins in both those years, year on year. And certainly, it was really driven, if you want to, because any pricing we had went to just offset increased costs. It was driven by simplification, cost savings initiatives, productivity initiatives, and the like. And we believe we are rich in targets to get after. It's a blessing in a sense, although at times it can be frustrating. So that's why we like this business model, and why we believe and go out and say confidently we're a resilient business.

You have a great business model. There is absolutely no question. I was wondering how much better it can get, given all of the steps that you are taking at the moment?

We are -- I guess talking and aiming to deliver 15% on a sustainable basis, which means even after we make investments and the like, we are pushing very hard and are committed to making this business model even better.

Okay. Thanks and good luck.

Bruce Simpson, William Blair.

Hey, Doug. I think in the past, you said in 2005 you thought net-net your raw material bill was up about 10% year-over-year, and that through price hikes and so forth, you just about exactly offset that. I wonder if you can give the same analysis for '06. Was the delay of a deceleration in your raws, coupled with a full-year impact of prices, did that help gross margins for the year? And what was the overall gross margin increase, do you think, '06 over '05 all in?

Well, I think gross profit was -- I think it's out there, it's 30 basis points, I think, right? For the full year? I'm already on '07 and '08, sorry. But what happened last year is, if raws were up roughly, you're right, 10% in '05, they're up about another 5 points in '06.

Okay.

So if you want 15 points total, you're in the $140 million neighborhood, '06 versus '04 spend, just to give you perspective. Which is really money for us. And you're right, you saw in the second half is when we started seeing daylight in the gross margin number year on year, third quarter and I'm going from memory. So I think it was 40 basis points and 100 basis points, and I think for the year it was 30 basis points. You have the numbers. I'm close. Now I'm being told I'm right. So I don't know if that answers your question. And so, certainly, you're right. It gained momentum, it takes a while for pricing and cost savings to gain traction. We were just barely ahead of the locomotive, and finally started pulling in front of it.

Okay, thanks.

I think that's the end of the questions here. So, thank you, everyone, for your time and attention. And have a great day.

That does conclude today's conference call. Thank you all for participating, and have a great day.