藝康 (ECL) 2007 Q2 法說會逐字稿

Welcome to the Ecolab second 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). At the request of the company, this conference is being recorded for playback purposes.

I would now like to turn the meeting over to your host, Mr. Michael Monahan, Vice President, External Relations. Sir, you may begin your conference.

Hello, everyone, and thank you for joining us. This webcast teleconferene includes estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Some of the factors that can cause actual results to differ are described in the section of our most recent form 10-K under item 1A, risk factors and in the second quarter earnings release. A copy of our earnings release is available on Ecolab's website at www.ecolab.com/investor.

Starting with highlights from the quarter, reported second quarter 2007 EPS increased 22%, reaching $0.44. Excluding a $0.02 tax benefit, earnings rose by a robust 17% to $0.42 and beat the top end of our forecasted range by $0.01. We enjoyed strong growth from our U.S. Institutional, Pest, Food and Beverage, Healthcare and Textile Care businesses and improved sales growth from GCS. International also showed good sales gains. Latin America rose double-digits, Canada and Asia Pacific showed solid gains, and Europe's growth improved over last year and the first quarter. As expected, both gross and operating margins increased.

We repurchased 3.4 million shares in the quarter. Over the past 18 months, we've invested $600 million in share repurchase, bringing our total debt to total capital ratio to 35%. We remained optimistic about our prospects for the third quarter and the full year. We expect EPS to show continued double-digit growth in both periods. We raised the low end of the estimate range by $0.01, and now look for earnings, excluding the effects of the second quarter tax benefit to be in the $1.64 to $1.66 range, indicating a 15 to 16% increase. In summary, we believe our business trends are good, and we continue to 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 second quarter rose 11%. Looking at the components, volume and mix were up 5%, pricing was up 2%, currency added 3%, and the impact of acquisitions was 1%. Sales for U.S. Cleaning & Sanitizing operations increased 8%. Institutional enjoyed another strong quarter, as sales rose 9%. Sales growth continued to be strong into its various end market segments, including Healthcare, Lodging and Travel, and benefited from significant competitive gains. We also continued to realize good momentum from the training investments, enhanced service protocols, new products and programs, like the 360 degrees of protection, sales force technology, and performance measurement tools that have implemented over the last several years. They have all helped to drive our strong sales and competitive gains which were partially offset by a lower impact from promotions. We believe the fundamental outlook for institutional remains very attractive, and we expect institutional to show continued superior growth in 2007.

As expected, Kay sales growth was modest, up 1%, reflecting the modest -- reflecting the impact of higher distributor shipments in the first quarter 2007, and in comparison to a strong second quarter in 2006. Adjusted for these, Kay sales showed strong growth. QSR's underlying business remains steady, with good ongoing demand from major existing and new fast food chain accounts. The food retail business also grew, new products and programs continued to bolster Kay's results and we expect much stronger third quarter and full year growth rate for Kay.

Textile Care sales rose a strong 12%, reporting yet another double-digit growth quarter. Significant new account gains once again drove the increase, as new products and solutions that helped reduce customer's water and energy consumption provided key differentiation and enabled the division to out pace its market. While the division will begin to lap some significant account wins in the second half, we still look for further good sales growth in the third quarter as Textile Care continues to benefit from the fundamental business improvements it has undertaken, as well as the differentiated products and value solutions Textile Care delivers for its customers.

Second quarter sales for the Healthcare division increased 19% against a soft quarter last year. 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 waterless skin care and solid instrument care products showed continued double-digit growth. Looking ahead, third quarter 2007 Healthcare sales should show continued strong sales growth. Food and Beverage enjoyed a great second quarter performance, with sales up 10%, led by strong performances in the dairy plant, meat and poultry and beverage segments.

Excluding last year's acquisition of DuChem, sales rose a strong 7%. 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 third quarter of 2007, as we focus on new account acquisition and expansion of our anti-microbial platform.

Water Care sales rose 6% in the second quarter. We continue to experience solid growth in the food Food and Beverage market as we leverage cross-selling opportunities. This more than off sets slower sales in our commercial and institutional market. We expect our continued focus on leveraging our circle to customer strategy will drive further growth in 2007.

Vehicle Care sales grew 7%. New product sales using advanced technology like Rain-X and SolidPower, combined with increased pricing to lead results. Vehicle Care expects better penetration of its existing markets, new market opportunities and investments in the salesforce to yield further good sales growth in the third quarter of 2007.

Sales for U.S. Other services increased 8% in the second quarter. Pest Elimination sales continued to show good growth, raising 9%. Business fundamentals remain good. New account activity remains healthy, driven by good corporate account gains while noncontract service growth slowed a bit in the quarter. We also continued to develop new programs targeted at specific market needs that provide better circle to customer penetration and better growth opportunities for Pest Elimination. We expect Pest Elimination to show double-digit growth in the third quarter, and strong growth for the full year.

GCS sales increased 7%, showing solid growth and improved momentum from the first quarter's 5% gain. We are getting a good reception from corporate accounts and the sales pipeline looks attractive. We also continue to make good progress on the systems and process infrastructure investments that will drive competitive advantage. The new systems now support about two-thirds of our business and those operations are running smoothly. The entire installation will be completed and become fully operational in the third quarter. We expect improved sales and profitability once the new systems are in place in the second half as newly won chain account business comes on board.

Measured in fixed currencies, international sales increased 7%, excluding acquisitions, fixed currency sales rose 6%. When measured in dollars, reported international sales increased 14%. Europe, Middle East, and Africa sales momentum improved. Sales rose 7% in the second quarter at fixed currency rates. Excluding acquisitions and divestitures, sales grew 5%. When measured in dollars, EMEA sales increased 15%. Europe's institutional sales momentum improved from the first quarter, growing 3%. The business benefited from strong sales performance in developing countries in the east as well as the west. Sales benefited from new account gains and growth in housekeeping. These were partially offset by flat consumption in catering accounts for manufacturers and declines in janitorial.

Food and Beverage sales showed a good increase with growth in major F and B segments. Healthcare sales also showed strong growth, led by our 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 good growth. New customer wins in the sales of water and energy conserving technology drove the higher sales.

Europe's pest business saw flat sales in the quarter. We continue to work on improving the sales teams, new contract growth, service quality and account profitability. As an update on our work to improve Europe's performance, our new European management team is in place and the the work is under way to improve our European business. The business information systems development work is progressing well, and moving from the design to the build stage. We will begin rolling out the salesforce training, metrics and technology efforts later this year. We remain confident these actions, as they're implemented, will lead to higher sales and profit growth and more effective business model. We look for Europe's third quarter fixed currency sales to continue to show moderate growth but look for better results in the coming quarters and years as the actions we're undertaking take hold. Asia Pacific sales grew 6% in fixed currencies as growth in the east, Asia, and China drove results. When reported in U.S. dollars, sales increased 12%.

From a divisional perspective, institutional sales gains were driven by new products, including the launch of a new wear washing platform in Japan and by growth in the MarketGuard program for retail stores. We achieved important account wins in casinos, catering, hotels and restaurants as well as food retail markets. Food and Beverage sales were flat due to soft results in Japan, Australia, and New Zealand. Both the beverage and brewing sectors continue to show good growth in Asia. The Food and Beverage division overall has benefited from increased product penetration and account gains. Asia Pacific expects better sales growth trends in the third quarter but increased delivered product costs and unfavorable business mix combined with growth investments will impact profits.

Second quarter sales for Ecolab's Canadian operations grew a strong 9% in fixed currency and were up 10% measured in U.S. dollars. Institutional sales were robust, benefiting from corporate account gains, accelerated street growth, new product sales and excellent account retention. Food and Beverage sales also improved while Pest Elimination grew double-digits. Latin America reported an outstanding performance, with sales rising a very strong 15% at fixed exchange rates, when measured in U.S. dollars, sales rose 16%.

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 and regional accounts. Food and Beverage sales reflected strong demand in the beverage and brewing markets as well as the benefits of new accounts. Pest Elimination continued its outstanding performance throughout Latin America, recording yet another double-digit gain for the quarter. Further, to bolster opportunities in Latin America, we expect to add to our portfolio of effective customer solutions in the coming quarters. Overall, we expect healthy growth trends to continue in Latin America.

Turning to the expense side of the income statement, second quarter gross margins increased 50 basis points to 50.9%. Strong improvement across the board in the U.S., driven by pricing and cost savings initiatives was partially offset by slightly lower margins in the international segment, principally in Europe, where higher delivered product costs not fully offset by pricing actions hurt results. SG&A expenses were 38.2% of sales, up 30 basis points from last year. The SG&A ratio reflected leverage from our healthy, organic sales growth that was more than offset by investments in business efficiency, R&D, and information technology.

Ecolab's U.S. Cleaning & Sanitizing operating income increased a strong 16%, driven by better pricing, higher sales and improved cost efficiencies. Operating income for U.S. other services increased 3%. Continued profit gains at Pest Elimination were partially offset for a charge for an increase in legal reserves. Excluding the charge, other services, operating income would have risen a robust 17%. International fixed currency operating income rose 8%. Latin America and Canada showed strong increase. Europe's operating income improved from the first quarter's reported results. Overall, international income benefited from small gains recognized on the sale of some assets as well as a strong performance of last year's Europe Healthcare acquisition, which will annualize in the third quarter.

Beginning in the second quarter, the corporate segment includes investments in the development of business systems previously reported in the international segment, and investments we're making to optimize our business structure as part of our ongoing efforts to improve our efficiency and returns. Ecolab's second quarter consolidated tax rate was 30.9%, down 350 basis points from last year's reported 34.4%. Excluding the benefits of various audit settlements, the adjusted effective tax rate for the second quarter 2007 was 34.3%. We believe the effective income tax rate for 2007, excluding the second quarter tax benefit, will be approximately 34%.

We repurchased 3.4 million shares during the second quarter under our share repurchase program as we worked towards better leverage on our balance sheet. Year-to-date, we have repurchased 7.7 million shares and invested $336 million doing so. When combined with our 2006 investments in share repurchase, we have invested more than $600 million in share buybacks and have prices below the current market. Also, current year repurchases were not materially accretive to the current year. The net of this performance is that diluted net income per share for the second quarter was $0.44, up 22% over the $0.36 earned a year ago, and up 17% to $0.42 when adjusted for the tax benefit.

Looking at the balance sheet, Ecolab's total debt to total capital was 35% at June 30 compared with 32% reported a year ago. Net debt was 33%, compared with 29% last year. Depreciation and amortization for the quarter was $72 million, and capital spending for the quarter was $64 million. That's a review of the second quarter. In summary, Ecolab delivered yet another strong double-digit EPS gain. Our performance was a result of continued strong sales growth and competitive gains led by our U.S., Canadian and Latin American businesses, showing the strength and balance of our global business model. Our gross and operating margins both rose once again in the quarter. We also continued to make ongoing investments in our sales and service force and major investments in our R&D, information technology, and other key areas to sustain our future growth.

Looking ahead to the third quarter of 2007, we begin by cautioning you that these statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of business acquisitions, divestitures, higher than anticipated raw material price increases, weather material events that may occur after date of this webcast. This 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 third quarter, we look for our U.S. operations to show continued solid momentum. We expect further strong sales growth from institutional, Pest Elimination, Food and Beverage, Kay and Healthcare and continued improving sales at GCS along with steady gains from our other domestic businesses to deliver further superior growth in the U.S. In addition, new products like the rollout of Apex, our new wear washing platform that provides unparalleled performance and energy and cost savings for customers as well as new on-premise laundry products in the U.S and Europe, and a new floor care line, will provide further differentiation and opportunity to help drive future results.

We look for international sales to again be led by strong Latin America, Canada, and Asia Pacific Growth. We believe this will result in overall good, fixed currency international sales growth. Gross margins should be around 51%, selling, general and administrative expenses are expected to come in around 36 to 37% of sales. We expect 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 $12 million. We expect the effective tax rate in the quarter will be approximately 34%. Overall currency translation is expected to benefit the third quarter earnings. As a result, we expect diluted earnings per share for the third quarter to show solid double-digit gain and be in a 0.48 to $0.49 range.

For the full year, we look for yet another strong performance. We raised the lower end of our range by $0.01 and now look for full year EPS, excluding the tax benefit to be in the $1.64 to $1.66 per share range. With a strong earnings momentum we are currently seeing in our business, and the many opportunities we see to make key investments to sustain our high growth into the future, we will make elective investments in our second half to improve our business structure and returns as well as continue to make significant investments in areas including technology and R&D and our sales and service force. Our forecast for full year EPS growth of 15 to 16% incorporates these planned elective investments as we use a strong earnings trends of 2007 to build for longer-term growth.

Also, please note, the estimated effective tax rate discussed does not reflect the impact of discrete event that, if and when they occur, are recognized in the appropriate period. As mentioned in the last call, we plan to hold our biannual investor meeting on September 11 in St. Paul. If you wish to sign up or 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 website through August 3. Operator, would you please begin the question and answer period?

(OPERATOR INSTRUCTIONS). our first question comes from Michel Morin, Merrill Lynch.

I just wanted to hone in a bit on both the institutional and pest business where is we saw deceleration in of those, and just wanted to see if you can give us a bit more color as to what's going on there and particularly considering that we're going to be facing some tougher comps in the second half of the year.

Hi. Thanks. Michel, regarding institutional, first of all, we think institutional sales growth of 9% in the quarter remains strong and compares well with the prior period, 10% last quarter. We're coming up against a period in which we'll be lapping the JV gains even though we're still bringing on some business today. Also, we reduced o net promotional activity for institutional this quarter. I think that as we look forward for institutional, we expect the gains to continue to grow in the upper single digit, possibly double-digit gains as we go forward. Pest Elimination I think as we know for the last 20 years institutional has grown -- pest has grown although double-digit almost every single year. I think this is a one quarter event for the full year, I think we'll look for it to be up double-digits as well.

Finally on GCS, what was the loss in the quarter?

GCS lost more in the quarter, I think about $4 million, and that's consistent with what we said for the year where we expect the first half loss to be a little bit bigger and the second half loss to be a bit smaller. I think the encouraging thing out of GCS is we saw an acceleration of sales growth in the quarter. We think that our pipeline looks very good, and I think that we're more confident than ever in what's going on at GCS and our prospects.

Thanks, Mike.

Thank you.

Our next question comes from Bruce Simpson, William Blair.

Hi, Mike.

Hey, Bruce, how are you doing?

Good, thanks. Can you talk a little bit about Pests in Europe in particular? Seems like that's a focus in globalizing Pests and were results in the quarter a little less than what you were looking for?

Definitely they were less than that, Bruce. We were hoping for better, but I think when we're looking at that business, we acquired those businesses a couple years ago, and as part of the process of converting those businesses to the Ecolab model, and for us that means strong sales with strong service, and I think as we look at those businesses, we've got in France, for example, we've got a very strong service organization, but we're developing a stronger sales side. In the U.K., we've got good sales side and trying to develop a stronger service side. We're trying to marry those into the unique combination that U.S. Pests has had of strong sales and service.

Okay. I wonder if you can talk a little bit about the operating margin performance in Europe? I think you told us earlier this year that you thought the year-over-year decline in Q1 was temporary, and it looks as if it was because you nipped last second quarter's performance a little bit, and when you look forward in the second half of 2007, focusing on European operating margins, should the -- number one, do you expect them to be higher than they were in the second half of '06, and, number two, will that be an accelerating process where we're sort of pulling away in terms of the year-on-year gains?

Well, when it comes to this year's first quarter or second quarter, pardon me, on Europe's margins, I think they were definitely up. They were helped a little bit by, as we said, the acquisition of Shield Medicare which benefited our earnings and will lap in the third quarter, and we also had in international overall a couple of small sales gains, so I think that as you look at international, it was probably a little better than the underlying business, but it was still up versus a year ago. As far as the second half goes, we're looking for flat, roughly flat to last year, and I think that says you're going to see good Latin American Canada, with flattish Europe and probably lower Asia Pacific due to the investments we're making there. Even in Europe, I think what you're seeing is the preactivity to the start of the improvements we're making there, the sales and service training and metrics and laptop distribution actually start in the fourth quarter of the EBS systems, the European systems are just in the build stage, so we really don't have the benefits of those yet, so I think the really good news on Europe is really yet to come as we make those fundamental improvements. I think that as those come, we'll start to see gradual improvement in Europe as you start to see these sales training and metrics start to take hold next year. I think that's at least a year process before you start to see some good results from those, and the European systems start to roll out in 2009, and we'll start to see early results there, so hopefully you will see a building of improvement in terms of sales and margin as we go out 2008, 2009, and beyond.

Okay. Thanks. Just lastly, a little commentary about the pricing environment, how the increase, whatever increases you may be facing in particular input chemicals are comparing to your anticipated changes in revenue from price mix?

Well, we had looked for raws to be flat to slightly lower this year. I think that raws have been stubbornly higher than anyone expected, but we're still looking in that range of flat to slightly lower.

Okay. Does that afford an opportunity for increasing operating margins in the U.S. business as you anniversary price hikes?

I think you're seeing that definitely in the U.S.

Okay. Thanks, Mike.

Thanks, Bruce.

Marybeth Connolly, Goldman Sachs.

Hi, Mike.

Hi, Mary Beth.

First question, just about -- just looking at the balance sheet, you mentioned the 35% debt to cap ratio. What's the target and I guess is there the bigger question, is there room to get more aggressive on buybacks relative to sort of what your strategy is on the bolt-on acquisition front?

I think our target for total debt, total cap remains 35 to 40%, we're now at the lower end of that range so we've certainly had good improvement. Net debt is 33%. I think we're in good shape there. In terms of share buyback on the balance sheet, what we've always looked at our balance sheet is the opportunity for us to grow our business, and in that respect, as you know, the first use of cash for us is really going to be acquisitions. We think that the 35 to 40% range gives us good leverage, and efficient balance sheet while preserving the opportunity for us to make acquisitions going forward. We've made a number of small acquisitions. We said we like to make larger ones, and I think that if we're fortunate, we'll be able to do some of that. We want to maintain some flexibility in the balance sheet going forward for those growth acquisitions. Again, if they don't happen, then we'll look at additional share repurchase as an offset to that.

Just kind of a quick question on the Other Services business, in the past, I think has Doug mentioned this, that the potential for GCS is to be something in the order of like a billion dollars business or five to seven years out or something like that, and EBIT margins could be in a high single digit range. How -- I guess I am trying to figure out how does that compare with Pests? What the potential business size for Pests and obviously the margins are higher there so just out of curiosity what that mix would like like down the road?

I am sorry, the mix of what?

Pests versus GCS and the other services.

Doug's comment is people spend as much on kitchen equipment repair as all their kitchen cleaning, so that's where we come up with the large size for the market of the overall U.S. market for kitchen repairs, around $3.4 billion. We're the only national independent provider so I think we have tremendous opportunity on the sales side. In terms of the margin side, we're certainly looking for double-digit margins out of that. We think they'll be close to the corporate average.

Maybe higher margin potential than I realized? Thanks.

Thank you.

David Begleiter, Deutsche Bank.

Hey, David, how are you?

Good thank you. Just on GCS; is the target now to be profitable in 2008?

Yes. We think there will be break even, small profit levels, for GCS in 2008, probably start off with it low and then with the second half showing in the black, remember that we're continuing to do in GCS, and we'll have the systems in place to operate the business, but we see some tremendous productivity and sales development opportunities in kind of a Phase II, so we'll be doing the same thing we've always done in most of our business, is trying to balance growth with investment as we go forward with GCS, so, yeah, you will see it break into black into next year and probably for the full year small profitability, but I think you will also see a top line that's showing pretty attractive growth.

Okay. And in Europe, does your new team have a long-term margin forecast, the same as the old margin forecast?

I think it is pretty much the same. We're still looking for it to be in the 14% range for Europe, so that's -- last year I think it was around 9%, 500-basis point improvement.

Is that 100 basis points per year improvement perhaps?

As you know, we always targeted about 50 basis points per year for most of our operations in corporate, so I think we can stick with that. Clearly not every year you will get that, particularly when you're going through a lot of transition like Europe is, but I think over time you will see roughly that 50 basis points --

And you mentioned some elective investments in the back half of the year. Can you define those more granularly?

Well, I think it is as before. These will be investments in our ability to sustain either greater growth or better efficiency in returns for our business going forward, so, for example, some of the things that we may step up on would be the European systems, R&D projects, some salesforce hiring, IT projects here in the U.S., so I think we'll use some of this earnings strength opportunistically to try to move forward again, but the target here is going to be higher growth and better efficiency out of the business.

And lastly, given the strength in Latin America, can you help size that opportunity and should we look for a sustained double-digit growth down there for the next two or three years?

Well, I don't have the Latin America market size off the top of my head. It is a several billion dollars size, but we clearly look for double-digit growth to continue in Latin America for some time in the foreseeable future.

Thank you very much.

We think it is a tremendous opportunity there as we continue to broaden that business as well.

Sounds good. Thank you.

Thank you.

Mark Gulley, Soleil Securities.

Hi, Mark.

A couple of things. One, you talked about competitive gains earlier in your narrative. I assume those have slowed down but can you remind us what they had been and that they are now?

Last time we said that we had captured around $100 million worth of business. I think that we don't try and track that publicly, but we're a little bit better than that, and we still have some opportunity left there, to I don't think the book is closed on that opportunity yet.

Okay. And secondly, I seem to remember you might have announced an acquisition of a Pest business in Australia. Can you talk a little bit further, is Pest one of your -- continues to be one of your prime areas of acquisition globally?

Yes, sir. As you know, there is about three focus areas for us in terms of strategic investment. Globalizing our Pest Elimination business is clearly one that we have been actively pursuing. This year you saw the Australian Pest acquisition as well as the Chinese Pest acquisition. We're now in almost 20 countries around the world, so I think that's progressing well.

The second one is Healthcare. We made a couple in Europe. We hope to be on the hunt in the U.S. for some acquisitions as well organic development, and the third is Water Care. We made an acquisition in Water Care a couple years ago and would like to make more going forward.

Thanks, Michael.

Ed Yang, CIBC.

Hi, Ed, how are you?

Great. CapEx spending was pretty tame in the quarter. Was this just a timing issue and how much do you expect to spend on the rest of the year on CapEx?

CapEx, I think it was more of a timing issue. I think for the full year we're still looking for it to be around 300.

And is the asset intensity of your business, is that changing at all as your revenue mix changes?

I don't think so. Obviously, we're always looking at ways to reduce the costs of dispensers and make them more efficient, et cetera, but I think fundamentally it will still be in that range, the 6, 7% of sales.

Okay. And secondly, there has just been a tremendous amount of consolidation amongst your hotel and restaurant customers, and is this basically a plus or a negative for Ecolabs?

We think it is kind of a neutral, doesn't have much impact. It certainly gives you the advantage as you go forward for getting a more consolidated customer to try to sell through your circle of customer opportunities more effectively, since it is a larger organization, they often want to consolidate vendors, plus you're still calling on one source to go after all the various solutions that we've got, so I think there is opportunity there, so kind of a net is about the same.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from Dmitry Silversteyn of Longbow Research.

Good morning. Just a couple of quick questions. I want to make sure I understand your GCS profit improvement timeline. I think at the beginning of the year you were targeting fourth quarter to be break even. Is that still the case and we're going to begin 2008 with maybe slight negative because of some timing of investments and then improve from that level, or do you now expect fourth quarter to be still a money-losing quarter for GCS?

Well, hi, Dmitry. I think we're pretty consistent in the forecast which was the first half of 2007, which showed greater losses versus 2006, and that's primarily because we're running two separate systems, the new one and the old one plus we've got a bunch of people to back it up and do the installation, so you're running excess costs at the beginning of the second half, and we're down to the one system we'll have some savings there, but also we'll start to get some volume benefits, so we thought that the first half would be more, second half would be less, and as we go into the first half of next year, we'll see further declining losses, so I think this is kind of the transition point at which we would expect lower losses year-over-year going forward. We had talked about the fourth quarter as perhaps reaching a break even run rate. That was something we still hope to do, but for the full quarter, it would still be a loss. Again, for the first half of next year, hard to say, but my expectation would be possibly developing the second half of next year and probably break even slightly profitable for the full year.

Fair enough. Just want to understand what's going on in international margins. They look to be up year-over-year, but I think you said that you were reclassifying some costs from international to corporate, so is that really where all the improvement in margin on year-over-year basis has come from and actually if you add those costs back in, did margins actually decline in the second quarter year-over-year?

It is really not material to last year. What we did is pulled out some of the expenses we're doing on the European system, which is only like a couple of million bucks, I think, in the first quarter and move that to corporate and provide a little more transparency about what's going on in the international business, and as we said for the full year, I think you will see overall international about flat with last year, so in which you have a second half that's probably around there, and again, it is where you see Latin America and Canada very strong, Europe about flat, and Asia Pacific probably down.

Okay. And then just want to clarify, when you talked about your goal of 14% operating margin, was that for all of international business or just the European portion of it?

Europe. We would expect Asia Pacific and Latin America to be higher.

Oh, okay, so all-in, when this, I guess when the European problem is rectified and you get a little more critical mass in Latin America and Asia you're looking for this to be high teens type of operating margin business international overall?

Certainly midteens, upper teens.

And I think that's it. Thank you very much.

Chris Shaw, UBS.

Hi, Mike, how are you doing?

Good. How are you?

All right. I was wondering with all the recent food scares coming out of China, have you seen any way to benefit from that scare either here or abroad?

Well, we certainly have a lot of alternatives for our customers, typically the customers we're dealing with in China are the same people that we have here in the U.S., so whenever there is a scare like this, with the phone rings off the hook and we have people looking for solutions and alternatives. Typically, though, when you have a process plant like that, it takes time to implement something like that, so there is not an immediate reaction but generally what they do is have us come in and help look at their processes and look for opportunities to develop that. They do a test, and then six months, a year later you start to see results from that.

Is that the whole food safety audit program sort of?

That's part --

That's part of it?

Part of what F and B will do with the customers because clearly they have great experience in the HAACP has a critical control point work that's done in these plants. We certainly have experience with the very best people around the world. We have the highest standards. There is a lot of skill level we can bring through our service force to our customers everywhere in the world.

Not sure what that standard was you just quoted, but I will believe you.

It was developed for NASA so the astronauts wouldn't be getting sick in the space capsules.

If it is good enough for NASA, I'm sure it is good enough for us. On the share buybacks, how much more do you have on the current authorization?

5 or 6 million.

Shares, right?

Shares.

Do you foresee just -- the current quarter's pace ebbing, flowing in the next -- it seemed a little higher than normal, and more than you've done in past years and past quarters, is there any color, also when do your options usually price to offset some of that?

I think the pace depends on acquisitions. If we're able to secure the acquisitions that we hope to, I think you would see less activity.

Right.

As far as option issuances, those are in December.

Okay. Thanks, Mike.

Thank you.

John McNulty, Credit Suisse.

Hey, Mike, just a few quick questions. In the press release, you guys had highlighted the kind of depth of new products and a lot of new products coming out and a pretty rich pipeline, can you help us to understand exactly what that may mean for the top line and the bottom line? It is my understanding they may be slightly higher margin products as you introduce them and they tend to have pretty high prices?

Sure. We're introducing a brand new platform in our wear washing area called Apex which brings actually new levels of cost savings for our customers in terms of not only water but energy, so we think that's going to have some tremendous opportunities, plus as we showed at the NRA show and will show again at our investor meeting, we've now got better information that the dispensing unit for Apex can provide customers to help them understand better their efficiency of their operations and specific areas they can improve, so we think it will be a powerful new tool going forward, now that said, we'll be mindful about rolling this out, we'll be starting with new accounts, and in terms of the capital impact will be rolling this out to new accounts and it will be a gradual rollout, and typical of the way that Ecolab does a lot of our products, they tend to be more singles than home runs, that the impact will be incremental going forward as we bring the product out, so that's the wear washing product in the laundry area and Europe we'll be bringing out a new product line for that area, and we'll have a new floor care product and we'll have a number of them and I think what you will see is incremental impact on the top line. In terms of the profitability, whenever we introduce a new product which has got greater advantages for the customer, greater cost savings, et cetera, we're generally able to also secure some value for Ecolab out of that, too, so the margins can improve on those products, so net of it all is I think you see incremental sales and margin opportunity going forward, although I don't think you will see a dramatic impact in any particular quarter.

Second thing was, you had made some comments with regard to investments in Asia that you might be making in the upcoming, I guess, year or so. Can you give us more color in what you're doing there and quantify maybe what the investment might be?

We'll be doing infrastructure investment across some of our high growth areas in Asia, particularly China, et cetera, to make sure we've got strong platform on which to continue to build our operations. We'll also be making management investments to make sure we got the talented leaders to drive and leverage that business.

And any quantification of investment?

All the investments will be in the several million dollars range.

Okay. Great. Thanks a lot.

(OPERATOR INSTRUCTIONS). Our next question comes from Mike Harrison, First Analysis.

Good morning.

Hi, Michael.

Not to beat a dead horse on GCS at all, but you talked a little bit about holding off on really working hard to seek new customers until that new IT system comes into place, and I was just wondering can you talk a little bit about what kind of customers you have in your sights as you get the new system in place, and maybe sort of the timing of how those new sales ramp up? Will it be gradual, or are we going to see more of a big bump up in sales at some point in the next few quarters?

Thanks. We had been holding back as the systems were developing, but as we'd say now the gloves are coming off, and we're going after the accounts, and the accounts we're going after are chain accounts. As we're going after those simply because the lower level of business that we have, it may be a little lumpy, but we're generally looking for strengthening sales growth going forward for GCS, and one of the things that we can offer these chains, as you know, is the ability to provide consistent data across all units in a chain that we're able to serve, such that the customer can get great information on their operations, the costs of their repairs, and that helps them better control their costs and budgets going forward.

We've seen increasing customer satisfaction out of GCS, and we're well over 90% and have stayed up there throughout all of this, and it is only improving as we get the new systems in place. The new customers we brought on, we've seen high satisfaction levels out of them, so for us, we've got tremendous opportunities going ahead with our customers, and also developing a strong model which includes increased preventive maintenance, which certainly is something that benefits the customer by having more predictable consistently operating businesses, as well as our business model for operations.

Is it a situation where you guys are sort of increasing the amount of resources and salespeople and technicians that you have in place to survive a sort of lumpiness in the GCS business, or a big bump as a new customer comes on stream, or could we potentially see maybe some operational issues with a big customer coming on stream in a bunch of new accounts all at once?

No. We should not. We're trying to be very mindful of how you roll out a customer so there is close connection between the sales area and the operations area, such that you can meet your commitments going forward. Ecolab's usually been very good about that, and we're going to make sure we follow through with that with our customers.

Okay. And in terms of the new Apex system, as that starts to roll out, do you -- have you seen any potential technical glitches with the way the computer interfaces with the Apex dispenser or does that all seem to be going smoothly, and in terms of Apex, how many of your wear washing customers are eventually going to be switched to that system? Would it be essentially all of them or are their customers who are going to stay on other products for whatever reasons they might have?

First of all, the rollout doesn't start until later in this quarter, so it hasn't really begun yet, but we've been testing it for, boy, over a year, and we certainly hope we've got all the the bugs out of it. So far we've seen excellent results out of those test markets, and performance of the products, so, so far so good, but the rollout is still coming. In terms of how many customers, like I said, we'll have a very mindful rollout as we go forward, bringing all customers in, bringing new customers in. Eight years down the road, is everybody on Apex probably not because different customer situations, different water conditions, different wear being run through those may require different things, so I think you will see a high percentage on Apex, but I couldn't give you a number.

It is something left up to the customer?

Absolutely. At the end of the day, what we want is the right result for the customer.

Thanks, Mike.

Thank you.

Mark Gulley, Soleil Securities.

Michael, follow-up. I know it is very, very early in terms of the turn around in Europe, and you did give us some comments in your narrative. Can you think about milestone, a mile post that you can share with us that we ought to look for, let's say sometime middle of next year, whatever, if you're on track in terms of sales growth or margins or whichever metric you think makes the most sense?

I don't think that looking in certainly the first half of the year is reason simply because we're starting to roll this stuff out in the fourth quarter, so to be honest with you, Mark, I don't know that I could give you a financial metric that would make a lot of sense during the year. I think you're going to see improving sales and margins but to pick out a specific number for operating margin level, I just don't think that gives it enough time or fairness and would be a reasonable to do that. My bottom line is I think you look for improving margins and sales growth but to specify a level I don't think would be responsible.

Okay. I think that's fair. Thanks.

Dmitry Silversteyn, Longbow Research.

I want to follow up, Michael, on GCS business you talked about the potential of being in terms of margins when it finally does get above break even, being close to corporate average. How big does this business have to be versus the current level, which I think is less than a couple hundred million dollars?

Probably the 250 range.

We're probably a couple years away from that, then?

Yes, because it is only about 130 now.

So maybe more than that. Okay.

Yes.

Thank you.

Okay. Thank you.

At this time we have no other questions. Sir, I will turn the meeting back over to you for any closing comments.

Well, thanks, everyone, for participating in this call. Like we say, we think we had a very strong quarter, a very strong outlook going forward, and all of you have a great summer. Thank you.

This concludes today's conference. Thank you and have a good day.