藝康 (ECL) 2007 Q3 法說會逐字稿

Welcome to the Ecolab third quarter 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 our most recent form 10-K under item 1A, Risk Factors and in our third quarter earnings release. A copy of our earnings release is available on Ecolab's website at Ecolab.com/investor.

Starting with some highlights from the quarter, reported third quarter 2007 EPS increased 7%, reaching $0.46. Excluding a discrete tax benefit and a special charge for the previously announced arbitration award, earnings rose 14% to $0.49, hitting the top end of our forecasted range. We enjoyed continued solid trends -- solid sales trends from our U.S. institutional pest and food and beverage businesses and record double-digit sales growth at GCS, Kay, Healthcare and Textile Care. International also showed good sales gains. Latin America again rose double-digits. Asia Pacific showed a better sales increase, and Europe reported steady growth.

Consolidated operating margins reflected the business investments we're making as well as the special charge for Pest Elimination's arbitration award. Operating margins excluding them rose 40 basis points. Our outlook for the fourth quarter and full year remains strong. We expect EPS to show continued strong double-digit growth in both periods. We raised the low end of the estimate range by $0.01, and now look for earnings excluding special gains and charges and discrete tax benefits it be in the $1.65 to $1.66 range, indicating a 15 to 16% increase. In summary, we believe our business trends remain solid, and we continue to expect yet another terrific year for Ecolab, and believe we're making the right investments to sustain attractive growth for the future.

Turning to the details, Ecolab's reported consolidated sales for the third 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 negligible. Sales for U.S. cleaning and sanitizing operations increased 8%. Institutional sales rose 7%, comparing against a very strong period last year when sales rose an exceptional 13%, as we brought on major business from a competitor. Third quarter 2007 sales growth continued to be healthy into the various end market segments, including restaurant, healthcare, lodging and travel.

Third quarter growth was in the more normal institutional trend line range of 7 to 9%. We believe most of the business gained from that competitor has been rolled out, and we're annualizing against some pipeline filling last year. We continue to make investments in new products and programs and sales force training and technology. The launch of the Apex wear washing platform and sales force training related to the new product and technology was undertaken in the third quarter, and the rollout to new accounts is progressing very well. We believe the fundamental outlook for institutional remains very attractive and we expect institutional to show continued superior growth in the fourth quarter 2008.

Kay's third quarter sales growth was 11%. QSR's underlying business remains healthy 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. We expect continued strong gains in the fourth quarter and full year for Kay. Textile Care sales rose 10%, reporting yet another double-digit growth quarter. 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 outpace its market. Textile Care continues to benefit from the fundamental business improvements it has undertaken as well as the differentiated products and value solutions it delivers for its customers. However, we look for more modest growth in the fourth quarter, as the division laps some significant account wins.

Third quarter sales for the Healthcare division increased 14%. Sales reflected continued solid end market demand for our infection control products and expanded penetration within our existing base of group purchasing organizations and health systems. Our waterless and antibacterial skin care products showed continued double-digit growth. Looking ahead, fourth quarter 2007 Healthcare sales should show continued good sales growth in the upper single-digits. As an update on the announced Microtek acquisition, the proxy has been sent to Microtek shareholders, and the shareholder vote is scheduled for November 9. If we receive a favorable vote, the acquisition is expected to close very soon thereafter. We have been working on integration planning and are ready to go when the deal is closed. We remain very excited about the prospects for Microtek and the potential our combined operations offer us and our customers.

Food and beverage delivered a solid third quarter performance with sales up 8%, led by strong performances in the meat and poultry, food and beverage segments. Excluding last year's acquisition of DuChem, sales rose 7%. The meat and poultry market was strong, reflecting significant customer gains. Corporate account wins, better pricing and new products have contributed to dairy plant sales growth. The Food and Beverage business also saw strong growth reflecting new account sales and the strength of our corporate account relationships. We expect continued good sales trends into the fourth quarter of 2007, as we focus on new account acquisition and continued expansion of our antimicrobial platform.

Water care sales were flat in the third quarter. Gains in boiler and cooling treatment as well as filtration were offset by lower waste water application sales. Vehicle care sales grew 8%. New product sales using advanced technology like Rain-X and Solid Power combined with increased pricing to lead results. Vehicle Care expects new account gains in existing markets along with new market opportunities and investments in the sales force to yield further good sales growth in the fourth quarter of 2007. Sales for U.S. Other Services increased 10% in the third quarter.

Pest elimination sales continued to show good growth, rising 9%. New account activity was driven by good corporate account gains while noncontract service growth also increased in the quarter. We also continued to develop new programs targeted at specific market needs that provide better "circle the customer" penetration and better growth opportunities tore Pest Elimination. We expect Pest Elimination to show similar growth in the fourth quarter.

GCS sales increased 12% showing strong growth and continued improvement in its sales momentum. For perspective, sales growth was 1% in the fourth quarter 2006, 5% in the first quarter 2007, and 7% in the second quarter. Sales to corporate accounts are trending well, and the sales pipeline looks attractive. The new business systems were brought online in the quarter. We're incurring some extra start-up costs due to training training and gearing up productivity on the new systems, and expect these costs to diminish over the next several quarters as our people gain experience with the new productivity tools. We expect continued double-digit sales growth in the fourth quarter 2007 and into 2008 with improving profitability.

Measured in fixed currencies, international sales increased 6%, when measured in dollars, reported international sales increased 13%. Europe, Middle East and Africa sales rose 5% in the third quarter at fixed currency rates. When measured in dollars, EMEA sales increased 12%. Europe's institutional sales showed a modest gain, good performances in developing countries in the east as well as the west were offset by slow results in France and Germany and weak floor care sales. Sales benefited from new account gains and growth in housekeeping. These are partially offset by flat consumption in catering accounts for manufacturers and declines in janitorial.

Food and Beverage sales showed a good gain with growth in all F&B segments. Healthcare sales showed good growth. Infection control and clean room products performed well. Textile Care sales continued to show good growth, with good customer gains in sales of water and energy conserving technology driving the higher sales. The Europe pest business saw flat sales in the quarter. Third quarter sales in part reflected the elimination of a couple of larger but low margin contracts. We continue to work on improving it is sales teams, new contract growth and account profitability. In addition, service quality measures have continued to show improvement.

As an update on our work to improve Europe's performance, the business information systems development work is making good progress, and is in the build stage. A multi-phase rollout will begin in the summer of 2008. We have begun rolling out the sales force training metrics and technology efforts. While these will take time to implement they're critical to the fundamental improvement we need to make to achieve better growth in Europe. We remain confident these actions as they're implemented will lead to higher sales and profit growth and a more effective business model. We look for Europe's fourth quarter fixed currency sales to show modest growth but look for better results in the coming quarters and years as the actions we are implementing take hold.

Asia Pacific sales grew 9% in fixed currencies. Excluding acquisitions, sales increased 7% as growth in east Asia, Australia and New Zealand drove results. When reported in U.S. dollars, sales increased 16%. From a divisional perspective, institutional's good 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 grew due to strength in east Asia and New Zealand. Both the beverage and brewing sectors continued to show good growth in Asia. The Food and Beverage division overall has benefited from increased product penetration and account gains. Asia Pacific expects continued good sales gains in the fourth quarter.

Third quarter sales for Ecolab's Canadian operations were up 4% in fixed currency, and rose 11% measured in U.S. dollars. Institutional sales were solid, benefiting from corporate account gains, accelerated street growth and new products. Food and Beverage sales also improved, while Pest Elimination and Vehicle Care grew double-digits. Latin America reported an outstanding performance, with sales rising a very strong 13% at fixed exchange rates. When measured in U.S. dollars, sales rose 19%. Sales were excellent through the region as all divisions rose double-digits.

Institutional growth was driven by new account gains, increased product penetration, through 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 the Latin America, recording yet another double-digit gain for the quarter. Further, to bolster our 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, though the fourth quarter will face a tough comparison to last year's very strong 20% sales gain. We currently expect Latin America sales to show a more moderate comparison in this year's fourth quarter.

Turning to the expense side of the income statement, third quarter gross gross margins increased 10 basis points to 51.2%. Strong improvement 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 and unfavorable business mix not fully offset by pricing actions hurt results. SG&A expenses excluding special charges were 37.1% of sales, up 20 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, information technology, and our new product lines.

Turning to the segment profits, Ecolab's U.S. cleaning and sanitizing segment operating income increased 13%, driven by better pricing, higher sales, and improved cost efficiencies, which were partially offset by investments in the business, including the costs associated with our new wear washing product line. Operating income with U.S. other services increased 4%. Continued profit gains at Pest Elimination were partially offset as expected by extra start up costs at GCS, due to training and gearing up on the new systems. We believe GCS will see sequentially lower operating losses beginning in the fourth quarter and into 2008, as costs associated with the systems implementation declined and the business benefits from strong growth.

International fixed currency operating income rose 9%. Latin America and Canada showed a strong increase. Europe's operating income was flat, as sales growth was offset by higher delivered product costs and unfavorable business mix. Corporate operating expense includes special charges for the previously disclosed arbitration settlement, other nonrecurring investments, and corporate investments to optimize our business structure as part of our ongoing efforts to improve our efficiency and returns. We believe this category assists in better understanding and comparability of our fundamental business progress as we complete the work in Europe and when we record nonrecurring events. Ecolab's third quarter consolidated tax rate was 28.2%, down from last year's reported 35.1%. Excluding an approximate $0.03 per share benefit from legislative corporate tax rate reductions in the United Kingdom and Germany, which reduced our net deferred tax liability and the tax rate impact from the arbitration charge, the adjusted effective income tax rate for the third quarter 2007 was 34.4%.

We repurchased half a million shares during the third quarter under our share repurchase program, as we worked toward better leverage on our balance sheet. Year-to-date we have repurchased 8.2 million shares, and invested $365 million while doing so. When combined with our 2006 investments in share repurchase, we have invested more than $640 million in share buybacks and at prices below the current market. The net of this performance is that diluted net income per share for the third quarter was $0.46, up 7% over the $0.43 earned a year ago, and up 14% to $0.49 when adjusted for the discrete tax benefit and special arbitration charge. Turning to the balance sheet, Ecolab's total debt to total capital was 33% at September 30, compared with 29% reported a year ago. The net debt was 30% compared with 27% last year. Depreciation and amortization for the quarter was $73 million, and capital spending for the quarter was $95 million. Looking ahead, we expect to fund the planned Microtek acquisition using commercial paper. Upon completion of the transaction, our total debt to capital would increase to approximately 38%. Longer term we'll look at permanent funding options.

That's a review of the third quarter. In summary, Ecolab delivered yet another strong quarter. Our performance was a result of continued solid sales growth led by our U.S., Asia Pacific and Latin America businesses, showing the strength and balance of our global business model. Our U.S. and international segment operating margins both rose once again 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 fourth quarter of 2007, we begin by cautioning that these statements are based on the 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 fourth quarter, we look for our U.S. operations to show continued solid momentum.

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 and will help drive future results. We look for international sales to again be led by Latin America and Asia Pacific Growth. We believe this will result in overall good fixed currency international sales growth. Gross margins should be around 50 to 51%. Selling, general and administrative expenses are expected to come in around 39% of sales. We look for improved margins in both U.S. business segments to more than offset a decline in the international margins and yield a consolidated operating margin increase.

Net interest expense should be around $15 million reflecting the additional costs of debt associated with the expected Microtek acquisition. We expect the effective tax rate in the quarter will be approximately 34 to 35%. Overall, currency translation is expected to benefit fourth quarter earnings. Also, as previously announced, we expect to record a $0.02 per share gain in the fourth quarter on the sale of a business in the U.K. As a result, we expect diluted earnings per share for the fourth quarter, excluding special gains and charges, to show a 15 to 18% gain and be in a $0.39 to $0.40 range. For the full year, we look for EPS excluding the special gains and charges to increase 15 to 16%, to $1.65 to $1.66. As previously disclosed, the ash training charge will be offset by discrete tax benefits recognized in the year and by the gain on the previously disclosed sale of a business. Also, please note the estimated tax rate discussed does not reflect the impact of discrete events that, if and when they occur, are recognized in the appropriate period.

That concludes our remarks. This conference call will be available for replay in our website through November 2. Operator, please begin the question and answer period.

Thank you. We will now begin the question and answer session. (OPERATOR INSTRUCTIONS). Our first question comes from Laurence Alexander of Jefferies. You may ask your question.

I guess the first question is on the recent JV with Site Controls, can you talk a little about your longer term strategy in terms of energy maintenance savings and whether this is an extra platform for GCS.

Sure. As you know, one of the key factors for our customers, one of the key concerns they've got is energy savings as they go forward. Also, as you know, of the total cost of cleaning, our products represent the smallest portion, labor and energy represent the larger portion, so as we're able to deliver better cost efficiencies for our customers, we're able to add more value to them. As energy prices have risen, that's become a greater concern to them, so through products such as Apex, and the systems we have with them that help our customers focus on their energy and cost savings, we're able to bring more value to them. We think that Site Control offers additional potential for us over the long-term to help further reduce energy costs for our customers.

Just to drill into that a little bit more, you mentioned in the past that you might eventually be moving into HVAC or air quality, and that is something that they targeted as well. Is this sort of -- should we look for more work on the air quality side of your business?

In the HVAC we're referring to GCS in the repair side, and in air quality, we're developing solutions for institutional and some other divisions, and how they would deal with air quality issues on the interior. Site Controls would be different, and looking at the energy consumption of those. That's something we'll be developing with Site Controls as we go forward.

And separately can you address the arbitration on in past and whether that is settled or anything still pending and how that affects morale in the segment?

In terms of where we're at, we have filed an appeal to vacate the judgment on the arbitration award. In terms of morale, I don't think it has had an impact -- negative impact on the morale of our folks in the field.

Thank you.

Thank you, Laurence.

Next question, PJ Juvekar with Citigroup.

Hi, Mike, this is Eric Katz in for PJ. I was wondering if you can talk a little more detail on how SAP implementation is progressing in Europe and when you expect to see a material improvement in margins?

As mentioned, they moved to the build stage for SAP, so we have not started implementation. That won't start until summer of 2008, and then we'll be rolling that out over a phased period which I think is about 18 months as we roll it out to those various countries.

And on healthcare, how much top line growth are you forecasting for 2008 and how much growth is related to the Microtek medical?

We haven't done our plans yet for 2008, so we don't have a normal forecast. I think as we looked at Healthcare, our objective is to have the business growing double-digits going forward. Obviously Microtek would be a part of that growth.

Thank you.

Next question, John Roberts, Buckingham Research.

Hi, Mike.

Hi, John, how are you doing?

Seems like your stock came under some pressure when Henkel announced their acquisition of National Starts. Did you have any discussions with them during the past quarter regarding the disposition of their ownership?

We really have nothing to report there. We talk to Henkel all the time, but there is really nothing to report. They haven't stated what they're going to do with the shares, and I think they will do that in a very public way, so until then we're just waiting and seeing.

And then secondly, you mentioned that the wastewater market kind of weighed on the water treatment business. I know it is not big, but I didn't think of wastewater as being a big part of your water treatment business.

Well, to begin, our water treatment business is a small business for us, and the waste water is a portion of what we do there. It is primarily in the F&B customers, and if you lose a few accounts there on a small business it has an impact.

Thank you.

Gary Bisbee, Lehman Brothers.

Hi, Mike, a couple questions. You mentioned last few quarters finished goods costs in Europe in particular has been an issue, and I guess I wanted to dig into that a little bit. Is that just a product of the decentralized structure you've had and your changing there and inefficiencies with that or is there some reason you're having a harder time getting pricing in Europe than you've seen in other areas?

I think it is all those things. First of all, we've said before that we don't view ourselves as having a highly efficient supply chain in Europe. The systems there have been set up on a country by country basis, so we don't feel we have the efficiencies of a highly integrated system throughout Europe, and that's part of what we're working for with the ERP system that we're developing in Europe. Secondly, we've had raw material price increases as has others throughout our raw material prices, so that has affected us, and lastly regarding pricing, that's one of the things we're focusing on whether sales force training is to enable our people to get them the right tools in training to be able to be more aggressive on pricing and get the type of pricing that we need, so I think in answer to that, Gary, it is all really all three things that you touched on, and I think we've got effective programs in place for all three of those going toward forward. It is just they're going to take time. The sales force training takes time. The ERP takes time. The logistics change takes time to happen.

Okay. And any updates on the management transition you had there and how that's progressing? Are there any issues within certain countries now that you're trying to manage the whole thing from one place or is that going pretty much as expected at this point?

I think it is pretty much as expected. We've said that we are going to move to a regional headquarters in Zurich. That involves a limited number of people. That will be involved in the move. In terms of the management changes, that's already been announced. Jim White was put in place. There was a couple of divisional shifts around there, but nothing more than that, so I think that right now we've got a good team in Europe, and they have a good plan, and it is just implementing that plan and getting the time to have those results show up.

And then just one last housekeeping one, do you know approximately today what the interest rate is on your commercial paper program, the rate you're paying?

No. 5, 6%.

Okay.

Something like that.

Thanks.

I can follow up on that one, Gary, when I check.

Thank you.

Next question, Dmitry Silversteyn, Longbow Research.

A couple of questions and a number have already been answered. Looking at your working capital, it's gone up in the quarter which is somewhat unusual, looking back at what happened in the previous year and wondering if there is anything beyond that, if you're building inventory anywhere or have any problems collecting accounts receivables?

I think it is primarily the Euro.

So it is just impact of foreign currency.

Yes, foreign currencies in general, Euro specific.

Got you. Second question on GCS, can you give us an idea of what was the loss rate for the business in the dash in the third quarter and I know you talked about it being somewhat less so in the first quarter -- in the fourth quarter. At which point in 2008 can we look for the business to start trending above break even?

Well, we said second half of '08 is when we expect it to break into profitability.

Okay. And the first part of the question, what was the losses in the third quarter compared to the previous couple of quarters?

Loss in the quarter is about $5.7 million.

That's quite a bit -- I guess it is going back all the way it beginning of the year in terms of losses. I thought they were supposed to trend down over the year.

What we said is the third quarter would be the last quarter in which we saw a large loss. We said in the fourth quarter -- beginning of the fourth quarter we expect to sequentially improve profitability, and the reason the third quarter was that size is we had extra costs as we completed the ERP system for GCS, number one. Number two is you're running two systems basically in 2007 versus 2006. You have the old system with the new system, and then third, you had additional people onsite as GCS basically trying to catch anything that fell out as you went through that implementation process. We look for the fourth quarter profitability to improve over the third quarter. To us it was pretty much as expected to have things run this way. Again, point to the top line improvement which I think is the exciting part of GCS that, as I said we've seen sequential improvement from 1 to 5 to 7 and now to 12% top line growth and we expect that to continue and as that top line continues, obviously you're going to see that impact profitability as well.

And the last question on the balance sheet, obviously you built up cash there and trimmed down debt. Are you going to reverse that with the pending acquisition of Microtek, and are there other thoughts for using the balance sheet beyond just offsetting dilutions with share repurchases and kind of steady as you go dividend increases? Your balance sheet now is getting to be somewhat under leveraged I would say. Is that something you guys are thinking about?

First of all, our target is 35 to 40%, so especially when we get the Microtek acquisition in a few weeks, we expect to be at 38%, so great to be at the heart of that, and we've improved our total debt to total capital from around 30% I think about a year, year-and-a-half ago up to 38% now, and the last piece is as mentioned before we're still waiting to see what Henkel does. I think we're in good shape, we're appropriately levered at this point, and we still have enough room for acquisitions and other events going forward to let us take advantage of those opportunities.

Did I read you correctly that if Henkel does decide to sell their shares that you'll be standing ready to participate in the purchase in some way?

We haven't said what we're going to do. We want to see what Henkel puts on the table first and then we'll be able to make our judgment after that. We consistently said, though, is that whatever happens in the situation, we'll do what we think is the best interest of the shareholders and do very shareholder friendly actions.

Thank you, Michael.

Thank you. Gary, in answer to your question on the commercial paper, it is 4.75%. I was a little high.

Next question Ed Yang, CIBC World Markets.

Hi, Mike.

Hey, Ed, how are you doing?

Great. On the commercial paper funding for Microtek, is that something that you typically do with acquisitions or are you unsatisfied with some of the rates that are available for longer term funding?

It is just typical short-term funding for something.

Okay.

As we said, as we see things develop here, we'll look at permanent funding options later.

Okay. On the -- in other news, on the staph infections have been in the news lately, particularly with schools, can you remind us what products you sell to the education sector currently, and whether that mix will change going forward as you gain more infection control expertise?

Did you say specifically to the educational sector?

Yes, or in I guess are there opportunities to leverage some of your new found expertise in Healthcare to other areas where you do business?

I think education is clearly one market, but Healthcare is the one that's far bigger. As we talked about before and as you saw at our Investor Day, HAI's Healthcare-caught infections is a huge issue in the U.S. It is killing over 100,000 people per year, costs our system well over $30 billion a year, and MRSAs are a significant part of that Healthcare-acquired infection problem, so for us as we go forward, we'll be marketing not only our products but also training programs, et cetera, for Healthcare,schools and other places that have those problems, trying to address those solutions with our products and programs. We've got some products now. We want to develop more as we go forward to deal with the evolving issues in these markets.

Mike, as you integrate Microtek, are you going to be able to ramp penetration of some of Microtek's products into your other sectors as well? Are there any transferability of those products?

Microtek's primary products is draping for equipment and patients, so I am not sure if there is much application outside of the healthcare area.

Okay. Thank you.

Thank you. Next question Bob Koort, Goldman Sachs.

Thanks. Good afternoon, Mike.

Hey, Robert.

Question really around what's going on in Europe and how much of what you're seeing is the external environment or do you think it is possible some of it may be company-specific and how have things changed do you think since your competitor pulled out of the U.S. and got more aggressive in Europe?

I don't think there has been much change in the competitive situation in Europe since JohnsonDiversey pulled out of the U.S. I think it is pretty much as before. In terms of what's going on in Europe, we're seeing where there are forecasts of a slowdown in the general economy, but more specific to us, I think that we've said before while our business in Europe has been doing okay at 4 to 5% growth, we don't think that's good enough, so no matter what the situation, we think that we wanted to get much stronger growth out of Europe, and that has been our focus and that's where we're doing the investments that we're doing across the board in the top line, on expenses, to drive the bottom line, funding the training for the sales force, the tools for the sales force, et cetera, since we can get more stronger results.

Okay. Thanks.

Thank you.

Question Bruce Simpson, William Blair.

Mike, can you talk a little bit about raw material pricing, where that is either this quarter or year-to-date versus a year ago, and then what the balance is between that incremental cost pressure and the incremental revenue you've got from price hikes, how those have been trending against one another this year.

Well, raws are relatively flat to 2006. They've come in sort of as we expected them to, and in terms of pricing our pricing has allowed us as you can see in the gross margin to improve upon that raw material costs and expand our margins.

It sounds like the incremental revenue from higher prices has more than offset whatever additional costs you have from raws?

Exactly.

Okay. That's all I got this time, Mike. Thanks.

Thank you.

Question Rosemarie Morbelli, Ingalls & Snyder.

Good afternoon, Michael.

Hello, Rosemarie, how are you?

I am fine, thanks. Regarding the international business, one of your comments earlier was that you expected that at some point Europe would have -- could reach a 14% margin, and it would be higher for Latin America and Asia Pacific. Where do we stand today, since Europe is much larger than the other two? Does it have at this moment a higher margin and the others are catching up and going to be above, or are they already above the European margin?

No. Europe margins are in the 9% range, and Latin America, Asia Pacific are in the low double-digits, so they're already -- Latin America and Asia Pacific are higher. As far as improvement in Europe, what we've said is we're undertaking a number of efforts to improve those, but those are going to take time to show up. We still think that there is a potential to get European margins into the 13, 14% range as you mentioned, but that's going to depend on us getting the ERP systems in place in terms of us getting the sales force well trained, well equipped to go out and sell more aggressively, and et cetera, and all those things are at work, but they take time to develop. We just started the rollout to the sales and service, the ERP doesn't get implemented until starting in the summer of next year, so it is going to take a little time to get those margins, but we're confident that we're going to get there.

Okay. Are those the only changes are are there other things that you are doing in Europe that we should kind of keep track of?

Well, we've talked about the major things that are going on in Europe, the major initiatives we've got, so I think those are the things that we think are key.

Okay. And then if we look at North America since the end of the second quarter, have you seen in some of the markets you served the beginning of an impact from the economic slowdown?

If you look at lodging, for example, lodging is actually expected to improve into 2008. If you look at rooms sold. If you look at restaurant trends, it is maybe down a 0.5% this year in terms of traffic, but the last few months we've actually seen improvement in it, so overall we say it is a good, not great environment for restaurants and lodging.

And when you look at Food and Beverage, this is probably where it would be affected more in terms of the breweries, and those kind of areas?

Yes. We haven't seen any real fundamental changes in those markets.

In the corporate expense of $6.8 million this quarter is higher than trend, and I understand that you're investing more, but were there some things special, higher expenses, higher level of investment in this quarter versus what is coming our way or is that close to $7 million the new booking number?

Well, corporate expense excluding the special charges was around 6, and we think that that's roughly what it is going to be for the foreseeable future.

Closer to 7, Michael, if I take out the one-time tranche, so that brings us closer to $7 million and that is a good number to look forward to?

No. It will be around 6, 6.5 range. It might be a little bit less next year.

Okay. Lastly if I may in the margin decline on the other services, is it because of the higher expenses on GCS or has Pest somehow lost a little bit of its margin?

No. It was GCS.

Totally?

Yes.

So did the Pest margin improve or was it flat?

Pest margins were similar to last year.

All right. Thanks a lot.

Thank you.

Question, Chris Shaw, UBS.

Hey, Mike, how are you doing?

Good, Chris. How are you?

Good. Just curious in Europe you talked about mix. I was trying to figure out maybe so I can figure out maybe for the future, but what shifted in the mix exactly and what was driving that shift?

There is a little more equipment than chemical?

Simply that?

In the F&B and the professional products area.

And also, have you guys been adding sales force and where is that standing right now because I know you often give a stat for that?

We expect the full year to be up 4 or 5%.

That hasn't changed?

Yeah, really no change there pretty much across the board.

That's basically all I have. Thanks, Mike.

Thank you.

(OPERATOR INSTRUCTIONS). Next question, Mark Gulley, Soleil Securities.

I had three questions. When I go back to the Investor Day, I think one of the strategies in Europe might have been to try to gain some market share at the expense of competitors,either JohnsonDiversey or smaller ones, are able to do that with all the changes going on or is that on hold?

We're still targeting to take share from the competitor. What we're trying to do is later on improved training for the sales force to make them better than they are today. That's all. We continue to be aggressive. We continue to focus on taking share from competition. We continue to focus on delivering better service solutions to our customers just as we always have. And we have a renewed focus on new products. What we hope to do is layer on top of the sales force more effective tools in the arsenal to approach customers to be more effective in selling better penetration through the customers more products and solutions to customers.

Okay. Second question was can we expect to see more Healthcare related acquisitions given your emphasis on that (technical issues) conference?

Absolutely.

And can you provide any color there? What is the pipeline look like? What is the prices of deals look like, that sort of thing?

I mean, Healthcare acquisitions are going to be more costly than the non-healthcare acquisitions simply because of the growth in profitability in those businesses. In terms of pipeline, we have a number of deals we're looking at, but it is there there is not much more you can say because as you know with deals, it isn't final until have you have a signed deal.

Last question is when you move people from Dusseldorf to Zurich is there a nonrecurring charge you'll take for that relocation, and will the smaller corporate staff in Zurich have a meaningful impact on European margins?

Yes, there will be a charge. It is in the special charge because that's viewed as a nonrecurring factor for the relocation for the people, the incentives to move, et cetera.

Was part of that in the third quarter? Did I miss it or is there more to come?

Just a tiny bit in the third quarter. There is more that that will be shown in futures, but that will show up in special charges.

Again, will that have an impact on overall European margins once that's all taken care of, those costs are out, or is it pretty de minimus?

It is a little too early to talk about that part of it. Again, the move costs are special charges, so there will be specifically identified, so you will be able to see those.

Okay. Thanks, Mike.

Thanks. Ultimately, Mark, as you know, the reason for all this stuff is to improve European margins. We believe the regionalization will allow to us grow faster and operate more efficiently in Europe, and that's the goal of all of these activities we're doing.

Thank you.

Thanks. Next question, Robert Felice, Gabelli & Company.

Most of my questions have answered. Just one or two more. You mentioned GCS lost $5.7 million during the quarter. What was the year-to-date loss?

I have to take a look here. About $13 million.

Okay. By how much do you expect to narrow that in the fourth quarter off of the $5.7 million this quarter?

We haven't forecasted operating margins or profits by division, but we think we'll be improving over the fourth quarter.

Okay. But still operating at a fairly large loss?

It will be a smaller loss in the third quarter, and we expect the loss to sequentially decrease through the second half of 2008 when we expect it to turn profitable.

I guess what I am trying to pin down is as you look to '08 by how much of a tail wind do you expect GCS to be? It looks like it will probably be somewhere around 16 or $17 million loss for the full year, how much of you expect to narrow that gap in '08?

I think you're probably looking at 10, $12 million swing, swing.

Okay, so probably a $0.03 to $0.05 benefit?

Yes.

Thanks for helping me with that.

Our last question comes from Jeff Zekauskas, JPMorgan.

Good afternoon, Mike.

Hi, Jeff.

At the beginning of the call, did you break out volumes, price, acquisition and currency for the Company as a whole?

We did.

Could you remind me what those numbers were? Forgive me.

Volume and mix is 5%. Pricing was 2%. Currency was 3, and acquisitions were negligible.

With oil prices having stepped up sharply over the past few weeks, does that make a difference to your raw material profile or does it not?

It does, but remember, one of the bigger issues is the capacity situation.

I am sorry, the capacity situation?

Well, while oil prices are a significant factor in our raw material costs, probably the greater factor is that there is not an excess of supply, and therefore as the dollars weaken, we've seen greater exports of product, there is not a lot of excess capacity to allow pricing to decline.

I guess lastly, do you have longer term gross margin targets?

We do. I mean, the target is basically higher. What we've said is we would like to have them exceed the 2004 levels, but beyond that, we don't have a specific numerical target because the way we view it is we want to continue to grow our gross margins. The second thing is as our model develops, if we get more service businesses, that will have an impact on the gross margins because as you know, they tend to have lower gross but also lower SG&A, and therefore we can have comparable if not better operating margins. What we focus on at the end of the day is operating margins, and that's where we're going to continue to focus our efforts to improve our results.

Do you have longer term operating margin targets?

We do. I mean, our objective is to grow them about 50 basis points per year.

Thanks very much. Thank you.

I would like to turn the meeting back over to Mr. Michael Monahan for closing remarks.

Everyone, thanks for your time today. We appreciate your attention and have a great week. Thank you.

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