藝康 (ECL) 2008 Q1 法說會逐字稿

Welcome to Ecolab first quarter 2008 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.

Thank you. Hello, everyone, and thanks for joining us.

This webcast teleconference includes estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Some of the factors that could cause actual results to differ are described in the section of our most recent Form 10-K under Item 1A, Risk Factors, and in our first quarter earnings release. A copy of our earnings release is available on Ecolab's Web site at ecolab.com/investor.

Starting with some highlights from the quarter. Reported first quarter 2008 EPS increased 17% reaching $0.41. Pro forma earnings per share, which excludes special gains and charges and discreet tax benefits, rose 11% to $0.39 hitting the top end of our forecasted range.

We also note that as projected, dilution from the Microtek and Ecovation acquisitions was approximately $0.01 per share in the first quarter. We enjoyed strong organic earnings growth. Pro forma EPS from operations increased $0.06 in the quarter.

The benefits from favorable foreign exchange and a lower tax rate shares and interest were fully offset by higher delivered product costs. Further, the strong earnings also funded our Europe investments and acquisition costs.

We enjoyed continued solid sales trend from our U.S. Institutional, Pest, Food & Beverage, and Healthcare businesses. International also showed good sales gains as Latin America rose double digits, Asia Pacific enjoyed strong gains and Europe reported modest growth.

We note that certain end markets in the U.S. have softened showing some headwinds from the overall economic slowdown. In response, we continue to focus on strong sales efforts emphasizing products that provide customers with labor, energy and water savings, as well as productivity and efficiency improvements at our pricing and cost savings to continue to drive our top line and bottom line growth. In addition, acquisitions are helping to accelerate our top line and create additional future opportunity.

We continue to be optimistic regarding the full-year outlook. We look for pro forma diluted earnings per share, which excludes special gains and charges and discreet tax items, to be in the $1.84 to $1.88 range. These results will include about $0.02 of dilution from the Microtek and Ecovation acquisitions.

Pro forma earnings excluding that dilution are expected to rise 12 to 14% to $1.86 to $1.90 per share. For the second quarter we expect pro forma EPS in the $0.45 to $0.47 range. These results will include between $0.01 to $0.02 from dilution from acquisitions.

In summary, we continue to expect yet another superior performance for Ecolab in 2008 as we leverage our markets with aggressive sales and cost efficiency actions to deliver very attractive growth and shareholder returns while continuing to build for future growth.

Turning to the details, Ecolab's reported consolidated sales for the first quarter rose 16%. Looking at the components volume and mix were up 4%, pricing was up 2%, currency added 5%, and the impact of acquisitions was also 5%.

Sales for U.S. Cleaning & Sanitizing operations increased 15%. Excluding the Microtek and Ecovation acquisitions, sales rose 5%. Institutional sales rose 6%, once again outpacing the end market growth.

We continue to see strong customer demand for energy and cost saving solutions. Products like our new Apex solids wear washing line are seeing success in new accounts as well as with existing customers. When matched with our legendary premium service, the new wear washing program provides highly differentiated offering that helps customers offset rising energy and water costs, as well as meet increasing customer concerns for more sustainable products with improved environmental impact.

We continue to invest in new products, programs, sales force training and technology to help drive better service and increase customer solutions. We believe the fundamental outlook for Institutional remains solid.

We had anticipated that markets might soften in 2008, and while basic restaurant traffic trends, as those reported through February, are similar to those that we experienced over the past year or so with some shifting between concept categories more recently we have seen some signs of softening in those trends and in restaurant owner expectations. Though these trends may be further affected by a weakening economy, we remain confident that our fundamental opportunities to increase market share and grow our sales within our customers' operations continue to be very attractive.

Further, our lodging business and underlying trends as reflected in the November rooms sold remains steady. In 2008, we expect Institutional will once again leverage its broad customer base, unit expansion by the chains, increase customer needs for solutions that effectively reduce costs and improve results, and aggressive sales efforts to drive further superior growth and market share gains. We look for continued growth from Institutional once again in the second quarter and throughout 2008.

Kays' first quarter sales grew 2% primarily reflecting the timing of distributor shipments and comparison against a strong first quarter last year. The underlying business trend in quick service restaurants remains healthy with strong ongoing demand from major existing and new fast food chain accounts. The food retail business continued to show strong growth with a double-digit gain.

New products and programs like the introduction of solids for QSR, along with customer wins continue to bolster Kays' results. We expect these initiatives to help drive double-digit gains in Kays' second quarter.

Textile Care sales fell 2%. Textile Care added new plants from existing customers, continued to drive new product solutions and broaden its markets, however, these gains were offset by lower volumes from existing accounts. We expect modest growth in the second quarter as Textile Care brings on new business and uses new technology to drive growth.

Reported first quarter sales for the Healthcare division nearly quadrupled, reflecting the impact of the Microtek acquisition. Excluding the impact of the acquisition, Healthcare sales rose a very strong 17%. Organic sales growth reflected continued solid end market demand for our infection control products and expanded penetration within our existing base of group purchasing organizations and healthcare purchasing systems.

Our line of skin care products showed continued double-digit growth. Microtek sales were strong rising double digits. The integration is going very well as sales reps from our legacy Healthcare and Microtek businesses are working together at the IDN and GPO levels and within specific healthcare departments such as the operating room.

We are working to develop additional opportunities to leverage relationships and achieve further sales synergies. Looking ahead, second quarter organic Healthcare sales should show continued good sales growth and be bolstered by the addition of Microtek.

Beginning in the first quarter of 2008 and following the acquisition of Ecovation, we have combined our water care operations with those of the U.S. Food & Beverage division. Food & Beverage customers are the primary targets for our water care sales efforts and there are synergies available between water care and Ecovation. We expect improved sales potential and efficiency through this consolidation of our industrial water activities within the same division.

Food & Beverage delivered a strong first quarter performance with sales up 28%. Adjusted for the Ecovation acquisition, sales rose 8%. The quarter was led by strong performances in the dairy, meat and poultry, beverage and agri segments.

Looking at the segments, corporate account wins, better pricing and new products contributed to dairy plant sales growth. The meat and poultry business enjoyed a robust quarter, reflecting significant customer gains.

The beverage and agri segments also saw a strong growth, reflecting new account sales, the strength of our corporate account relationships and favorable agri market conditions. Water care sales were off slightly in the quarter as new account gains were offset by lower sugar and wastewater chemistry sales.

Ecovation, the leading provide of effluent water treatment and renewable energy solutions that we acquired during the first quarter, continues to do well, more than tripling its sales and remains on track for substantial growth in 2008. We expect continued good sales trends for the Food & Beverage business in the second quarter of 2008 as we focus on new account acquisition, pricing, and continued expansion of our antimicrobial and water management platforms.

Vehicle care sales decreased 8%. Results were primarily impacted by the softening economy, higher gas prices, and weather-related market softness, all of which more than offset new products including the car wash industries first comprehensive sustainability program as well as better pricing.

EcoCare expects new account gains in its existing markets, investments in its sales force and new market opportunities to yield improved sales trends in the second quarter of 2008. Sales for U.S. Other Services increased 8% in the first quarter. (Inaudible) sales continue to show good growth rising 9%.

New account activity was driven by corporate account gains, while new account service growth also contributed to the quarter. We continue to develop our programs to target specific market needs that provide better circle the customer penetration and better customer growth opportunities.

We expect Pest Elimination to show strong growth in the second quarter. GCS sales increased 6% showing continued good momentum in service sales offset by soft parts volume. The sales pipeline continues to look attractive.

The new business systems are fully on line and we are now working through the system stabilization and optimization phase of the implementation. We are seeing the benefits of the new system through the better business transparency which has helped our business decision making.

Productivity is continuing to improve on the new systems and we expect significant gains as our people build experience with new productivity tools. We expect continued sales growth in the second quarter and year with improving profitability in the second half.

Measured and fixed currencies, international sales increased 8%. Excluding acquisitions, fixed currency sales increased 7%. When measured in dollars, reported international sales increased 19%.

Europe, Middle East and African sales rose 4% in the first quarter at fixed currency rates. Excluding acquisitions and divestitures, fixed currency sales increased 6%. When measured in dollars, EMEA sales increased 15%.

Europe's Institutional sales were strong as steady but modest sales growth benefited from significant floor machine sales and distributor orders. Product sales grew across the regions.

New products like the introduction of wash and walk and the max floor care lines combined with continued gains from housekeeping to help drive sales. We expect second quarter Institutional sales to rise modestly, in part due to the impact of the first quarter distributor orders.

The sales force training programs we are implementing to improve sales execution in our Europe Institutional business are underway and we believe it's beginning to gain traction with the sales force. While still too early to see material results, we continue to expect these efforts to improve top line growth as they take hold later this year and into 2009.

Food & Beverage sales showed a good gain benefiting from corporate account growth. Healthcare sales showed good growth benefiting from skin care lines and Textile Care sales also increased.

Adjusted for the divestiture of our property services business last year, Pest Europe sales increased as programs to improve sales and profitability gained traction. Key metrics including service delivery in the U.K., new contract sales growth in France and overall customer retention showed good improvement and helped to offset the elimination of a couple of larger but low margin contracts in the U.K.

As an update, our work to improve Europe's performance, the business information systems development work, continues to move ahead and is completing the build stage. A multiphase rollout will begin in the third quarter starting with two countries and then rolling out to additional countries over the next 24 months.

Obviously, it is still too early to see results and while these improvements will take time to implement, they are critical to the fundamental development we need to make to achieve better growth and profitability in Europe. We have started the first moves to our regional headquarters and expect to make major staffing relocations this summer as we build a pan European operating structure.

While a significant cost to 2008, we remain confident these actions as they are implemented will lead to higher sales and profit growth and a more effective business model. We look for Europe's second quarter fixed currency sales to show a more modest growth than the first quarter, primarily reflecting the timing of distributor orders, however, we look for better results ahead as the actions we are implementing take hold.

Asia Pacific sales grew 10% in fixed currencies. Excluding acquisitions, sales increased 8%. When reported in U.S. dollars, sales increased 21%.

From a divisional perspective, Institutional strong sales gains were driven by new products, including the launch of a new wear washing platform in Japan and by growth in the market guard program for retail stores. We achieved important account wins in casinos, catering, hotels and restaurants as well as food retail markets.

Food & Beverage sales also enjoyed strong growth. Both the beverage and brewing sectors continued to show good growth in Asia. The Food & Beverage division benefited from increased product penetration and account gains.

Asia Pacific expects continued good sales growth in the second quarter. First quarter sales for Ecolab's Canadian operations were up 3% in fixed currency, and rose 20% when measured in U.S. dollars.

Institutional and Pest Elimination sales were strong benefiting from corporate account gains, accelerated street growth and the rollout of Apex. Food & Beverage sales also improved.

Latin America reported an outstanding performance of sales rising a very strong 18% at fixed exchange rates. When measured in U.S. dollars, sales rose 26%. Sales were excellent throughout 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 & 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. Overall, we expect healthy growth trends to continue in Latin America. We expect Latin American sales to show another double-digit gain in the second quarter.

Turning to the expense side of the income statement, as we expected, first quarter gross margins decreased 150 basis points to 49.4%. The impact of acquisitions, which by their business model operate at lower gross margins than our historic business, were 110 basis points of the margin decline and along with higher delivered product costs and an unfavorable business mix, more than offset sales leverage, pricing and cost savings initiatives.

SG&A expenses were 38.2% of sales on 90 basis points below that last year. The SG&A ratio reflected leverage from our healthy organic sales growth and the impact of acquisitions which operate at lower SG&A ratios. These more than offset investments in the business systems and efficiently is, R&D and information technology.

Turning to the segment profits, operating income for Ecolab's Cleaning & Sanitizing segment increased 6% driven by the higher sales and improved cost efficiencies and the resulting strong operating leverage which more than offset higher delivered product costs and investments in the business. Operating income for U.S. Other Services decreased by $2 million as continued profit gains at Pest Elimination were offset by systems deployment and stabilization and optimization costs in GCS.

(Inaudible) national fixed currency operating income rose 13%. Europe and Latin America lead the growth with double-digit gains as benefits of the strong sales increase more than offset higher delivered product costs and unfavorable business mix.

The corporate segment includes special gains and charges which are reported as a separate line item on the income statement. Special gains and charges for the first quarter included $3.6 million of nonrecurring costs to optimize our business structure, including the establishment of our European headquarters in Zurich, Switzerland.

These costs were partially offset by the additional $1.7 million gain from the previously announced sale of a business in the U.K. The corporate segment also includes $5 million of investments, including within our pro forma EPS reporting, primarily related to the development of business systems and other corporate investments we are making as part of our ongoing efforts to improve our efficiency and returns.

Ecolab's first quarter consolidated tax rate was 29.4%, down from last year's reported 34.5%. Excluding discreet tax benefits primarily from the ratification of a new tax treaty between the U.S. and Germany of approximately $0.02 per share, and the tax impact of special gains and charges, the adjusted effective income tax rate for the first quarter 2008 was 32.8%.

The decrease in the adjusted first quarter effective tax rate was primarily due to tax planning efforts, international rate reductions and U.S. tax legislation. We also repurchased 0.4 million shares during the first quarter.

The net of this performance is that reported diluted net income per share for the first quarter was $0.41, up 17% over the $0.35 earned a year ago. Pro forma earnings were up 11% to $0.39 when adjusted for the discreet tax benefit and special gains and charges.

These results included dilution of $0.01 per share from the Microtek and Ecovation acquisitions and as mentioned in our opening comments, pro forma EPS from operations increased $0.06 in the quarter, the benefits from favorable foreign exchange, the lower tax rate shares and interest were fully offset by higher delivered product costs. Further the strong earnings also funded our Europe investments and acquisition costs.

Turning to the balance sheet, Ecolab's total debt to capital was 39% at March 31 compared with 33% reported a year ago. Our net debt at March 31, 2008 was 35%. Depreciation and amortization for the quarter was $85 million and capital spending for the quarter was $76 million.

That's a review of the first quarter. In summary, Ecolab delivered yet another solid quarter. Our performance was the result of continued growth led by our U.S., Latin America and Asia Pacific businesses showing the strength and the balance of our global business model. We also continued to use that strength 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 our guidance for 2008, we begin by cautioning these statements are based on current expectations. These statements are forward-looking and actual results could differ materially.

These statements do not include the potential impact of additional business acquisitions, divestitures, higher than anticipated raw material price increases or 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 limits risk factors that may cause results to differ.

For 2008 we continue to expect another superior year of growth. We expect solid sales gains, continued strong sales efforts and pricing along with acquisitions that accelerate our top line to be leveraged by productivity and efficiency increases and cost savings to yield another year of attractive earnings growth.

For the full-year, we look for pro forma diluted earnings per share, which excludes special gains and charges and discreet tax items, to be in the $1.84 to $1.88 range. These expected pro forma earnings include approximately $0.02 of dilution for the Microtek and Ecovation acquisitions putting pro forma earnings excluding dilution up 12 to 14% to $1.86 to $1.90 for the year.

Please note these are pro forma numbers which exclude special gains and charges and discreet tax items that we presently expect to net to a range of zero to a positive $0.03 per share in 2008. This income statement line will include the sale of a plant in Europe, as well as certain costs associated with the establishment of our European headquarters and move to Zurich.

In the second quarter we look for our U.S. operations to show continued solid momentum. New products like the ongoing rollout of Apex, our new wear washing platform that provides unparallel performance and energy and cost savings for customers, as well as the first solids for QSR, new on-premise laundry products in the U.S. and Europe and new floor care line that will provide further differentiation and opportunity and will help drive results.

We look for international sales to again be led by strong growth from Latin America and Asia Pacific as they enhance modest gains from Europe. We believe this will result in overall good, fixed currency international sales growth.

Second quarter gross margins should be 49 to 50%. Selling, general and administrative expenses are expected to come in around 37 to 38% of sales with declines in gross margins and SG&A primarily reflecting the acquisitions.

Net interest expense should be around 15 to $16 million. We expect the effective tax rate in the quarter will be 32 to 33%. Overall, currency translation is expected to benefit second quarter earnings.

As a result, we expect pro forma diluted earnings per share for the second quarter excluding gains and charges to be in the $0.45 to $0.47 range compared with pro forma earnings per share of $0.42 earned a year ago. The second quarter of 2008 pro forma results will include between $0.01 to $0.02 per share from dilution from acquisitions.

Except as noted, the second quarter and full-year results and the remaining impact on earnings per share estimates do not reflect the impact of special gains and charges or discreet future tax events that may if and when they occur, are recognized in the appropriate period. Overall, we expect a superior performance in 2008 as these are strong sales and service team to drive growth through aggressive selling, additional solutions per account, new services and appropriate pricing to drive our top line and a constant focus on efficiency and effectiveness to leverage the bottom line while at the same time making the key investments to assure growth for the future.

A final note. We plan to hold the tour of our booth at the National Restaurant Association show in Chicago on May 19th. We'll be sending out more details on the event next week. In the meantime, if you have questions, please contact me or Nicole in our office.

That concludes our remarks. This conference call will be available for replay on our Web site through May 2nd. Operator, please begin the question-and-answer period.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from David Begleiter with Deutsche Bank.

Mike, can you discuss pricing versus recall materials, the gap in how you will close that going forward?

Well, I think as you know, David, you get the raw material hit right away and for our contracts, which are spread basically over the year, we roll the price increases into those. I think we've been pretty effective in our pricing thus far, but, again, you get the hit from the raw materials up front and you get your pricings back as you go forward. Our 2005/2006 experience showed that we were able to certainly recover those well as well as our margins.

What was that gap in Q1, Mike? Do you have the number?

I'm sorry, the gap?

Between pricing and raw material costs?

It was favorable.

Fair enough. And can you just comment on European profitability? I know it will take time to improve it. Were margins down in the quarter year-over-year?

No, margins were up in the quarter. Again, I think that benefited against the comparison last year. It was fairly easy, but also you had some additional volume in the Institutional division, which we mentioned. I think for the full-year we look for the European margins to be about flat.

And last thing just on GCS, what were GCS' headwinds in the quarter? How much did it lose?

It lost about $6 million.

Thank you very much.

Our next question comes from Michel Morin with Merrill Lynch.

Yes, Mike, I was wondering on the Institutional side, how much of an impact are you seeing from the economy?

Well, I think that we're starting to see maybe more in tone than -- much more than that. I mean, we're starting to see customers get apprehensive about the economy and as a result of that you see them a little more cautious than before. But, you know, if you look at our results, we're certainly within the long-term range that we expect for Institutional which has been 6 to 8%, we're within that range.

We continue to see positive foot traffic out of the restaurant, so that's been good news and then we also continue to drive our own growth through account wins, through additional solutions per account. So overall, I'd say that, you know, it's more of a tone than it is anything significant.

And in terms of the pricing gains you said it contributed 2% to organic growth or total organic growth. Can you talk a little bit about how that differs either by segment or region, where are you being more successful at passing on price and where are you not having as much success?

Well, I think that kind of reflects some regions, for example, in North America, I think we've been more successful. Europe which is much more of an independent type of account, where you really need a strong sales force to deliver those.

They're not as strong sales force so they're not able to deliver as much pricing but on the other hand, our raws in Europe have not risen as much as they have in the U.S. So I think in the U.S. you're seeing the better pricing but that's where we also have a stronger sales force and also had stronger raw material cost increases.

Great. Thanks very much, Mike.

Our next question comes from Mike Harrison with First Analysis.

Hi. Good afternoon.

Hi, Mike.

We've heard some companies specifically mention that they've seen some weakness in the U.K. and in Spain. I was wondering if you could talk about what you're seeing in terms of economic health from country to country as you look at mainland Europe.

You know, I don't think that we've seen much from U.K. and Spain in terms of weakness. I couldn't really say too much to that. I mean, overall, it's been more the central countries, Germany, France, where we've seen more weakness. The east Europe, northern Europe has been pretty good.

Okay.

And then in Healthcare, can you break out what the top line contribution was of Microtek in the quarter, and then maybe talk a little bit about whether you're seeing -- whether the top line synergies are tracking about with where you would have been expecting them at this point?

Well, as we said, growth for the division was up 289% with Microtek, it was up 17% excluding it. Microtek was about $34 million in the quarter. In terms of synergies, it was -- things are coming along well.

All right. And then as you look at the, you know, staying with Healthcare, as you look at the infection prevention market, it seems like you have some hospitals looking to improve basic sanitation. You maybe have others looking at testing incoming patients for infections.

You know, obviously, the basic sanitation route is probably much more cost effective, but we, at the same time are seeing some state legislators pushing for these testing requirements. Can you talk about how you're taking your offering to market in this environment where you're essentially pushing, you know, hand washing which isn't that fancy, against this fancy and expensive test?

Well, what we're driving toward is a comprehensive solutions for the customers to try and break down, as we call it, the vectors between the sources of potential HAIs and the patients. So for us that means trying to drive that on a broad base throughout the organization.

So for us we're trying to go towards the sea level to drive the concept that number one, this has to be a comprehensive solution and broad based. Number two, this is a way that you're going to be able to reduce your costs, particularly as you see healthcare reimbursement change to one that does not necessarily pay for the HAIs going forward.

We think that our real strength in this area is that we've got strong product approach, but even more so, it's the training that we can provide because, again, to treat MRSAs, et cetera, it's not fabulous technology that's needed, it's much more the practice of it. We think that we've excellent background in helping train people in the use of cleaning and sanitizing products in multiple areas and that's going to be the real key for the healthcare area.

Okay.

And last question I had, you seem to have quite a bit of cash sitting on your balance sheet. I'm wondering if that's related to your desire to buy some shares from Henkel? Are you keeping that around for potential M&A opportunities or do you have some debt that's actually coming due any time soon?

No, it's just timing, Mike.

All right. Thanks very much.

Thank you.

Our next question comes from Laurence Alexander with Jefferies.

Good afternoon.

First of all, with INIS, so sorry, with Cleaning & Sanitizing in the U.S., have you seen any push back on the adoption of Apex with some of the other new products as customers become more nervous?

No, not really. In fact, we've seen quite an embrace of it for a couple of reasons. First of all is it does offer demonstrable cost savings for the customer in terms of not only water, energy and labor, but the other aspect has been the sustainable aspects of Apex in terms of its total footprint from sourcing through production through disposal by customers.

So we actually had one customer that bought it solely for the sustainability reasons. We've had a couple others actually been in the news that have picked it up because of the cost savings. So so far, I'd say that it's doing very, very well and we're very pleased with the rollout of Apex.

And for the $5 million investment in productivity, you know, is that the restructuring in Europe or is that across the firm and what would be the expected payback period on those kinds of investments?

That's the investment in the European systems as well as the creation of a pan European organization establishment of the facility in Zurich.

Thank you.

Thank you.

Our next question comes from Chris Shaw with UBS.

Hey, Mike. How are you doing?

Hi, Chris, how are you?

Good. I was curious, the amount of shares you bought back this quarter, is that the kind of sort of minimal level we'll see until we get some sort of resolution out of Henkel?

Well, there's a couple of things. First of all, our target debt to total cap is 35 to 40%, we're at 39% so we're up there, but the second thing is obviously there is a potential pending action and we'd just like to keep some powder dry.

And there's no new news to report on Henkel, right?

Nothing to report, no, sir.

Okay. On Ecovation do you know how much their sales went to the ethanol market?

It's a fairly small market today. It's certainly something we'll be pursuing in the future. Right now, it's much more aligned with our traditional Food & Beverage business in terms of dairy and beverage and meat and poultry.

Okay.

And then curiously, given sort of the weaker economic environment, I know in past cycles like this you guys get a little more aggressive with share and street accounts. Are you doing something similar at this time?

Oh, absolutely. When we came into 2008, we were expecting a more difficult economic environment so as part of our plans we really built in to be much more aggressive on the street in terms of new accounts, in terms of solutions per account, in terms of our general approach to the markets. So, so far what we've seen has been pretty much in line with what we expected and, again, it's driving just those things that you mentioned, Chris, which are going to be the enablers for us to continue to out perform the market.

Any numbers you can attach to any share gains or greater circle of customer selling?

Well, you know, in terms of solutions per account it's tough to measure on a quarter by quarter basis simply because you've got such a large base. But as you've seen, we've continued to expand that over last couple of years.

In fact, I think up over the last three years, we're up two solutions versus two years ago. So we're up to about 5.5 versus 3.5. So we continue to advance that and I think if you look at every quarter we continue to make further progress on those.

And one more. In past, just theoretically, it's not showing up in the numbers but would that be something that the customer would cut back on before some of your other product lines just because the pest elimination is a bit of almost insurance kind of thing?

No, I don't think. I mean the fact is that, you know, the pests will continue to return to the environment consistently and so flies, rats, bugs, whatever, they're going to keep coming back in. So if you try and cut back, you're simply inviting a very demonstrable public health problem. I mean you've seen a mouse run across the floor, it does not exactly bring in more people to your restaurant.

Yes, good point. All right. Thanks, Mike.

Our next question comes from Rosemarie Morbelli with Ingalls & Snyder.

Good afternoon, all.

Hi, Rosemarie.

Mike if you're not alone or to you alone. Could you give us a feel for the losses in GCS, sir, in the quarter?

Yes, they're about $6 million.

So they don't seem to be diminishing, are they?

Well, as we said when we completed the installation in September of the ERP that there was additional stabilization and implementation costs for that system going forward, we had hoped to avoid those through a number of things but we weren't. The people I talked to regarding the ERP installations, they'll tell you that it's very typical to have things like this.

And what we're going right now is we're we may have some reports that in the new system weren't complete, you have to fill in a few fields maybe some missing reports you have to get those regenerated. It's all that cleanup work after you've installed something this major. So that's pretty normal activity.

The second thing is you've got people relearning the system. They're relearning reports, formats, et cetera, so their productivity is not what it was on the old system. But it's improving day by day and we think over the next couple of months you're going to see continued improvement there, such that we expect that as we go through the second, third, fourth quarters, we'll be able to improve the productivity significantly on this, and secondly, the number of the costs are related to, if you will, perfecting this system will start to go away as well.

Are you still planning on breaking even by the end of the fourth quarter?

You know, what we've said is that we expect the profitability to improve this year and be profitable next year. In terms of timing, I don't think I really want to time it because, as you know, my record on that hasn't been so hot.

Okay. You said it.

Could you give us a feel for the economic situation you are expecting behind that $1.84 to $1.88? I mean you made comments regarding the fact that you felt that things were going to be worse than they were actually and so I am guessing that this is why the first quarter was a little stronger or at the high end of the range. What -- can you help us with your expectations and whether you think you are being conservative?

Yes, I mean we were looking for the U.S. economy to slow down. We were looking for slightly better but not robust international economies.

On the raw materials side, as you know, Rosemarie, we've been a believer that we're in kind of a secular high raw material environment so we were expecting raws to be high, maybe not quite this high, but certainly high and as a result we took action early on in all of our plans to drive higher growth, to drive appropriate pricing and cost savings to offset that. So, so far the economic environment's pretty much what we expected and I think our actions in that environment are paying off pretty well.

You know, here we've got, you know, a tough economy. We've held our estimates for the year. We still are confident in our projections for the year so I think that in a tough environment we're feeling pretty good about where we're at and what we can do in this environment.

I know you are doing a great job I was just wondering if, you know, if you had expectation of things actually slowing further deteriorating further in the U.S. in your numbers?

Pretty much the same. I mean, we're not looking for any disasters here, but I think like everybody looking for a general slowdown in the economy which is kind of what we're getting and so there's really been no surprises for us yet.

Okay.

And then with the signs of slowdown within the institution, the hotels, restaurants and so on, do you see some growth in other accounts such as Kay versus your general institutional accounts? And are those margins at Kay lower than those of Institutional?

I mean, we're continuing to win accounts through all of our areas and, for example, you mentioned Kay. Kay's had some great account wins this year. We think they'll be up double digits in the second quarter and for the full-year and so I think that as you look across the business we're just continuing to enjoy good success.

I mean one of the advantages, if you will, of this environment where people are worried about cost is Ecolab's products and solutions are about really helping customers control costs while providing good results. So it's a great environment in which we can sell and really address specific customer needs.

I understand that but are your margins higher in the regular institutionals than they are in the QRS?

Yes, I think if you look at operational margins and take out the impact of acquisitions that we're in good shape. In fact, if you look at the U.S. Cleaning & Sanitizing we said sales were up 5%, operating profits were up 6% so we're expanding our margins there.

And if Kay grows a lot faster and the rest of the institutional restaurants slows down should we expect to see those margins decline?

I'm sorry, what was that Rosemarie?

If you grow Kay at a faster rate and the rest of the institutional business slows down, should we expect to see some decline in the operating margins?

No, they're both above average margin so we would expect continued operating margin, or operating profit improvement, Rosemarie.

Okay. And if I may, you made a comment regarding Europe, Michael, saying that margins were up in first quarter and you expected them flat for the year. So I would translate that to mean that they are coming down in the next three quarters or am I missing something?

Well, what we said is the first quarter benefited by some distributor orders and some machine sales that will occur in the second quarter. In fact, some of those distributor orders will be offset in the second quarter so I think the second quarter will be a little tougher than the first.

Okay. Thanks a lot.

Our next question comes from Gary Bisbee with Lehman Brothers.

Hey, Mike. Good afternoon.

Hi, Gary, how are you doing?

Good, thanks. I guess a couple of questions.

First of all, what exactly does it mean that you're putting together Food & Beverage and water carriage? Is that just in terms of reporting or is there sort of big structural change in terms of how it's run how it's sold, et cetera?

It's both. I mean they've been working together for some time. The bulk of the marketing for water care has been to F&B accounts, Food & Beverage accounts, so that was kind of a natural alignment there and then secondly, with Ecovation, which is really addressing Food & Beverage accounts being reporting into Food & Beverage and the fact that there's some synergies between water care and Ecovation just made all the sense in the world to consolidate that and strengthen the efforts.

Does that mean you put the sales force together it's now managed by one person or one team of people, that type of thing?

There's separate sales forces but the overall businesses are reporting into one individual.

Okay.

You said there's no update on Henkel, but could you give us any sense, how much would you be willing to go above or beyond the debt to cap target you set since this seems like it's sort of a one-time thing? Would you be willing to go a fair amount above that or is that still a pretty tight range? Just trying to understand.

It all depends on what Henkel actually says they're going to do. I mean it's hard for us to comment before then. If you look back in history when we bought Henkel-Ecolab joint venture, our total debt total capital went up to 50% but.

Hello?

Oh, that was it.

Okay. All right.

And then I guess just the last question on the GCS, can you give us a sense of that $6 million loss how much of that is the sort of ongoing system spin versus the loss of the business, you know, as it's operating ex the system spend?

About a third was what we call one-time.

Okay.

Part of it, remember the GCS it's pretty much a fixed cost, if you will, business now so as you get sales, you're going to get tremendous operating leverage so it's kind of operating or its sales are kind of below the break even line, if you will. And so as we continue to grow those sales, which we think we will be able to do at double-digit rates, you're going to see some significant operating improvement to offset that and that's how we think we break into profitability the next year, particularly as we all saw those one-time costs go away.

Okay.

In last quarter you mentioned you'd called a few accounts now that the system allows you to look much closer at profitability per client. Any sense that you're going to take more steps in that direction or is it much more what you just said just accelerating the top line?

No, I don't think there's going to be any major ones. I think it's we're focused on accelerating the growth and driving the growth.

Okay. Thanks a lot.

Our next question comes from Dmitry Silversteyn with Longbow Research.

Hi, Mike. A couple of questions.

First of all, I'd just like to follow-up on your comment on Kay, you know, they had relatively slow growth here in first quarter and you expect double-digit growth for the year so I just want to understand a little bit better, you know, what's the timing or how are you going to get to that accelerated growth compared to what you delivered in the first quarter?

Well, first of all, the first quarter resulted in comparing it to very strong quarter last year it was up about 16% and the timing is distributors this year. So that's why it had less growth.

Again, we expect very strong -- we expect good double-digit growth in the second quarter. It's got a very robust new customer pipeline so we're very confident in the outlook for not only the second quarter but the balance of the year.

Okay. All right. Fair enough.

And this is something that I think was asked at least one time on this call but I'm trying to get a little bit of a feel. Where, in your turn around program to Europe, you know, you've gotten the headquarters relocated, you're, I guess, retraining the sales force now. Kind of give us an idea of where you are in putting in the foundation for the program so that we can look forward to actually reaping the rewards of this or is it all done and you're just now waiting to gain traction from all the effort you put in?

Well, it terms of the sales force training we just started that around the beginning of the year. We've rolled it out to most of the countries but that's going to take time to change as you can guess when you're looking at human behavior. I think you're looking at probably end of the year, early next year before you see some material impacts.

But I've got to tell you already in the countries where we've been in the longest, we're already starting to see some benefits and some metrics there like solutions for accounts (inaudible). So that part's showing positive signs.

But the EBS system, the ERP system, we don't make the first installation until the third quarter and that's in two countries. And they'll be rolling out over the next couple of years country by country or a couple of countries at a time. So it's going to take some time before you actually start to get some traction out of that. I think that's more a 2009 before you start to see any meaningful impacts from that and really 2010, 2011 on EDS.

So until that time the way for us to judge here, your performance in Europe is what? Top line growth or --

No, you should start to see the top line start to improve in 2009 as the benefits start to come along.

Okay.

Okay. Thank you.

Our next question comes from John McNulty with Credit Suisse.

Yes, good afternoon. Two questions.

First of all, with regard to the high fuel prices Ecolab has a lot of vehicles out on the road. Can you remind us how you actually deal with them, whether there's a fuel surcharge to your customers or was it just part of your general pricing increases that you try to put through?

It's part of general pricing, John.

Okay. So there would be a bit of a lag between when you actually feel the pain coming in versus when, on the fuel side versus when you're actually recovering it on the price?

I mean it's like anything, the price goes up right away for us and then we roll our pricing with customers as the contracts renew or as the pricing agreements go into effect, but that's all year long.

Okay.

And then on the Latin America business, it seems like it took a pretty big step up. Is there anything kind of anything kind of significant there or special there that, you know, maybe where you had a one-time benefit or is it really just you finally got kind of it to scale and it's really starting to hum on all cylinders?

I think it's a story that is good one, particularly as you start to look at some of the things we're doing elsewhere. We had a lot of investments that we've been doing in Latin America in terms of people, training programs, et cetera, and we think they're starting to pay off and you're seeing the benefits of that.

Great. Thanks very much.

Thank you.

Our next question comes from Robert Cord with Goldman Sachs.

This is Amy John sitting for Bob. Most of my questions were answered and then I have one last.

What's your outlook for the raw materials cost to inflation for this year? (Inaudible) area are you confident your pricing power can fully offset the higher raws going forward?

Well, I mean, I think that we're looking at raws to be up maybe about 5% or so this year. And then you can -- you maintain a 2% year-over-year price increase and then you think that 2% can offset is 5%? Well, yes, because raw materials are only about 20% of sales so the pricing goes on all of your sales, the raw material costs is only on 20% of your sales.

Okay.

And then obviously there was some (inaudible) you saw in underlying demand for your business. Have you seen your customers give you push back on your pricing actions obviously because of the superior service Ecolab provides to customers and then typically you charge higher than your competitors for the products and services. You have seen any major push back?

You know, customers never really get excited about a price increase, so as Doug always says, they always start with no then you try and work back from there. So no, we haven't seen any material impact.

Okay. Thank you.

Our next question comes from P.J. Juvekar with Citi.

Hi, Mike.

Hi, P.J. How are you doing? Good.

So your new European headquarters, why wouldn't you include that in your Cap Ex and amortize that amount rather than take a special charge?

Well, because they're operating costs. They're not capital. We're talking about relocations of people. We're talking about the cost of establishing a business operation, lawyers, accountants, et cetera, consultants, so it's operating that capital.

And you did that for tax reasons? The headquarter relocation?

Well, the move to Zurich is multi purpose. I mean first of all, we need to create a Pan European operation so you need a location for that and we felt that Zurich was very attractive in terms of the incredible talent pool its got because of the many multinationals that are based there, but second, Zurich also has very attractive tax reasons and you're starting to see that flow through on our reduced tax rate and you'll see more of it in future. So there's just lots of good reasons to do it.

Yes, but I'm not sure why you want to take a special charge for that if you're going to keep the tax benefit in the number.

And the second question I have is the $0.01 dilution of Microtek and Ecovation, again, why was the dilution a special charge when if you were to do an accretive deal would you take the accretion as a special charge also?

Well let's go back to the Zurich deal. I mean the special charge is only related to expenses that we feel are one-time in nature. So, for example, it's where you are moving a lot of people from one area to another one. So that's the only reason for the special charge. The other costs related to the move are shown up in the corporate segment which is part of the P&L.

Okay. And the dilution.

And none of this, we think this is a very positive move, P.J., especially when we look at -- the special charge this year will end up being a positive, as we said, when you include that plant sale that will occur in the second and third quarter. So net of it, the special charge will be positive and the only reason we break all this stuff out is so that you can have greater transparency to the actual underlying European and international business.

(Inaudible) about the dilution from Microtek and Ecovation why the dilution is a special charge?

It's not.

I thought you said that $0.01 dilution.

No, that's within our P&L. We have not included that in the line called special gains and charges. All we did is we identified that as an item for your information.

And the second question I have on operations. Can you elaborate on your comments about restaurant traffic softening? And the related question is that do restaurant and lodging trends go hand in hand with each other?

Well, they're currently not doing that. I mean, lodging continues to show good room demand trends. In restaurants, we've seen restaurant traffic being fairly consistent with what it has been for at least the last year or so.

So all I was referring to is we're starting to see, if you will, more of a tone change in the institutional customer where they're getting a little more cautious, because like everybody they're reading all the headlines about the economy, so there's just a little more caution from their sense. But as you look at our numbers like we said for Institutional, it grew 6% in the quarter. We always said it's a 6 to 8% growth business, so it's within its long-term growth trend.

Okay.

And one last question on your water treatment business, what are your ambitions in water treatment? How large do you want to get it and do you want to go after the industrial customers or stick to some of the commercial customers?

As we've always said we're focused on the middle market. We're not going after large industrials or municipals. As you've seen, we've made significant investment in the effluent water treatment with Ecovation for the food and beverage plant so we're focused on our customer base. We want to continue to serve that customer base serving their water needs and we hope to continue to do so in the future, but, again, you can see where our bets have been which is middle market.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Robert Felice with Gabelli & Company your line is open.

Hey, Mike. Most of my questions have been answered. Just have one or two more.

I guess first, how much of the operating income margin compression in U.S. Cleaning & Sanitizing was attributable to Ecovation and Microtek and as the year progresses would you expect similar level of year-over-year compression?

Yes, because actually if you look at excluding acquisitions, margins expanded.

So what was the absolute amount attributable to Ecovation and Microtek?

Well, in gross margins, it was 1.1% -- 1 percentage point of the decline.

And that's for the entire P&L or for U.S. Cleaning & Sanitizing?

For the entire P&L.

And if we were just to break it down in U.S. Cleaning & Sanitizing in terms of the operating income margin?

If you exclude it, Ecovation and Microtek, margins expanded for U.S. Cleaning & Sanitizing. I don't have the margin number in front of me but the profits would have been up 7%.

Okay. And as the year progresses you would expect a similar level of year-over-year compression?

Yes, because we're looking for, well, I don't know about the level or the rate of progression, but we're looking for them to become accretive in the second half of the year.

Okay.

And then how long do you think it takes before the business gets back to its preacquisition margin levels?

I mean, the Ecovation and Microtek?

The entire U.S. Cleaning & Sanitizing business, in terms of the reported operating income margin.

I don't know. I don't know. Let me give some thought and I'll get back to you, Rob. I haven't really thought about the terms of that.

Okay. I'll follow-up with you offline. Thanks.

Okay.

Our final questions comes from Michel Marin with Merrill Lynch.

Mike, just a quick follow-up.

I think Apex is being rolled out, you know, if I'm not mistaken, pretty aggressively. Are the dispensing equipment here mostly expense or capitalized and are we seeing a bit more than usual in terms of these kinds of costs going through the P&L?

The equipment itself is capitalized. There's some expense, obviously, on installing it that's slow to the P&L.

Okay. But it wouldn't be, you know, relative to prior years, it's nothing unusual?

No.

Okay.

That's part of the pacing that we're doing for the rollout.

Right. Okay.

And then in terms of pricing, you've been at 2% since the second quarter of '06, if memory serves me right, is that kind of a number that we should expect going forward or is there any hope that you might be able to get that to 3? If we add an extra decimal point to the 2%, which way is it trending?

I think that 2% is probably a good number for now. I mean, it all depends on where we're seeing things go, but at this point, I think you could plan -- should forecast it 2%.

Okay. Thanks, Mike.

At this time, we have no additional questions.

Well, thanks, everyone, for your attention and your questions today. If you have any questions, please let us know, otherwise have a great day. Thank you.

Thank you for joining today's conference. That does conclude the call at this time. Please disconnect.