藝康 (ECL) 2007 Q1 法說會逐字稿

Welcome to the Ecolab first quarter 2007 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. If you have any objections, you may disconnect at this time.

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

Hello, everyone, and thanks for joining us.

This webcast teleconference includes estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected.

Some of the factors that could cause actual results to differ are described in the section of or most recent Form 10-K under Item 1-A, Risk Factors, and in our first quarter earnings release. A copy of the earnings release is available on Ecolab's Web site at ecolab.com/investor.

Before we begin, I'd 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 first quarter 2007 EPS soared 17% and was on the top end of our forecasted range. We continued to deliver good organic growth with increase of 8%.

U.S. organic growth was up a very strong 10%. We saw double-digit growth in most divisions, including Institutional, Pests, Kay, Healthcare, Textile Care and Vehicle Care, with good growth from Food and Beverage and improved sales growth from GCS.

Latin America and Canada also showed double-digit gains and we saw further strong growth in Asia-Pacific. As expected, both gross and operating margins increased.

We repurchased 4.3 million shares in the quarter, bringing our total debt to capital ratio to 33%. We made a leadership change in Europe that we believe will facilitate the development of higher sales growth and profitability. We will be undertaking the key investments and actions and leveraging the strength of our other global operations as we deliver on operational improvement.

We remain optimistic about our prospects for the second quarter and the full-year. We expect EPS to show continued double-digit growth in both periods and we raised our full-year 2007 range by a penny to $1.63 to $1.66 range, indicating a 14 to 16% increase for the full-year.

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 first quarter rose 12%. Looking at the components, volume and mix were up 6%, pricing was up 2%, currency added 3% and the impact of acquisitions was 1%.

Sales for our U.S. Cleaning & Sanitizing operations increased a strong 11%. Institutional enjoyed another great quarter as sales rose 10%. Sales growth continued to be strong into its various end market segments including restaurant, healthcare, lodging and travel and benefited from promotions and significant competitive gains.

We also continued to realize good momentum from the training investments, enhanced service protocols, new products and programs, like 360 Degrees of Protection, sales force technology, and the performance measurement tools we have implemented over the past several years. They have all helped drive our strong sales and competitive gains. We believe the fundamental outlook for Institutional remains very attractive and we expect Institutional to show continued superior growth in 2007.

Kay reported strong first quarter sales growth, rising 16%. Kay enjoyed good new account gains in the broader QSR and fast casual restaurant markets, and benefited from strong distributor shipments. QSR's underlying business remains strong with good ongoing demand from major existing and new fast food chain accounts.

The food retail business also grew. New products and programs continue to bolster Kay's results. We expect modest second quarter growth from Kay due to the very strong first quarter 2007 and comparison to a strong second quarter in 2006, however, we continue to look for another year of solid growth for the full-year 2007.

Textile Care sales rose an outstanding 22%, reporting yet another terrific quarter. Textile Care continues to benefit from investments made over the past several years in its sales force, customer programs and marketing focus.

Significant new account gains once again drove the increase, as new products and solutions that help reduce customers' water and energy consumption provided key differentiation and enabled the division to significantly outpace its market. We look for further good sales growth, as Textile Care continues to benefit from account wins, improved pricing, and new products to yield good gains in the second quarter.

First quarter sales for the Healthcare division increased 10%. Sales reflected continued solid end market demand for our infection control products and expanded penetration within our existing base of group purchasing organizations and integrated delivery networks.

Our skin care and solid instrument care products each showed double-digit growth. Looking ahead, second quarter 2007 Healthcare sales should show continued strong sales growth.

Food and Beverage sales increased 8% in the first quarter, led by strong performances in the dairy plant and meat and poultry segments. Excluding last year's acquisition of DuChem, sales rose 5%. The meat and poultry market was strong, reflecting significant customer gains.

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

We expect continued good sales momentum into the second quarter of 2007 as we focus on new account acquisition and expansion of the antimicrobial platform. Water Care sales rose 3% in the first quarter, as compared against a strong first quarter last year.

We experienced steady growth in the food and beverage market, as we leverage cross-selling opportunities. This more than offsets slow sales in the light industrial market. We expect our continued focus on leveraging our Circle the Customer strategy will drive further growth in 2007.

Vehicle Care sales grew 13%. New product sales with products using advanced terminology, like Rain-X and SolidPower combined with increased pricing to lead results. Vehicle Care expects better penetration of its existing markets, new market opportunities, along with investments in its sales force to yield further good sales growth in the second quarter of 2007.

Sales for other U.S. services increased 10% in the first quarter. Pest Elimination sales continued to show strong growth, rising 12%. Business fundamentals remain good. New account activity remains healthy driven by good corporate account gains and non-contract service growth.

We also continue to develop new programs targeted at specific market needs that provide better Circle the Customer penetration and better growth opportunities for Pest Elimination. We expect Pest Elimination to show continued double-digit growth in the second quarter and strong growth for the full-year.

GCS sales growth improved in the first quarter, rising 5%. Our primary focus remains on the systems and process infrastructure investments that will drive competitive advantage and we continue to make good progress on these key objectives. The new systems are now supporting about 25% of our business and were installed in early March and we're very pleased with the results.

Installation will be completed and become fully operational this summer. We expect some additional costs during this implementation, but look for improved sales and profitability once the new systems are in place.

Measured in fixed currencies, International sales increased 7%. Europe, Middle East and Africa sales rose 5% in the first quarter at fixed currency rates. Excluding acquisitions and divestitures, sales grew 3%.

Sales for Europe's Institutional business fell slightly, as Institutional gains were offset by a decline in the recently emerged professional products line. New account gains, better sales through foodservice distributors and moderate growth in housekeeping were offset by soft consumption in the catering accounts for manufacturers and declines in janitorial.

Food and Beverage sales showed a good increase, with sales growth in all F and B segments. Healthcare sales grew 7%, led by a recent acquisition in the U.K., growth in contamination control and long-term care, and by sales of instrument, surface and skin disinfection products.

Textile Care sales continued to show strong growth. Good customer gains in sales of award-winning water and energy-conserving technology drove the higher sales. We continue to grow sales and market share in the U.K. and Ireland pest elimination businesses.

The French pest elimination operation continues to focus on developing a strengthened sales organization and investing in programs that will deliver better growth. However, combined French pest elimination sales were off as non-core subsidiary business sales declined.

As mentioned in our opening and in the press release, we made our leadership change in Europe late last year. Jim White, previously Ecolab's Senior Vice President for Marketing, assumed responsibility for the region. Jim's prior experience includes running businesses for Pillsbury and International Multifoods and he worked closely on the project that assessed Europe last year.

His primary job will be to focus on developing higher and consistent growth in Europe, as well as improving margins toward U.S. levels. This will involve implementing a range of actions, none of which are quick fixes, but all of which are fundamental to developing Europe's potential.

These actions will include improved sales force training, programs, technology, and sales metrics, continuing to upgrade the business and product portfolio to higher growth and higher profit potential, and completing the development work already under way to enhance Europe's information system. We believe these are the right actions to strengthen our European business and we've begun to implement the changes that will drive improved results, but it will take time for them to show up in sales and profit growth.

In the near-term, we look for Europe's second quarter fixed currency sales to show moderate growth, but look for better results as the actions described here take hold in coming quarters.

Asia-Pacific sales grew 9% in fixed currencies, as growth in east Asia and Japan drove results. When reported in U.S. dollars, sales increased 12%.

From a divisional perspective, Institutional sales gains were driven by new products, including Wash 'n Walk, and by growth in the MarketGuard program for retail stores. We continue-- we achieved important account wins in catering, hotels and restaurants, as well as food retail markets and benefited from a focus on independent restaurant accounts.

Food and Beverage sales increased due to solid growth in east Asia. Both the beverage and brewing sectors continued 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 strength in management team in place and a focus on improving operating fundamentals, Asia-Pacific expects better growth trends in the second quarter.

First quarter sales for Ecolab's Canadian operations grew a strong 12% in fixed currency and were up 10% measured 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 strong 14% at fixed exchange rates. When measured in U.S. dollars, sales rose 12%. Sales were excellent throughout the region as all divisions rose double digits.

Institutional growth was driven by new account gains, increased product penetration to the 360 Degrees of Protection program, 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, first quarter gross margins increased 20 basis points to 50.9%. Strong improvement in the U.S., driven by pricing and cost savings initiatives, was offset by a lower margins in the International segment, principally in Europe, where higher delivered product costs, not fully offset by pricing actions and comparing it to strong quarter last year hurt results.

SG&A expenses were 39.1% of sales, up 10 basis points from last year. The SG&A ratio reflected leverage from our strong organic sales growth, offset by investments in business efficiency, R&D and information technology.

Ecolab's U.S. Cleaning & Sanitizing segment operating income increased an outstanding 25%, driven by better pricing, higher sales and improved cost efficiencies, which more than offset higher delivered product costs and investments in the business. Operating income for U.S. other services increased 16% as the higher sales and improvements at Pest Elimination were partially offset by investments as we complete the systems rollout at GCS.

International fixed currency operating income declined 13%. The decline was entirely from Europe, where higher delivered product costs, not fully offset by pricing actions, along with business investments and annualization against a very strong quarter last year hurt results.

Ecolab's first quarter consolidated tax rate was 34.5%, down 120 basis points from a year ago, and in line with expectations. The lower rate is primarily due to U.S. tax legislation, international rate reductions, and tax planning strategies.

We expect the effective income tax rate for 2007 will approximate 34 to 35%. Please note that excluding the benefit from the year-on-year rate reduction, first quarter 2007 EPS would still have been $0.35.

We repurchased 4.3 million shares during the first quarter under our share repurchase program, as we worked toward better leverage on our balance sheet. The net of this activity is that diluted net income per share for the first quarter was $0.35, up 17% over the $0.30 earned a year ago.

Looking at the balance sheet, Ecolab's total debt to total capital was 33% at March 31 compared with 39% reported at year-end 2006. You may recall year-end included the 300 million in euro notes we issued in December 2006. These new euro notes were issued to replace existing euro notes that matured in February 2007.

Pro forma, adjusting for the euro note that matured in the first quarter, our de facto total debt to total capital was approximately 28% at year-end 2006. Depreciation and amortization was $70 million in the quarter and capital spending was $62 million.

That's a review of the first 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 America businesses, showing the strength and balance of our global business model.

Our gross and operating margins both rose in the quarter. We also continued to make ongoing investments in our sales and service force and double-digit investments in our R&D, information technology, and other key areas to sustain our future growth.

Looking ahead to the second 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. This business outlook section should be considered in conjunction with the information on risk factors in our press release and our Form 10-K, which lists risk factors that may cause results to differ.

In the second quarter, we look for U.S. operations to show continued solid momentum. We expect strong sales growth from Institutional, Pest Elimination and Healthcare, with steady gains from the 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 and Asia-Pacific growth, with moderate European results. We believe this will result in overall good fixed currency International sales growth.

Gross margins should continue to show good year-over-year improvement, approximating 51%. Selling, general and administrative expenses are expected to come in around 38 to 39% of sales. We will believe these trends will drive higher operating margins when compared with last year, as good profit gains in the U.S. more than offset flattish Europe and International income.

Interest expense should be around 13 to $14 million, reflecting our recent stock repurchase activity. We expect the effective tax rate in the quarter will be in a 34 to 35% range.

Overall, currency translation is expected to benefit second quarter earnings. As a result, we expect diluted earnings per share for the second quarter to show a solid gain against a strong earnings increase last year and be in a 40 to $0.41range.

For the full-year we look for another strong performance and we raised our full-year EPS range by $0.01 on both ends to $1.63 to $1.66 per share. Please note that the estimated effective tax rate discussed does not reflect the impact of discreet events that, if and when they occur, are recognized in the appropriate period.

A final note on some upcoming Ecolab events. As mentioned in the last call we plan to hold a tour of our booth at the National Restaurant Association show in Chicago on May 21. We will have more details on it in our next week-- next week.

In addition, we are planning to hold our biannual investor meeting on September 11 in St. Paul. We'll be sending more detail this summer. In the meantime, if you have any questions, please contact me or Nicole in my office.

That concludes our remarks. This conference call will be available for replay on our Web site through May 4. Operator, please begin the question-and-answer period.

Thank you, sir. (OPERATOR INSTRUCTIONS) Amy Zhang of Goldman Sachs, you may ask your question.

Good afternoon. It's Amy sitting in for Bob Corey.

I have a quick question first related to the European market. It looks like on the margins the first quarter was under some pressure on a year-over-year basis.

Can you just give a little bit of color about the market fundamentals in that region and what really happened there? And then how quickly we should expect to see some turnaround going forward?

Amy, this is Doug. How are you doing?

Good.

Good. You know, why don't I, let me just start by saying, give a quick take on the quarter and then let me talk Europe. I think it's a good question.

My take on the quarter was that overall we got off to a very strong start, and importantly we maintained and even built on the sales momentum globally in total, team executed well, and we were able to use the sales momentum and leverage to accelerate key investments, which is what we wanted to do. And so this allowed us to deliver strong EPS as well and get moving on things that we think are going to have a big impact long-term.

So Europe. Europe was, you know, clearly we weren't really excited about Europe. I will also say that you got a couple of things going on here. One, this is really a slow volume quarter in Europe if you look seasonally and that translates into its by far its smallest OI quarter year-on-year.

So numbers are going to have a surprising effect on a small base. So I think you got to keep that in mind. Last year I think Europe was up 18% and the same story held true last year. So first quarter's always going to be a little higher beta than other quarters if you just look at Europe for 13 weeks.

The margin, you had a couple things going on. We have higher cost pressures there, not overly dramatic, but we're seeing some raw material inflation, which we predicted, given that it was somewhat negated in the past by having a strong currency, but sooner or later it starts sneaking into your business.

We are not where we want to be on pricing there, but are on pricing and are on cost savings and most importantly, our number one priority there is we have got to drive profitable organic sales growth. And that's our number one mission there.

And I guess what I would tell you is when we looked at the quarter, we knew we had some tough comparisons, higher costs, and in spite of that, my mantra was I want you to make the field investments, make the GP investments necessary to drive organic sales growth. Why? Because it's the key to long-term profitability and candidly, we could and we need to drive those things because they're most important to our long-term.

My expectation for Europe, and here I'll get into future-looking, is I expect the year that Europe will be more profitable than last year in total. It's going to be a fairly modest growth.

You know, I could be wrong by a couple of points, but basically we expect Europe to make more money this year than last year in spite of the first quarter. Some of it is timing of things that happen in the first quarter that we know aren't going to happen again in two, three and four.

I expect you'll start seeing that type of result as early as Q2 where we expect to be, call it flat year-on-year plus or minus a couple of points either way. Tough to predict what's going to happen in 13 weeks, but it's going to be nowhere near the type of optical result you saw here.

Fundamentals in Europe, I told you we're pushing on sales. It's way too early to claim victory, but I'll also say we see some signs of organic sales acceleration, which we know in our business is the key.

So, you know, long-term, I'm bullish on Europe. I think we've got a clear, long-term plan. Our aim is to get this thing to 6 to 7% organic sales growth.

We want it to be kicking out 15% OI margins. We think we know how to do that, and our aim is to get there as fast as we can and the key is, of course, getting the sales growth, which we've taken care of customers.

Okay. That sounds great.

My follow-up question of the, because last year, or over the past few years, you have been talking about, you know, reducing [ASUs] and implement more growth initiatives in Europe and I was wondering, any progress on that trend? Obviously now you have a new management team. Can you give us an update on operating efficiency improvement in that region?

Yes, I'd say, look, we're on two fronts. You know we're undergoing what we call EBS, which is putting in new systems there, which are going to enable us to do a lot of things better.

And simultaneously, we have been redoing our product lines there to eliminate SKUs and to better leverage the scale that we have in Europe. You know, there's been tremendous progress made.

I would say by the end of this year we feel we're going to be about 50% down the path that we ultimately see and on target. It will be significant moving somewhere from I think 13,000 SKUs to in the neighborhood of 9,000 by year-end. You know, ultimately we would like to get down to 6, 7,000 SKUs and we'll see doing that really as we move into '08, '09.

Great. Thank you.

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

Thank you. Good afternoon.

Doug, just on GCS, you did see some sales improvement. Could you comment on the initiatives to improve that business and when we might see profitability in GCS?

Yes, you know, we feel great about GCS's start. You know, we, if you will, open the doors to new business and have started a more aggressive sales campaign, it's showing a good result basically on two fronts, just if you will street selling and campaigns to get after that via direct mail and telemarketing, as well as corporate account initiatives and we've got some real good sales momentum. I think it's even stronger, frankly, than the 5% reported, because we are missing a couple of days in the quarter year-on-year.

In terms of the systems improvement, which is the other front, which is leveraging the sales into profit, we made very good progress there. We turned it on. It worked. We closed the books. The team feels very good about what they've built. We're on track.

I think Mike mentioned to have this thing operational this summer, as we had indicated earlier and I guess we feel the same way. If anything, I'm more confident, because we're three, four months further into this than I was last time I talked to you y'all that we think we're going to be at a profitable run rate by, you know, year-end, moving into next year.

And, Doug, long-term profitability, any reason it can't be in the teen's operating margin?

No, David, if we, if we didn't believe this business was a mid teens operating business ultimately, we would not be making these investments.

And last thing, Doug, on U.S. Cleaning & Sanitizing is a 17.5 margin new level for this business?

Only as of March 31st. You know what, I don't spend a lot of time on the history. I think, you know, we've said before that we believe in every region we've got both opportunity to accelerate sales and create more leverage, and we're clearly doing it North America.

I mean we've been doing it in Europe. We'll be back on that track. We're doing it in Latin America, Asia-Pacific, and so my expectation is that we grow the top line and do a good job of increasing OI leverage (inaudible).

Thank you very much.

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

Hi. Good afternoon.

I was wondering, Doug, you just mentioned the number of days impacting GCS. I presume that's true throughout the U.S. for your Institutional business, for example?

Businesses where, you know, look, sometimes our businesses wonder about days. I am-- when you got hourly work force, it's billing for hours, and you got to pay the infrastructure over a month no matter what, how many days, I know GCS for sure is impacted. I'm less sure on the rest of the business.

And when you look at the Institutional business, how much was included in there do you think from competitor wins from JD and also from the change in segments from the professional business?

Well, you know, look, the EPP business, if anything, was, you know, as you know, growing slower than Institutional when we merged it. We believe it's accelerating, but it's not nearly at the rate that Institutional was when we put the two together. But we like the prospects of that business when you start looking at the product segments. Certainly JD had, you know, impact on it.

I guess I'd make a point, which is, you know, you go where you can. We've been installing this business. We still have business installing. It's still coming on. We're still putting it on.

We don't believe we fully realized the benefit either in the top or bottom line from this business, nor do we think we're going to fully realize it by the end of this year because there's going to be plenty of upselling to be done as we go on. But it's part of it.

I would say it's not the only thing going on, because if you look in North America or even in the other regions of the world, we're accelerating in a bunch of business, most of them unaffected by JD's decision.

And I'd like to add, Michael, that job one was to make sure we took care of existing customers. Job two is to make sure we brought on the JD wins last year.

So a lot of the attention turned to that and as a result we didn't spend as much time as we might have, say, on the 360 and other things. We'll be getting to those as we get into 2007 and we complete the JD stuff.

The other thing on the professional products is it's hard to tell what the numbers are because it's fully integrated now, but the anecdotal evidence has been very strong. We picked up some great accounts that, say, Institutional had great relationships with and professional products is being able to pick that up. So again, the anecdotal evidence is pretty good.

Doug, just a final one here. Regarding the business you've picked up from JD, the assumption would be that in the first year of picking up that business, it would be lower margin. Is that something that would be noticeable in terms of the numbers that we're seeing, given, particularly given how strong your margin was in U.S. Cleaning & Sanitizing despite that potential headwind?

Yes, it, you know, really Michel, the way it works is when you install an account, you know, you put the equipment in. There's expense-- there's cost that needs to be expensed that hits you right away and you don't realize going volume maybe for the first two months, okay?

So you got a lot of moving parts in this thing. That's basically why I said earlier I don't think we've realized the full top line or bottom line effect right of this business yet. So it's, you know, a favorable (inaudible).

All right. Thanks very much.

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

Hi, guys.

How are you?

Doug, I wonder if you can try to quantify what you think the 360 Degrees of Protection is having across the business or Institutional or wherever you can kind of make it concrete for us.

You know, I, you know, it's funny. We're excited about it. Mike just went to the fact that last year when JD made a strategic change in direction, we changed our plan in Institutional North America fairly dramatically, and went full after that opportunity because it was time sensitive and postponed launches and frankly some 360 work.

We are-- Miller's got his team all over 360 Degrees again and is out after that, and we've even taken a new tact. I think we've got a new way of executing that accelerates penetration.

I guess I'm very bullish about it and as much opportunity as there is in North America, there's even more in Europe and the rest of the world in our Institutional market because our product penetration is even lower in those markets in comparison. And so some of this is getting after and selling, if you want, mini bundles, so instead of trying to get a customer to say yes to 12, we've broken it up into four parts.

A lot of this will be talked about at the NRA and you can see it firsthand there, but it makes a lot of sense and we're having very good results in the field with the approach.

Have you seen any increase in the average number of products taken per customer?

Absolutely. Yes. I mean what I want to see is instead of a tenth of a percent or a tenth of a point increase and we see increases in that level, which add up to real money, I think what Miller's targeting, and I agree with them, is we want to see whole number increases.

But, yes, over the last few years, we have significantly increased our penetration and we think we're still at the very early stages of that.

And is the compensation scheme to reward those kinds of cross sale leads and so forth, is that already fully in place or is that being tinkered with as Miller's team goes after it now?

Well, clearly the compensation in place today rewards our field associates for obtaining new sales and customers and broadening the line, but we do think that we can make it even clearer and more apparent how important this is to them, to our customers and to us. So we're going to tweak it more.

Okay. Last question.

If you could just kind of talk about acquisition pipeline. It looked like you moved pretty aggressively to repurchase shares this quarter and I would guess that's because there really wasn't any major acquisition activity in the quarter.

So I think at last years NRA you thought that you were pretty close to any one of three or four fairly major acquisitions. What does that pipeline look like today?

Yes. You know, last year, look, we closed on three of them. Couple others we ended up walking because of price last year. I like the pipeline right now.

If we've been working on anything without going crazy, we would like to do fewer medium to big size acquisitions. mean the hundreds of millions, not in the billions, okay, type of acquisitions.

We think we've had a very good target and the reason that we bought a lot of shares in the first quarter was because we thought they were incredibly cheap.

Thanks.

Mark Gulley of Soleil Securities, you may ask your question.

Yes, Doug, further questions on Europe, when Mike talked about some of the things that you'll be doing in Europe, I imagine you were doing the same things before and they weren't giving you the results that you were after. So is it possible for you to drill down maybe one more layer and maybe tell us what's going to be different under this new leadership team than was true under the previous leadership team?

Yes, you know, I'd say, Mark, there's a couple of things. One, in the last three or four years, I think we've learned a lot corporately about how do you further enhance sales and service execution and get real results? And a lot of that groundwork was frankly taken in North America, starting in Institutional but now moved over to F and B and some of our other businesses here.

And you clearly can see-- I mean Vehicle Care is on the band wagon. You clearly can see very strong improvements in organic sales growth. So it's-- I wouldn't say that the same tool box was available.

At the same time, a lot of the work I did last year, I brought in some outsiders, I spent a bunch of time in Europe last year. At the end of the day I wasn't satisfied that we had the focus right in Europe. We weren't spending enough time trying to drive the right talent at the field level, the right sales execution focus and the right innovation pipeline focus, which were the keys to driving organic sales, so we made changes at the end of last year because we want to get on that.

That's what drives growth. And so at the end of the day, we weren't satisfied with the type of focus we had on that. So that is where the energy's going.

At the end of the day when I look at the Europe plan now over the next four years, I think we have got by far a clear idea how to drive top line and turn that into better leverage, i.e., OI margin enhancement than we've ever had. And we've got a number of very big, very lucrative initiatives to undertake that we feel very good about. A lot of this is we're just getting after it now.

Could you give us a little bit of background on Jim White? You talked about his previous experience. How long has he been at Ecolab and that kind of stuff?

Yes, Jim joined us, oh, a little under two years ago and has been working with me during that time. I think Mike talked-- I tagged him and had him go over and work on the Europe assignment trying to understand what was going on, and then work with me for an interim period where I stepped into the breach after Luciano left and before I appointed a new leader full-time which ended up to be Jim.

Jim's background, he worked at Pillsbury, ran a number of their large businesses and then, Frankly, when Pillsbury was bought by Mills, they had to spinoff businesses because of FTC issues and frankly create a standalone company. He went over to the Multifood business with those businesses and had to build the business ground-up.

Jim's a great, I mean a very experienced business leader. I think he's going to be, he's off to a great start. He's a focused guy, right, drive sales, good things happen. Don't get confused by all the noise.

Okay. Thanks.

Chris Shaw of UBS, you may ask your question.

Yes, hi, guys.

Hey, Chris.

I was just curious, International, given what's happened in the first quarter, what do you think the chances are we do sort of traditional 50 basis point increase in margins this year? Is that still possible?

In International?

Yes.

No, you know what, Chris, we're not going to, no, we don't think that's going to happen this year. Not in total in International.

Right.

You ain't got to break International apart. I mean we had very strong results internationally in Latin America, Asia-Pacific in the first quarter. Europe was where we did not have strong results, and the 50 basis points, you know, stick to it, I guess what we're committed to, take Europe, take any of them is getting these guys up to mid teens.

I believe that's doable and I think the 50 basis points is, what we said to you, the type of progress you can expect year-on-year but you're not going to see it every year.

Right. Okay.

In Europe is there, I'm not sure, I can't think if you've mentioned in the past, but is there any sort of-- is there less of the opportunity to do sort of the Circle the Customer the cross-selling there? Have you found that to be true or is it just sort of equal as it is in the United States?

Yes, I think the, you know, as we build out Pest, we're increasing our opportunity to Circle the Customer. But if you take, within, say, Institutional, it's still the same number of product categories and it's roughly in Institutional there, ex some water and some others, but a wide array of products there.

But we certainly don't have a kitchen equipment repair business. We have Pest in part of the market, not all of the market. So that's what we're building out.

But there's nothing specific to, I don't know, the European customer that suggests they wouldn't be open to getting more service or more product from you?

No.

Okay.

And have you got any, I know you sort of addressed this and say that you want to do some smaller deals, but have you looked at all, I know [Rent-O-Kill] is sort of in play. There are some rumors of management of buyout.

I know they've been shedding some assets. Is there anything there that interests you in terms of assets or anything?

You know what, we don't comment on specific targets at all. I would say we've always been I think very aware and are cognizant of what's going on in our markets and looking for opportunities that make sense for us.

How about this? How much of a competitor are they of yours in Europe?

[Rent-O-Kill] specifically?

Yes.

Well, [Rent-O-Kill] and us compete really in the pest arena and that would be it.

Okay. That was what I was curious.

So that would be the overlap in our business.

All right. Thanks a lot.

John McNulty of Credit Suisse, you may ask your question.

Good afternoon. Just a couple of quick ones.

In Kay you had said I guess in your comments in the beginning that the distributor business seemed to really pick up. I know that's been an area that's kind of been a little bit soft over the last year, year and a half or so. What's changed there?

In terms of Kay, I think that what you're seeing is just some increases in some distributor orders from various quarters and then you got the year later impact from that. So it's been kind of some up and down stuff due to the ebb and flow of some distributors, really nothing much fundamental.

If you look at full-year numbers for Kay for the last several years, it's been growing double digits. Just the quarterly variation.

This is in good shape. You get these timing issues and distributor. If a customer moves from one distributor to another, if there's some new units coming on to a given distributor and the rest, their fundamental business has been very solid and remains so.

Okay. That's helpful.

With regard to Europe and the margins there, can you tell us what the margins actually are, since you're targeting 15% at some point?

It would be kind of meaningless to talk about the first quarter because it's only about 15% of their profits. As of last year it was around 9%.

Okay.

In the Water Care, you had talked about how Food and Beverage strength offset the Industrial area. Can you give us a little more color on what weakness you're seeing in the industrial markets?

Is it just your ability to get traction there, because I know it's a relatively kind of newish area for you, or is it just the economy is starting to soften? What do you think it is?

Well, I'd say it's just strictly focus. We're focusing our new sales efforts principally in the F and B area and that's where the, if you will, extra time in that organization is being driven. We don't have a ,there's not a hole in the Industrial segment that's worrisome it's just, frankly, the new growth that's coming in the CTC part of our business, which is F and B.

Okay. Fair enough.

And then last question, with regard to Europe, are you seeing Johnson Diversity step up their efforts in Europe any more than they had been in the past now that they've pulled out of the U.S. market, or is it pretty much business as usual for them?

We haven't seen a big change in, you know, they've been active in Europe. They were prior to their change in North America and they remain active post. I haven't seen a fundamental change in their activity level or even approach or other.

So there's no change in the competitive environment really out there at all?

Not in the other regions. I mean JD remains probably our principal competitor in the AP, Latin America and European market. No huge change.

Okay. Great. Thanks a lot.

Laurence Alexander of Jefferies & Company, you may ask your question.

Hi, Doug.

I guess first question is on Europe, just to round out one last detail. You mentioned that there was some timing-related costs due to your IT investments this year. How much tailwind will you have next year just from those costs lapping?

You know, I think you're going to see those costs, I mean ultimately you'll start lapping them, but it's not going to be next year. This project, EBS, we're in the blueprint stage, (inaudible) the realization stage second half this year, we're going to be rolling it out next year as we go forward.

But, you know, ultimately, you know what, what's important, Laurence, is about EBS is it is the key enabler for us to get after a number of, if you will, changes in the way we do business that will create real leverage and an ability to put more resources customer facing, i.e., hard drive and growth and do things much more efficiently which is drive leverage.

And I guess a broader question is you've spoken several times about having the levers to drive operating income margins as well as the sales growth? Are there also levers that you can be pulling to improve your free cash flow generation without hurting your long-term competitive advantage?

Yes, we believe-- well, a couple of things. One, OI leverage will, right, clearly help drive more cash. We also think on the capital side of our business that there are ways for us to support the businesses more efficiently than we have before.

SKUs, getting after inventory, which is a big opportunity not only in Europe but in other of our markets. I mean these are all parts of working capital that we think we can reduce. I think OI leverage is going to help, so, yes.

I guess lastly can you discuss perhaps the leverage you have to accelerate U.S. Food and Beverage sales? Can we talk about the trends in this quarter and how they may play out over the balance of the year?

You know, why don't I, look, we've been investing and I think that team's invested wisely in antimicrobial technologies. I think we've got the best product offering that we've ever had in F and B and we're now developing other new enhancements to that technology will be coming down.

So a lot of the trends that you see I think we are in better shape to handle, meaning we've got unique technology to handle Listeria on ready-to-eat meats, we've got unique technology to handle E. coli on ground beef. We've got, we think the best technology to manage Salmonella on chicken.

We've got efforts in produce that we think are very positive and much better than the prevailing technologies out there that frankly don't work very well at all. So, I don't know, as we look at F and B, I think we've got a very good portfolio.

I think the other thing is, is we've broadened the portfolio at F and B. We've been able to pursue the multiple interventions approach where we can help the customers by inserting cleaning and sanitizing at various points along the way to enhance the end result and end up by helping the customer, is end up with products that have much lower potential incidences of food-borne illnesses or lower bacteria accounts.

Thank you.

P.J. Juvekar, you may ask your question of Citigroup.

Hi, Doug.

Hi, P.J.

Doug, you mentioned that you want to get margins close to U.S. When you think that could happen and how long do you give for that?

You know, P.J., I'm saying I guess I always say with somewhat of a smile, I hope U.S. margins continue to move also, so this is a game of chase, but, yes, we think European margins can get up into the mid teens and that's our goal.

How long's it going to take? You know, I guess what I would say is the type of initiatives we have and how you've got to go build it now, the 50 basis points per year, I think it's going to be lumpier than that. I think it's going to be stable for a period and then come in big buckets because that's just the nature of the work that we're undertaking right now.

How long's it going to take? You know, I would be looking-- you're going to see progress before this, clearly, but I think you'll start seeing meaningful differences in, I don't know, 4 or 5-year timetable, but that's very early, you know looks at this thing.

Okay.

And then how are you positioning International? I know you're making some small acquisitions. Which are the geographical areas that you're targeting for acquisitions?

We're looking all over the world, P.J., and we've been making acquisitions basically around the world. As you know, we've got, you know, several target areas, globalizing Pest, we've made acquisitions in Europe, South Africa, Latin America, Asia-Pacific.

Hong Kong, China.

Yes, so we've made them all over and we'd also like to expand our Healthcare business where, again, we've made acquisitions in Europe. We'd like to make some in the U.S. and elsewhere so we've certainly, and Water Care is another one where we've made acquisitions both the U.S. and Europe. So we're making them around the world.

Thank you.

Dmitry Silversteyn of Longbow Research, you may ask your question.

Good morning, gentlemen. Or good afternoon, I should say. Most of my questions have been answered, but I do want to revisit a couple of areas.

Again, with Europe and I'm sorry to be beating a dead horse, but it seems to be the only pronounced area of weakness that this quarter saw. Aside from long-term plans and then ahead of Europe really making a difference in this business over the next three to five years, over the course of the next two to three quarters, let's say, can we expect to get back to the old levels of margins with this business?

In other words, can we get back to where we've been before we going forward, or is 2007 going to be a year of depressed margins in Europe and we hope the rest of International business pulls more than its own weight to get to us a flattish margins on year-over-year basis?

Dmitry, I guess first of all, Europe's not a dead horse. But what I would say is, yes, our expectation, I think I mentioned this earlier, was that for the year we expect Europe to have, you know, this is forward-looking, quite modest profit growth year-on-year which suggests our margins are going to be, you know, in line with what you've seen before, and that really Q1 is not a trend.

It's a 13-week period where you had a bunch of, you know, stuff fall in one way versus the other but for the year while we aren't here to pronounce Europe to be exactly where we want it, Europe is going to be contributing OI for the year, we believe, and we'll be fine.

Okay.

So if I understand what you're saying correctly, is that is the, you know, Europe probably will get back to at least the old level of profitability this year and with the non-European International business growing and maturing and hopefully seeing some margin expansion, we'll actually see some positive margin comps if not quite the 50 basis points that you're looking for.

You know, we don't get at that kind of precision on our forecasting.

I think you're directionally right, though, that it's not going to be bad.

Okay. Fair enough.

Then the second question on GCS, I think it was either talking to Mike or maybe on the last conference call, there were some expectations that the costs this quarter and maybe next quarter actually going to be higher year-over-year and I'm talking about investment cost and therefore profit loss will be greater before the business really turns around in the second half of the year. Is that still the expectation, and, you know, roughly, what was the level of the loss of GCS business in the first quarter?

Yes, the expectation you laid out of the plan is exactly how it's moving ahead. The GCS business is almost precisely where we thought it would be, probably a little stronger on the top, but exactly where we thought it would be overall. It lost roughly $3 million in the first quarter with the increased costs.

Okay.

And Dmitry, as you know, we're running two systems simultaneously at GCS as a cost of that. We've got cost of the training that we're doing for all the people. Plus you've got the cost of additional people there as backup in case something goes wrong with the new system so we really overlaid a bunch of costs that will go away when we get to the second half of the year.

Got it. Got it.

And then just a bookkeeping question. Can you give us an idea of what the foreign exchange component of European growth was? You gave it for the other regions but I don't think, unless I missed it, you gave it for Europe.

It's at management rate so it's at a flat year-over-year.

It's flat year-over-year. Okay.

Right.

Okay. That's all I needed. Thank you very much.

Rosemarie Morbelli of Ingalls Snyder, you may ask your question.

Good afternoon, all.

Doug, I would not call Europe a dead horse, but I would certainly call it a different horse than the U.S. So far, you have had two teams. You had a Frenchman trying to make progress. You had an Italian fellow trying to make progress and now we have an American and we know how popular we all are over there at the moment.

People just don't operate the same way in western Europe than they do in the U.S. They don't have the entrepreneurial mentality because the governments are taking care of them.

So what do you-- how do you think you are going to convince them to work a few extra hours, which obviously they think 35 is top, and they would rather work a little less, and if there is one vacation day on Tuesdays, they will take the Monday before and so on. How do you motivate them to go out and actually do what you motivate the U.S. troops to do?

Well, you know, I would say a couple of things. One, you know, we have made, look, I think we have made progress in Europe since we bought it. We expanded margins. We've grown the business.

We've made a number of acquisitions. We made a number of divestitures and so when you look at the total portfolio that we have today versus what we bought, I mean if you look at returns and everything else in progress, we really made considerable progress over the period of time.

Now we're really talking about how do we get to the next stage and how do we start doing this in, frankly, a way that's more sustainable and even creates more leverage? And I also believe we've got a very clear path to do it. When you get down to, I guess, work ethic and the rest of the thing, you know, I will tell you it's never quite as easy as that.

We believe, and we've seen, and we are driving-- we have European businesses right now in key markets growing double-digit. We've got very good acceleration even in traditional Europe and a healthcare business and others, so we've been successful doing this in the past and plan to be going forward.

And 35-hour work weeks, while I don't particularly like them, they are in the base and they will be in, you know, the business as we move forward. And so whatever hours are working, a lot of this is how do you maximize the productivity and the focus of the team as they go forward.

Now, my experience running the business over there is people still like to win. They still like to be successful. They still like to have the business moving forward if you get the thing focused right.

It is not exactly like running a business in the U.S., I agree with that. But a number of principals are the same and if we sell more products to a customer, we'll make more money in any country. And so we've got to get the team focused on doing the right things to make sure the metrics and measurements are lined up and we don't like the way they're lined up right now.

When you say that some European businesses are growing at 10%, could you give me-- could you be a little more specific in terms of which categories and in which regions?

Look, our Healthcare business across Europe, it's principally in Germany, right, U.K., big markets, its also got business in east Europe. But I mean it's growing quite well in all markets.

I've got, you know, almost all of our businesses are doing quite well in east Europe, we've got Institutional and others doing quite well in Spain. We've been doing well in the U.K., been gaining share there for a while and moving north, I mean doing quite well. So there's a bunch of markets.

And I would also say, you know, it's important when we talk Europe. We get into the U.S. and often we'll talk different businesses. We've got really separate divisions there who've got individual focuses, who are getting after it and we've got I think improving performance in F and B.

We've got a very good textile business over there. Healthcare's doing well. Middle East, Africa is going to have a heck of a year. It's getting the other businesses, Institutional, who is growing but not nearly as fast as we want it, off and moving.

If you look at those businesses and narrow it down to the bulk of your European business which consists of Germany, Italy and France, I mean we eliminate eastern Europe because they are more entrepreneurial than the western economies who are used to not really pushing very hard.

Are you planning, I mean do you see signs of growth in those three major countries which represent the bulk of your European business if you eliminate all the growth areas?

We've got, you know, look, I mean on a different year, we've got growth in, you know, Italy's showing some signs of life. We don't like our business right now in Germany and France, but some of this is, right, how are we going to get down to it?

We've got a new leader in Institutional in Germany who is a long-term Ecolab sales leader who we brought out of a smaller market, he used to work in Germany, put him back in the country because we believe he's the type of sales driver we need to get after it. There is plenty of opportunity in these markets and we do not have dominating share in any of them.

So, you know, we can go back and forth. I guess I'm a happy owner of a European business. We believe we've got a lot of very positive sales acceleration to be had and leverage to be realized in this business, and I believe it's going to be important value driver for Ecolab.

And if I may ask a couple of small questions.

Raw material, leaving Europe for a while, raw material cost came down in North America and probably helped your large margin improvement. Do you think you are going to give that back and what are your raw material cost trends at the moment?

It was basically flat in North America after two years of significant increases. So we've not really seen a downturn in raw materials in North America of any substance or any size. When it occurs, if it occurs, no, we do not, we will not be giving it back.

We did not use it to justify pricing as we went forward. In fact, we made it very clear that we were in this for the long haul and we talked to customers about pricing.

It was not in hopes of recovering the very dramatic raw materials in whole, that we would do this over a period of time, not try to recapture it in two years. So we do not feel we're going to have negative price pressure as a result of any downturn in the raw material market.

And lastly, do you expect to buy more stock during the balance of the year?

Yes. We'll buy some more.

Okay.

You know, part to offset options and do the rest of the stuff.

Not more than to offset options? I mean you have offset options in the [first] quarter, but by year-end are we going to be flat?

We haven't set a goal, Rosemarie. I mean we bought 4.3 million in the first quarter, we'll buy some more over the balance of the year, but it all depends on what our other opportunities of using the cash will be.

Okay. Thank you.

Jeff Zekauskas of JPMorgan, you may ask your question.

Hi. Good afternoon.

Very quickly, if your average prices were up two, is it fair to say prices in North America were up three and Europe was down one?

We didn't have, no, we didn't have deflation in Europe.

No, pricing in Europe was not up as strong as the U.S., but it was still up.

Yes, it was still up. It was up year-on-year, but just not nearly as--

It wasn't enough.

So Europe was up one?

Yes.

And U.S. up a little bit more than two?

It was about 1.5, 2. Europe was up about 1.

About half a point.

Lastly, what's your Cap Ex number for the year?

About 300.

300? And D&A?

D&A, yes, I'm not sure what that number is. It's about, probably about the same.

Okay. Thanks very much.

Our last question comes from Michel Morin of Merrill Lynch. You may ask your question.

Doug, just a quick follow-up.

I was noticing your tax rate has been coming down pretty steadily even after the acquisition in Europe and we've seen a lot of countries lower their corporate tax rates. So I was wondering, you know, you've given guidance for '07, how should we think about the tax rate looking out a few years? Would it be safe to assume that that is, that downward trend will continue?

I mean our objective, Michel, is through as we've mentioned, tax planning strategies in various activities that we can undertake in the legal basis, obviously, is to attempt to minimize the amount of tax that we have to pay.

We think that we've got a number of things that we can pursue such that we will be looking at trying to lower our rate as we go ahead in the future. We don't have any great sense of any numbers on that, but we do think that we've got some opportunities to help improve our rate.

That sounds like a yes, Mike.

Yes, sir.

Michel, if the tax department's on this call, I'd be happy to give them a target.

Thanks, guys.

Thank you. I guess that's all the questions that we have. So, I thank everyone for your attention, and have a great day.