藝康 (ECL) 2008 Q3 法說會逐字稿

Welcome to the Ecolab third 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 do 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, and hello, everyone, and welcome to Ecolab's third quarter conference call. With me today is Doug Baker, Ecolab's Chairman, President and CEO, who will join us for the Q&A section following our review of the quarter's results. A copy of our earnings release and the slides referenced in this teleconference are available on Ecolab's website at Ecolab.com/investor. Please take a moment to read the cautionary statement on slide two, stating this teleconference and the slides, including estimates on the future performance, these are forward-looking statements and actual results could differ materially from those projected.. Factors that could cause actual results to differ are described in the section of our most recent form 10K under item 1A Risk Factors, in our third quarter earnings release and on slide two.

Starting with slide three In the third quarter we achieved another strong performance despite challenging market conditions and major increases in delivered product costs. As we continued our efforts to aggressively drive new account gains, product penetration, new products, pricing, and cost reductions to deliver double-digit earnings growth, while still making the key investments to continue our growth for the future. We expect to continue to outperform our markets and deliver superior growth for the fourth quarter and the full year 2008. Starting with some highlights from the quarter, as we move on to slide four. Reported third quarter 2008 EPS increased 9% reaching $0.50. Pro forma earnings per share, which exclude special gains and charges and discrete tax items, rose 12% to $0.55. We also note that the third quarter earnings include dilution from our recent acquisitions of approximately $0.02 per share. We once again enjoyed strong organic earnings growth.

Organic growth more than offset higher delivered product costs, while exchange and tax also benefited earnings. This overall strength helped fund our investments in Europe and acquisitions. In the U.S. we continued to show strong sales trends from our K, Institutional, and Food and Beverage businesses, with good trends in most of our other U.S. businesses, as we worked hard to offset slowdowns in our full service restaurant and lodging markets. International also showed good sales gains as Latin America and Asia Pacific both rose double-digits, Canada was strong and Europe reported moderate growth. Looking ahead, our full service restaurant and lodging markets have softened in the U.S. and Europe, while quick service restaurant, food processing, Healthcare, government and education markets remain steady.

In response we continue to drive aggressive sales efforts, emphasizing our innovative products that provide customers with labor, energy and water savings, and using them to deliver new account acquisition among our national, regional and independent prospects. In addition, we have undertaken productivity and efficient improvements, cost reduction actions, and increased pricing to recover significantly increased raw material costs and to continue to drive our bottom-line performance. Despite the challenges, we continue to expect a strong performance in 2008. We trimmed the top-end of our full year range by $0.01, reflecting unfavorable exchange rate trends and uncertain economy. We now look for full year pro forma diluted earnings per share, which excludes special gains and charges and discrete tax items, to be in a $1.85 to $1.87 range. For the fourth quarter we expect pro forma EPS to be in the $0.44 to $0.46 range.

In summary, we continue to expect yet another superior performance for Ecolab in the very challenging environment ahead. As we leverage our markets with aggressive new account and better penetration sales efforts, appropriate pricing and cost efficiency actions to deliver steady growth and shelter returns, while continuing to build for future our growth. Turning to the details as shown on slide five, Ecolab's reported consolidated sales for the third quarter rose 15%. Looking at the components, volume and mix were up 4%, pricing was up 3%, currency added 5% and the impact of acquisitions and divestitures was 3%. Slide six includes sales growth by segment and division. Sales for the U.S. cleaning and sanitizing operations increased 15%. Excluding the Microtech and Evocation acquisitions, sales rose 8%. Institutional sales rose 6%. Our new Apex solids warewashing line is running well ahead of plan and showing terrific momentum, as heightened customer demand for energy and cost savings solutions drives interest.

New business gains also continue to be solid, as we've picked up market share against regional and local competitors. These gains are partially offset by moderating consumption among our food service and lodging customers, as they experience a softening in their traffic trends. In response to the tighter market, we continue to drive new product and program sales, focusing on the cost savings and performance improvement opportunities that our products offer customers and how well they tie into the broader 360 degrees of protection program that is designed to maximize total operational savings for customers. We have accelerated the rollout of our new Apex warewashing system, which provides customers with new standards of performance and cost savings. And we are adding more new products and programs that deliver similar performance and value. We've added additional new account incentives. We're also driving new account growth, utilizing improved prospecting tools and software, and targeting independent accounts and regional change with additional and redeployed sales people and programs.

We expect these aggressive sales efforts, along with pricing and market share gains, will deliver continued good growth for Institutional in the fourth quarter. Kay's third quarter sales grew a very strong 21%, primarily reflecting new account gains and new product sales. Business trends remain strong in the quick service restaurants, with very good ongoing demand from major, existing and new fast food chain accounts. The quarter benefited slightly from the timing of some shipments, but even adjusting for this, QSR was still up in mid-teens. Food retail business continues to show strong growth with a double-digit gain. New products and programs, like the introductions of solids for QSR, along with customer wins, continue to bolster Kay's results. We expect these initiatives to drive strong gains in Kay's fourth quarter. Textile Care sales increased 9%.

New plant additions from new and existing customers more than offset softer volume from existing customers. We expect more moderate growth in the fourth quarter, as Textile Care brings on new business, new markets, and uses new technology, as well as leveraging customer needs for operational efficiency to drive growth in a slower environment. Reported third quarter sales for the Healthcare division again more than tripled, reflecting the impact of the Microtech acquisition. Excluding the impact of Microtech, organic Healthcare sales rose 7%. 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 skin care products led the growth for Ecolab's original business, showing continued double-digit growth. Microtech sales rose double-digits, led by strong sales of infection barrier products across all channels.

Looking ahead, fourth quarter organic Healthcare sales are expected to show continued gains against strong quarter last year and be bolstered by the Microtech growth. Food and Beverage delivered strong third quarter. Reported sales were up 14%. Adjusted for acquisitions, sales rose 9%. The quarter was led by strong gains in nearly all markets. 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 very strong quarter, driven by customer gains, which more than offset weak market conditions. The Agri market also saw strong growth, reflecting new account sales and favorable Agri market conditions. Beverage also increased. Water care sales grew nicely in the quarter, as a focus on larger F&B processor accounts helped to offset account rationalization.

As discussed last quarter, the uncertain economy has caused a number of Evocation projects to be delayed and it will not reach the very aggressive sales growth targets that were originally projected for 2008. We have been rebuilding the project pipeline and expect to enter next year with a much better business outlook. The need for Evocation's affluent management and energy systems and the resulting long-term growth prospects remain strong. And we continue to be excited about its outlook and the $4 billion market opportunity it addresses. We expect continued good sales trends for Food and Beverage business in the fourth quarter of 2008, as we focus on new account acquisition, pricing, and continued expansion of our antimicrobial and water management's platforms. We will also focus on new account profitability and cull those that do not provide sufficient returns based on the new raw material cost realities. Vehicle Care sales increased 8%.

Results continue to be influenced by higher gas prices and a softening economy, both of which more than offset better pricing and new products, including the car wash industry's first comprehensive sustainability program. Vehicle Care continues to focus on new programs, investments in its sales force, and new market opportunities to drive sales in what will be a continued challenging environment in the fourth quarter. Sales for U.S. other services increased 5% in the third quarter. Pest Elimination sales rose 8%. New account activity was driven by corporate account gains, while non-contract services for seasonal or periodic work experienced slower growth. Both were affected by increased customer caution in the food service and hospitality toward spending on such additional ancillary services or new initiatives. In response, we are focusing on selling the basic programs to new accounts, as well as regional and local chain accounts.

We're also keying in on growth markets, like QSR and Food and Beverage processing, and continuing to develop programs to better target specific market needs, like our bed bug program, which is growing at double-digit rates. We have increased sales force hires to more aggressively pursue contract business. We're enhancing field sales force effectiveness with new training and hires. We expect Pest Elimination to show steady growth in the fourth quarter, as it leverages its high quality and high reliable service results to drive business. GCS sales increased 3%. Pardon me, GCS sales decreased 3%. Service sales grew modestly, as customers showed the same caution toward kitchen equipment repair that has also effected our food service businesses. The sales pipeline continues to look attractive and we are adding new chain customers and gaining market share, but the softer economy has resulted in deferred repairs that have slowed third quarter revenues. Parts volume also reflected deferred repairs and was lower.

GCS profitability improved as the operating loss shrank from both the second quarter and last year. The new business systems are fully online and we're seeing the benefits of the new system through better business transparency, customer and market segment profitability, dispatching improvements, and better tech utilization, all of which helped our business decision making and operating efficiency, and worked to improve profitability. Productivity has continued to increase on the new systems and we look for new further gains from our people, or as our people build experience with the new tools. Looking to the fourth quarter, we expect flattish sales as GCS actions offset decreased customer repair activity, while continuing to show further profitability improvement. Measured in fixed currencies, international sales increased 6%. Europe, Middle East and Africa sales rose 2% in the third quarter at fixed currency rates. However, excluding acquisitions and divestitures, fixed currency sales increased 4%.

Europe's Institutional sales showed modest growth. New products and progress with the sales force were partially offset by slow markets. New products include the introduction of Wash and Walk, a new line of floor scrubbers, and the expanded Max floor care line. These new entries combined with continued gains from housekeeping to help drive sales. Food and Beverage used new products and customer wins to offset slow markets and industry consolidation. Textile Care showed a modest gain, while Healthcare reported strong growth led by skin care and clean room sales. Adjusted for the divestiture of a property services business last year, Pest Europe sales increased as initiatives to build the business continued to drive profitable growth. Key metrics, including customer retention, continued to improve. Europe's business information systems development work continues to move forward. A multi-phase rollout began in September, as we successfully rolled it out to two countries. We will complete the rollout for the rest of the European countries over the next 24 months.

The initial read is good, but obviously we will need more time to see the benefits. While these improvements take time to implement, they're critical to the fundamental development that we need to make to achieve better growth and profitability in Europe. Sales force training is going well and we're beginning to see improvement in the sales team's performance metrics. Lastly, we completed the bulk of our move to our new regional headquarters in Zurich, as we build a Pan European operating structure. You look for Europe's fourth quarter fixed currency sales to continue to show moderate growth. However, we also look for better results ahead, as the actions we are implementing take hold. Asia Pacific sales grew 10% in fixed currencies. From a divisional perspective, Institutional solid sales gains were driven by new products, including the launch of a new warewashing 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 had strong growth. Both the beverage and brewing sectors continue to show good growth in Asia. The Food and Beverage division benefited from increased product penetration and account gains. Looking ahead, Asia Pacific expects good sales growth in the fourth quarter. Third quarter sales for Ecolab's Canadian operations were up 8% at fixed exchange rates. Institutional and Pest Eliminations sales were strong, benefiting from corporate account gains, accelerated street growth and a rollout of Apex. Food and Beverage sales also improved. Latin America reported yet another outstanding performance, with sales rising a very strong 15% at fixed exchange rates. Sales were excellent throughout the region as all divisions again rose double-digits. Institutional growth was driven by new account gains, increased product penetration as well as continued success with global and regional accounts. Food and Beverage sales reflected strong demand in the beverage and brewing markets, as well as the benefits of new accounts.

Pest Elimination continued its outstanding performance throughout Latin America. Overall, we expect healthy growth trends to continue in Latin America, with another double-digit gain in the fourth quarter. Turning to the margins on the income statement in slide seven of our presentation. As we expected, third quarter gross margins decreased, reaching 48.7% compared with 51.2% last year. The impact of acquisitions, which by their business model operate at lower gross margins than our historic business, was 70 basis points of the margin decline and along with higher delivered product costs, more than offset sales leverage, pricing, and cost savings initiatives from a margin perspective. SG&A expenses were 35.6% of sales, 150 basis points below last year. The SG&A ratio reflected leverage from our healthy organic sales growth, cost controls and the impact of acquisitions, which operate at lower SG&A ratios. These more than offset investments in business process and efficiency, R&D, and information technology.

Operating income for Ecolab's U.S. cleaning and sanitizing segment increased 9%. Excluding dilution from the recent acquisitions, operating income grew 11% as adjusted margins, excluding acquisitions, expanded by 60 basis points over last year. The increase was driven by the volume of pricing gains and improved cost efficiencies, which more than offset higher delivered product costs and investments in the business. Operating income for U.S. other services grew 38%. GCS profitability improved compared to the year ago period and the second quarter, despite higher operating costs of the new system. Pest Elimination income also increased. International fixed currency operating income decreased 9%. Latin America and Canada increased, while Asia Pacific was flat. Europe declined as the moderate sales gain and pricing were more than offset by higher delivered product and operating costs.

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 third quarter were $12 million, of which the largest portion was the cost for the move to the new regional headquarters in Zurich, as well as other nonrecurring costs to optimize our business. Corporate segment also includes $8 million of investments, primarily related to the development of business systems, structure, and other corporate investments we are making as part of our ongoing efforts to improve our efficiency and returns in Europe. Ecolab's reported third quarter consolidated tax rate was 32.0%, up from last year's reported 28.2%. Excluding discrete tax items, the tax impact of special gains and charges, the effective income tax rate for the third quarter, 2008 as expected was 30.4% and compared with 34.4% in the third quarter 2007.

The substantial decrease in the adjusted third quarter, 2008 effective tax rate was primarily due to the timing of our move to the new Zurich office, which triggered certain onetime and ongoing tax benefits that resulted from our tax planning efforts, as well as international rate reductions. We expect the full year 2008 tax rate to approximate 31% to 32% and look for further improvements in 2009. The net of this performance is that reported diluted net income per share for the third quarter was $0.50, up 9% over the $0.46 reported a year ago. Pro forma earnings were up 12% to $0.55, when adjusted for special gains and charges and discrete tax items. As mentioned in our opening comments, organic growth more than offset higher delivered product costs, while exchange and tax also benefited earnings. The overall strength helped fund our Europe investments and acquisitions. Turning to slide eight, Ecolab's balance sheet and cash flow remains strong. Total debt to total capital was 32% at September 30, compared with 33% reported a year ago.

Our net debt at September 30 was 29%. There were no shares repurchased during the third quarter. Slide nine shows our forecast for the fourth quarter and full year 2008. In the fourth quarter we look for U.S. operation to show continued solid momentum in the face of challenging conditions. We continue to emphasize products that provide unparalleled performance and energy and cost savings for customers, such as Apex, our new warewashing platform, Solid Sense, a new line of solids for fast food, Dry-X, a lubricant for food and beverage plants, and many more. We expect them to provide further differentiation and opportunity to help drive results. We look for international sales to, again, be led by strong growth from Latin America and Asia Pacific, as they enhance moderate gains from Europe. We believe this will result in overall good fixed currency international sales growth. The press release includes line item forecasts of our fourth quarter P&L.

As discussed in that release, we expect pro forma diluted earnings per share for the fourth quarter, excluding special gains and charges and discrete tax items, to be in the $0.44 to $0.46 range, compared with the pro forma earnings per share of $0.40 earned a year ago. As mentioned earlier, we now look for pro forma diluted earnings per share, which excludes special gains and charges and discrete tax items, to be in the $1.85 to $1.87 range for the full year 2008. Please note these are pro forma numbers which excludes special gains and charges and discrete tax items. Looking ahead to 2009, while we do not issue our EPS guidance for the year until February, we want to provide some overview thoughts for those making forecasts ahead of ours.

We're planning for slower markets in 2009 and are taking appropriate actions to drive both the top and bottom-lines in such markets. We also see 2009 as a period in which raw materials and currency present formidable headwinds in the first half as they compare against the prior year. We hope that proves too negative, but we also think it is a more prudent place to start our planning. At the same time we're looking for somewhat better comparisons for both the second half. As always you can expect us to undertake aggressive plans and significant actions to drive growth. We will begin our planning with our long-term financial objectives in mind. However, with market conditions expected to be very difficult, the objectives will clearly be tougher to reach. And as we have said many times before, we'll not take actions to boost near-term earnings if they would impair necessary investments to achieve our long-term targets.

In summary, we approach 2009 with caution, expecting a tough first half that will likely give way to a more reasonable second half. We know this is an opportunity to capture market share and drive new products that help customers reduce their costs and improve their efficiency. There's also a time we will control our expenses and work harder than ever to produce attractive growth for our shareholders in a very challenging environment. In summary, we're proud of our accomplishments in the third quarter as we delivered effectively against tough conditions and achieved double-digits pro forma EPS growth, while building for our future. Despite the increased challenge from both the U.S. food service and lodging markets and raw material costs, we continue to expect an attractive performance in 2008 and again in 2009.

We'll use our strong sales and service team to drive top-line growth for aggressive selling, additional solutions for account, new services and appropriate pricing, and a constant focus on efficiency and effectiveness to leverage the bottom-line, while at the same time making key investments to assure growth for the future. That concludes our remarks. This conference call and the associated slides will be available for replay on our website through November 7th. Operator, please begin the question and answer period.

(OPERATOR INSTRUCTIONS) David (inaudible) you may ask your question and please state your Company name?

Mike, can you just comment on the raw materials in terms of timing, why there will be a headwind in the first half of next year as opposed to perhaps either flat or tailwind as crude and nat gas come down?

Well, I think that first of all, if you look at what we buy, David, it's probably a split between hydrocarbons and inorganics. And on the inorganic side we haven't seen anything come down yet. On the hydrocarbon side, we've had sequential increases. On a year-over-year basis, oil is much higher. We think that we're starting to see some improvement in a few items but that hasn't rolled through yet. The last think I would say is that as you remember, we tend to buy on contract not on spot, so we never saw quite the big increases coming up and so we won't see the big increases coming down.

On U.S. demand have you seen any signs of slowing in the lodging and/or food service areas?

Dave, Doug Baker. I think as I've said earlier, we wouldn't call the end markets very healthy at any time this year. And certainly I think as we forecast going-forward, we certainly don't see them getting any better. And are planning on them getting worse and hoping we're wrong. So I think you saw our Institutional business. The only way for us to offset end-market slowdown is to be very aggressive on new business and that's exactly what we're doing.

Thank you.

Laurence Alexander, you may as your question and please state your Company name?

Jefferies. I guess, Doug, maybe it would be helpful just to revisit how Ecolab has changed from the last recession. If you think about the levers that were available for the firm to pull last time around and I think if we exclude, obviously, the shock from 9/11, with difference structure without the business, if you could compare how you're positioned now?

Yes, I think the last recession is '01, '02. I think there's a couple key changes. One we have got a very different looking Healthcare business, which doesn't have, obviously, isn't in the same headwind that the other businesses may or may not be. The other is we're certainly more global. We were consummating the European deal right as we entered that recession and now have that business fully under our leadership. So we have got a much different profile globally. So any one segment in U.S. food service represents a smaller percent of our overall exposure today than it did back in the earlier. The other things, we've had a lot of investments in new products. I think we're much better positioned in terms of what our offerings are going into this period versus the last period, specifically Apex,, Dry-X, the number of the initiatives that we have for lower water and energy.

And I guess secondly just on the ongoing restructuring in Europe, how does that affect your effective (inaudible) shall we call it your all (inaudible) leverage in Europe. So if European demand were to slow or your business sort of approached negative sales, any difference in your operating leverage compared to the U.S.?

Well, I -- I don't think -- the restructure per se is -- we've said before, and I think you can start, you're starting to see the results of it, we have traded, if you will, some negative leverage on our OI line for even more positive leverage on our net income line, i.e. that shows up in tax. So we made some investments, but they're more than paying for themselves. In terms of overall leverage in Europe, frankly, all businesses are somewhat volume sensitive and Europe is also somewhat volume sensitive, it's not a dramatically different equation than in the U.S..

And then lastly, just very briefly, any opportunities you'll repatriate cash from Europe, given the changes in IRS ruling?

You know what, we already have repatriated cash from Europe and I think we have very good vehicles to do that.

Okay. Thank you.

Michelle Moore, you may ask your question and please state your Company name

Michel Morin from Merrill Lynch, hi, guys. A couple of things that I heard for the first time here on today's call. Pricing up 3%, maybe that's rounding up, but that's -- that's better than what we had been seeing. And then you also, I believe, Mike, mentioned that in F&B, in particular, that you might be looking to cull certain low profit accounts. So I'm reading here that you're becoming a lot more aggressive on price and I'm just wondering, how far can you go on that?

Well, we are -- I think we've been aggressive on price and you're starting to see the fruits of the work and our team has done a very good job. So we moved up to three. We expect that to continue to build as we move throughout the year. And, yes, I would say we are -- I think the environment -- if you aren't reacting by getting after margin and looking at both, how you're going to do it from a revenue standpoint as well as reduced cost, you're missing the boat. And we aren't going to miss it. So we're all over it.

And in terms of culling the accounts -- I mean, how material could that be to the top-line specific to F&B?

Our work is, we are big believers in simply exiting businesses. We work very aggressively to move customers to a more profitable place. And obviously, the first priority is do it where it doesn't cost them anything, but benefits us significantly. I don't -- we are not out here forecasting that our sales growth is going to be impaired because we are culling accounts.

And Michel, it is much more a reflection of the focus on profitability that we're taking, as we said, as the higher costs really drive us to need to do that and looking at the count, as Doug says, trying to look at those and say, we have got to be able to make money in the account for us to be a viable supplier to them.

Okay. And then one last one if I can. You mentioned you're accelerating the rollout of Apex and if I'm not mistaken you had showcased both Apex and the QSR solids at the last investor day. Can you even give us a sense of how penetrated the account base is at this point for both of those? I realize these are multi-year rollouts, just to gauge how much more room you have here for these products to drive growth?

Well, Apex is very early. I think we would have to think about Apex do a rollout over almost a four year period. And so there is a lot of room. We are sitting here today with probably 10,000 accounts installed. So we're by no means done pushing on Apex. We doubled our goal this year. We're going to come close to meeting our double expectation. If anything, Apex is gaining momentum in spite of the market condition. Regarding Kay solids, that program is going as well as we expected and we had very high expectations and the first customer that we're rolling it to is our largest QSR customer. You could probably figure it out. And it's doing exactly what they hoped it would and what we hoped it would. We have plenty of room to go on Kay solids as well.

Great, thanks very much.

Chris Shaw, you may ask your question and please state your Company name.

UBS. Hey, guys, how are you doing?

Good, Chris.

You guys take any stabs at quantifying what -- if currency stayed, where they are, what the affect headwind would be either fourth quarter or next year. Any ideas?

We haven't done any forecasts yet for 2009, so we don't have a FX forecast. I guess I'd look backwards, though, Chris, to see what it has meant and typically currency's been, maybe, $0.01 or $0.02 a quarter on the way up. So I think, depending on what your forecast is, you could look for a similar type of thing on the way down.

Okay. That helps. The -- just trying -- I was going on other services in terms of margins and all, the sales were down at GCS, but I guess you guys finally profitable there or is it getting really close?

Yes --

Overall.

Well, in other services, GCS is not yet profitable. I would say in spite of sales pressure, we improved our OI or our loss improved sequentially again Q3 versus Q2 and we anticipated continuing to improve Q4 versus Q3, even in this environment. What I would say about GCS is our financial engineering is working as well or even better than expected. The challenge really in GCS right now is top-line.

So is the majority of the margin improvement in other services more pass related?

No, it would be clearly GCS, particularly year-on-year it is a substantial improvement.

Okay, and then lastly, on the pricing, are there any -- when you factor -- do you factor in any sort of surcharges for delivery on -- for fuel?

Yes, we do have some businesses that implemented some fuel surcharges. Was not the majority of our business, but that did exist and certainly if fuel continues to drop we'll lose a surcharge. I would say I'd rather have low fuel.

All right. Thanks, Doug.

Andrea Wirth you may ask your question and please state your Company name.

Robert Baird. Doug, I know you're not forecasting much for 2009 yet. You're still working on that plan, but just want to try to get a sense of really, I guess, when you look back to 2001, that was probably the worst year, at least in terms of hotel demand. I just saw a forecast that's assuming 2009 actually is worse than what we saw in 2001. Just want to understand a little bit of your thought process, I mean, if we are in a situation where it's worse than that. Do you think growth rates and at least the Institutional business, specifically, can we see growth rates maybe not quite as bad as we saw in 2001, where they dropped down to 3% or a little bit below? Essentially is your business a little bit different now that you can still kind of post that same kind of growth rate? Or is this still a scenario where if the market comes down that hard, you're still going to come down even harder?

Yes, I guess the simple answer is, we anticipate next year being a very difficult year. It's almost philosophical for us, which is we'd much rather build our plans around what we think the worst case circumstances can be, so we have a fairly pessimistic assumption, I'd say very pessimistic assumption built into our thinking around 2009. I do believe we are in a better position to weather those types of markets than we were even in '01, for several reasons. A number of it gets to the technology that we have and what we're doing. The competitive situation is certainly different in the market than it was in 2001 as well. So when you get to the harder question, plus or minus 3%, I can't imagine ever agreeing to a plan for Institutional that had 3% growth.

Okay. Fair enough. And then just on the other services side, do you think this kind of 14% margin is sustainable, now at this point trying -- since you've gotten over really the productive side of thinks on GCS.

Andrea, this is Mike Monahan. I mean, clearly we'd looked for the margin to improve there, simply because we still have got GCS and losing money. So as that picks up, you look for the margins in U.S.O.S. to improve.

Okay. Great, thanks.

Mike Harrison, you may ask your question and state your Company name.

Good morning, Mike Harrison with First Analysis. Speaking with the U.S. other services operating income, can you breakout exactly what the GCS loss was in the quarter?

Do you have it

Yes, it was just under 4 million.

3.5 million.

Okay. And you mentioned that in Pest, the seasonal kind of one-shot business was actually softer than you had expected. That's usually a higher margin business, so given the margin improvement that you saw year-over-year there, can you talk about the sustainability of the gains there?

In Pest or U.S. O.S.

U.S. other services overall. But it sounds like most of the improvement was in Pest. The margin standpoint.

Yes, clearly the one-shot business is good business, but I wouldn't want to hang everything on that, because the underlying base business is good. If we look at the U.S.O.S. margins, as GCS improves, you'll see improvement there. I don't think that we'll have any onetime or reversals in the margins.

Okay. And then looking at the Evocation pipeline, it sounds like you're working to refill that. Can you talk about maybe what kind of interest you're seeing for that offering and, if you can, talk about what your expectations are for sales for next year. You had initially talked about exceeding $100 million this year, is that a good target for next year or you think uptake is still slower than that?

We haven't set, this is Doug. We haven't set budgets either corporately or by division. I would say clearly Evocation this year and we expect it to continue through next year, is going to be slower than initially foreseen. A big reason for that is, these are fairly big ticket installations up-front. Clearly the credit crunch had a impact on our ability to go close these businesses and so we anticipated a lousy economy. We weren't anticipating the credit crunch that occurred. So I don't know if it's going to be -- if I had to guess right now, but that's all I'm doing, I'd say it's more likely under 100 next year, but it's going to be substantially over this year.

All right. And then last question in the Healthcare business, the underlying or organic sales growth has been maybe a little more moderate than I think I would have expected over the last two quarters. Have you guys been contemplating any changes in the way you're going to market with the infection control offering and the Healthcare offering overall. Or any concerns about the underlying growth rate there?

Yes, I would say if you looked, there's three key pieces to our global Healthcare business. You had Europe Healthcare at double-digits. You had Microtech, year on year versus their sales in the mid-teens, organic growth. And you had legacy Healthcare, the smallest of those three pieces, had, I think what was it, 7%?

Right.

And that gets moved around fairly dramatically by order timing and the rest. We are pushing very aggressively. I think part of Microtech's success is cross-selling efforts, as well as the pipe they had laid, et cetera. So we're very bullish on our Healthcare business. If you look at it overall, it's doing quite well. We expect it to continue to do so.

And Mike, this is Mike Monahan. Just to join in on that, remember that Healthcare U.S., the one we refer to, is still a relatively smaller business, so you can have significant impact on percentage gains by small amounts, too.

All right. Thanks very much.

Bob Koort, you may ask your question? He's with Goldman Sachs.

Thanks, good morning.

Morning, Bob.

Is there any reason, guys, that -- a lot of people want to make comparisons to the last recession and have some, I guess, inspiration that you guys can keep delivering strong results. I think last go round in '01 you were able to pretty much get to double-digits in Asia Pacific, Latin America, it's been very strong up until now. Is there something different about the scale of business or the infrastructure you've put in place from a fixed cost standpoint that would make that more vulnerable this go around than last recession, if it spreads into those regions?

No. Bob, this is Doug. I don't think -- I think by and large, I think the type of recession is going to be more the news than our relative position or structure. I think if anything, we're structured in a better way to withstand market difficulties from a competitive position, from a product line position, from a offensive -- I mean, I think our GM team is as strong as it's ever been. So that -- I think we are in a very good position to go through it. I think what's going to market difference, if there is one, is really how does it unfold, which frankly, now we're into speculation. Here's what we know. We're anticipating '09 to be a lousy year from an end use market standpoint. I don't know what other forecast would be responsible at this point in time.

And as a result, we're putting great emphasis on making sure that we protect and frankly increase investments and corporate account folks, getting after Healthcare growth and a number of other, what I will call, our core growth initiatives are. And if anything we're increasing our bets there. Now, all other non-growth costs, we're going to work very aggressively to go look at every one of them and make sure we're in a position to protect our bottom-line in a very difficult environment. We're taking, I think, very strong, smart wide-eyed steps going into what we think can be an adverse market to make sure that we, again, have a successful year next.

And if I might, Doug, you have got the European guys have a fancy new home. What can they do to get the regional performance of the year award back in the St. Paul office? What are your goals there for the next year?

Well, I think the goals have been laid out for a while. We have been, like in other regions, we've been expanding our corporate account, sales resources in Europe and making sure that we're aggressively targeting who we think are going to be the likely victors in the recession and coming out of the recession. So it's going to be continue to put emphasis on selling new business. Our top-line doesn't grow because the river flows, it grows because we succeed in convincing new customers to join our roster and so that's priority one for Europe. The second priorities are to make sure that they rollout EBS or our SAP programs successfully. We're off to a good start. But there's a lot of work to be done there, because that's going to be key to getting after and harvesting more leverage in that business long-term, both on the G&A side as well as the cost to goods side. So those are their two primary focuses and if different people doing those things, so we have every expectation that both are going to get done.

Got it. And one last one, I appreciate the time. Last recession you guys cut the work force in Latin America a little bit, the textiles, professional products. In terms -- you said you weren't going to cut any muscle, but maybe more, other sources of costs. What do you anticipate would happen to your sales and service force going into '09. Thanks.

Yes, our plan is -- look, if I just take -- I think it would be easier to answer, we have got a couple hundred operating units, if I want to break it down on the most granular level. We'll go operating unit by operating unit. But our expectation is, as we go through this, if anything there's key part to the sales force we want to expand and we are going to find ways to make sure that we pay for that in an intelligent way.

Our next question comes from PJ Juvekar,you may ask your question, with Citigroup.

Doug, your key growth was 21%. Are you seeing customers sort of trading down and going more to these quick service restaurants.

I think quick service has seen customers move from family, mid-scale dining to quick service. If you look at McDonald's comps and some of the other fast food comps, they're certainly more favorable. Traffic patterns and QSR are more favorable than they are in other food service segments. Certainly, that's got something to do with Kay's performance, I would also say the biggest news there is Kay is selling new business, too. We're expanding share in QSR also.

If that's the case, if people go from high end restaurants to, let's say, quick service restaurants, is that a net wash for you, whatever you lose there, you gain here?

No, I mean, ideally,PJ, if you could help me, I'd like to convince everybody to eat at white table cloth restaurants and have wine-flight dinners, because it maximizes consumption. That trade down for us isn't completely clean, but here's what I would say. We are well penetrated and have a very good share, frankly, we probably have highest share in QSR of any of them. So as a trade down goes, we probably do as well there. But we're also in food retail. People are doing more takeout. So I think we're well positioned for this thing. But no, you'd rather have -- a consumer in a, oh, I don't know pick it, Morton's generally creates more volume for us, than a consumer in McDonald's.

Okay, fair enough. And then just a question on your charge that you're taking, $11.8 million. How much of that is European headquarter location and what else is in there.

Roughly half is European headquarter location.

And what is the other half?

The other half, PJ, is related to some restructuring actions we've taken in Europe as well as -- you remember we sold Valby in the second quarter? We have some follow on costs of renting and shutting down the facility that were in there. So that's the other half of those two.

Valby was our plant in Denmark.

Okay. Thank you.

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

Good afternoon, just a few quick ones. On the Kay business, the numbers really were strong, even when you pull out the pull forward that sounds like you got. Anything there that was lumpy that may fall off looking out over the next quarter or so?

Yes, I don't -- we had some order timing, which helped the 21%, but we would expect Kay's fourth quarter not to maybe have a two on it, but to be pretty darn strong.

Okay, great. And then with regard to your balance sheet and your cash flow right now, I know you put your share repurchase program somewhat on hold with the kind of pending Henkel block out there. In this credit crunch type environment, how should we be thinking about your uses for cash and your balance sheet and the flexibility that you think you have, and potentially, even looking at that block as well?

Yes, John, I guess I would repeat what I said earlier, which is, the one thing we're going to be very careful not to do is harm our balance sheet through any kind of share buyback. That we will work to do the right thing by our shareholder. But that also includes making sure that we have continued flexibility moving forward, particularly what we consider to be improving M&A market.

Okay, understood. And then on the tax line, I know you said some of the benefits or you got a couple benefits that were onetimish and some that were going to be sustainable. I know it's a little bit early, but can you give us some color as to what you think or give us at least a range of where you think the tax rate may be for 2009?

Well, John, we said it would be 31%, 32% for the full year 2008. We expect some improvement in 2009, but until we do plans you don't know what your geographic incomes are to really get more definitive than that, but we do expect improvement from 2008 into 2009.

Okay, great. And then the last question, just with regard to your customers, a lot of them, I would imagine, are starting to struggle at this point. Can you give us some color as to what you're seeing with regard to bad debt allowances and maybe what you're factoring in there?

Nothing significant.

John we are always watchful, as you would expect us to be, in these environments on bad debt.

It's right in line with the last few years, though. No changes yet.

Okay, great. Thanks very much.

You bet.

Gary Bisbee with Barclays Capital, you may ask your question.

Hi, guys, good afternoon. I guess a couple of questions. First of all are you -- can you give us a sense -- I don't know if I've ever asked what percent of your customer base is small businesses? And I'm wondering just what the impact of the credit crunch might be. The thing that jogged my thought of the question is my favorite burrito place in New York just went under and closed because they couldn't get a loan. Are you seeing that from the restaurant customers or are more of your customers the big guy.

Well, first of all, what was the name of the burrito place?

It was called Burritoville's, eight stores in New York.

We're going to be checking that right after this call. Here, I guess, what I would say is, one, a lot of our businesses with large corporate accounts, who frankly also can have credit issues and so we watch that play carefully, just like small guys, the way we approach the market in different markets in the U.S.. A number of the independents are done in partnership with customers like Cisco and others, who have very good leverage to collect because if a restaurant can't pay for food, they can't open their door. And I think Cisco has got a long track record of doing a very good job on collections. I don't know if that answers it. I think there's no doubt that there's always going to be increased credit pressure when you get into these environments. I would say we recognize it, we're on it, and feel very confident we'll manage it.

Okay. This second question, just given what we've seen from a couple other companies, I went back and looked at your last 10K to review the pension footnote. Obviously, with the market coming down so much, I felt like you had reasonably aggressive assumptions for your expected returns built into that. And you had a reasonably under funded pension as of the end of '07, I assume that's worse today. Are we likely to see a big bump in '09 in the pension expense, number one? And number 2, any sense what the cash flow impact of that could be in '09 versus '08, if anything?

Yes, I would -- on the expense, I would say if the return -- the assumption on returns goes down, the discount rate's going to likely improve dramatically and there's more leverage there in terms of P&L than there is on the assumed return. Okay?

So we don't expect -- we don't expect that there's going to be a big fundamental difference. From a cash standpoint and cash use, we were in a very good position before the market went down. I think we're going to have to go all look at the pension once everything settles down, but I don't think I'd be making forecasts based on the market as it sits here today.

So is it safe to say then you don't think there's going to be a very large swing on either earnings or cash flow next year from what you can tell today?

If you can tell me what the interest rate will be on December 31st, I can tell you exactly what it could be. But, my assumption is that I think those two are going to negate each other and it's not going to be a material difference.

Let me just try one more time on this. Given that it looked like the funded status was like almost a third under funded at the end of '07 and yet 70% of the pension assets in equities, which have obviously taken on the chin this year, I mean, is that likely to lead to you wanting to set aside a larger amount of money or larger expense? Or is that is it still in, within the range that you don't think is going to change that much.

Yes, I'm not sure what you where looking at, but at the end of -- you say the end of '07?

Yes. I realize it's dated.

We were over on ABO and like in the 90s on PDO in terms of funding at the end of '07. So we didn't start underfunded. We started very comfortably funded going into this. Certainly the market decline, you're right. Part of it is in equities and it's been impacted. But I would say we will look and understand what's going on.

Okay. And then just the last question related to the balance sheet. Can you remind us when the next big pieces of the debt that you hold today mature and if there's anything coming up in the near-term?

The next big traunch of debt is 2011. And it's not even that big.

Great, thanks for all the color.

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

Good afternoon, a lot of my questions have been answered, but I do want to follow-up on a couple of things. You continuing to see a little bit of a year-over-year deterioration in the profitability of International operations. A lot of it has to do, obviously, with the move too Zurich, which has, hopefully, will tail off here towards the end of the year. But can you update us -- you gave a pretty good summary in your prepared remarks about what you're doing with the sales force there, can you update us on what's going on with your profit improvement initiatives in the region?

Yes, Dmitry, Doug. I think this is going to be hard to see for a while, but there's two things. You're right, part of the deterioration at EBIT or OI is the investment we're making, not only to move, but also the ongoing investment in EDS and, frankly, the headquarter in Zurich. But that's the investment that enables us to realize tax benefits early, also sales benefits, and then ultimately SG&A and cost of goods benefits. But as we always said, you'll see the tax benefit before you see the rest. So frankly, we've made a trade, which is a little uglier OI for a much prettier NI, and net, it's a much better trade for shareholders.

Okay, thanks, thanks for that clarification. Second question, back in beginning of the decade when we went through the last recessionary period in your end market, if I remember correctly, between food service and lodging, at least in North America, was about 45% of your sales and I thought, if I remember correctly, that food service was about twice as big as lodging. Given all the changes you made to the portfolio, the growth in Healthcare, the Food and Beverage and the growth in Europe, what's the percentage of your revenue that's exposed to food service and lodging these days?

Well, yes, globally 30% of our sales come from food service and about 10% come from lodging, that's a global number. So if you want to get down to any one region, the simple math, it's not exactly precise, is take that region's percent, so U.S. divide them by two.

Okay. So it sounds like your food service component pretty much stayed the same over these years, but lodging percentage has declined a little bit from what I remember?

Yes, I think as you've seen us expand QSR into some other regions, we've successfully built that business.

I got you. And then final question if, assuming that GCS will get close to breakeven and hopefully will start contributing to operating income next year and given that you're making, it seems, like progress in Europe, with the economy deteriorating here and with expectations of a pretty tough year next year with some challenges to volume growth, does it make sense to take a look at your asset base and see if there's any opportunities there to consolidate your asset footprint to maybe start outsourcing some production to get into a broader restructuring program to try to maximize how hard you sweat your assets coming out of this recession?

Yes, Dmitry, I would -- what I would say is I got -- I'll answer the spirit of the question, which is we look at '09 and certainly there's parts of '09 we would like to wish away. We wish end markets were going to be robust and all the other happy stuff, everybody else is wishing for. We're planning for it by any means. But I will also say '09 presents opportunities and we want to make sure that we are fully leveraging those opportunities. So when you go through these things, we're certainly going to look at how do we get our business structure, our asset structure, our product line in terms of positioning for green.

How do we lean it down. How do we make sure we maximize its margin coming through this. What happens in these times is, certainly, our ability to have conversations with our people and with our customers is much more open in these environments, open for change, than it is in what I would call traditional growth environment. And we want to make sure that we fully utilize that for the benefit of our customer and the benefit of our Company. So I think we're doing, and we're going to aggressively use this period to position ourself with, if you will, even a bigger sale coming out of '09. That doesn't mean our expectation in any year is that we're going to have a better top-line and bottom-line. But we also want to make sure that we capitalize in the environment too.

Thank you, Doug.

(OPERATOR INSTRUCTIONS) Rosemarie Morbelli, with Ingalls & Snyder, you may ask your question.

Good afternoon, thanks for taking my question. Doug, you said that you were looking at '09 and as part of your forecast you were looking at the worst case scenario. Could you share with us what your idea of the worst case scenario is?

It's pretty dark. You know, Rosemarie, I guess what I would say is, if you look at -- my expectation, our expectation is that all of our end use markets are worse in terms of consumption than they were in '08, and given that several of our very large end use markets in '08 were frankly pretty bad, I think it's a fairly conservative estimate. We also expect raw materials to sequentially come down, but we certainly are not hanging on the most optimistic oil forecasts that are out there. We expect FX to be a headwind next year as well. Now, we have got some built in tailwinds that we've created. Mike already alluded to one, which is a further rollout of tax benefits that are coming because of the investments we've made.

We have got some changes in the accretion/dilution impact from acquisitions that we made last year. We are expecting to see continued improvement in GCS and some other businesses. And we are going to be all over growth to offset market decline, both in Europe and other places. So there are a number of puts and takes next year, but it does start with a fairly, what I would call, I don't know, dark assessment of where market consumption is going to be.

Okay. Thanks. And you said that in (inaudible) in the press release that you were targeting additional market segments? Could you give us a better feel for what that is. Are those markets you are not currently or just entering more aggressively into existing markets?

Yes, I think the market segment comment would be, we're not going to enter a whole bunch of brand new segments next year, but it's continuing to push Pest into some of the new geographies that we've entered. So they'll expand. They usually start in Food and Beverage and then move over into the hotel and food service space. So it is those types of moves that we're talking about.

Okay. And then in a similar vain, you also talked about multiple initiatives to improve efficiencies and lower operating costs. Could you give us a better feel for what you are going to do and the benefits you expect, both at the gross margin level and the SG&A, assuming that you can't grow revenues next year?

Well, Rosemarie, you are going to get my forecast one line at a time.

Well, I'm trying.

Yes, I know. The number of -- I would say a couple things. We are going to be aggressively looking at SG&A productivity, starting with G&A and making sure that we are positioned properly to go further improve our productivity, i.e. our ratio in SG&A in businesses. Now, we aren't going to have the same targeted growth in every business, because candidly, we have got some businesses that we expect to perform quite well next year and other businesses that we know are going to be under more pressure, about Healthcare and Vehicle Care. It will just take two businesses that are affected quite differently from these economic circumstances and we'll have different plans for them as a result. The other point I would make -- and we're also going to be quite aggressive in retooling our product line.

We don't feel, and we think '09 is the place, particularly in North America, to do some very smart moves in terms of getting our raw material channels more lined up with the raw material channels we think are going to fare better long-term i.e. get out of the way of the Ag business channel, (inaudible) and some of those other areas. We're also going to reduce substantially the number of formulas and the number of raw materials that we have to buy, because we know it's going to give us more flexibility and more leverage as we move forward. And '09 is the year to get after those things. The last thing I'll say is one of your assumptions. We have a pretty dark forecast. We -- our top-line we fully expect will grow next year, under almost any of our assumptions. It certainly grows better in better markets, but we don't foresee an issue where our top-line is not expanding.

Okay. That's very helpful. And if I can have just one last quick question. In this environment, can you still get price increases to cover your higher costs or do you find that or do you expect that competitively speaking it would be not suicide, but painful.

Yes, I think you get an issue, we expect that our price revenue rate will continue to expand in Q4 and on a dollar over dollar basis, but there becomes a line where we have got to make sure that we're doing all we can on the cost side as well. That you don't just mind pricing alone to improve your margin. You get there eventually. I don't believe we're there right now.

Okay. Thank you.

John Roberts, you may ask your question with Buckingham Research?

When you report the effect of foreign currency on translation, the $3.5 million benefit in the quarter, does that all fall to the bottom-line at the EPS level or have you swapped out some of your currency exposure on debt, for example, so that you get some interest rate offset as well, so the EPS affects even smaller than what you show of the operating side.

That 3.5 is EPS -- falls down to EPS.

It is straight forward in coming down. And then secondly, Henkel came off the board a quarter or so ago. At some point if they haven't sold their interests, do they get to come back or are they forever now a passive investor if they decide to hold off on selling their interests?

We have a stockholder agreement. And so when they stepped off the board, if I get to say conclusively change their mind and said they're going to remain a long-term investor, by our stockholder agreement they would have the right to board seats again.

Okay, thank you.

Robert Felice with Gabelli &Company, you may ask your question.

Hi, guys, most of my questions have been answered. Just one last one. Everyone has very high expectations for Ecolab regardless of the state of the external environment. And I guess that's the positive and negative of performing so well and constantly delivering on expectations. But given the way the world looks to you today, Doug, what level of '09 earnings growth would you say is respectable, would make you look up a year from now and say that you weathered the storm and continued to invest for growth?

Yes, that's a question I would ask if I were you. And I would say this, even if -- we're not going to go out and establish EPS targets right now. And even if it were our practice to do so on this call, it's been our practice to do so in our February call, I would really refrain from doing it, because it's such a fluid environment. When we started writing this material a week ago, oil, FX, write the credit markets, it was completely different and I imagine in a week it could be different again. And so right now I think we're doing the prudent things as we move forward.

I understand the spirit of your question. I guess what I would take away from this call is, we do not have rose colored glasses on, we are planning for a very difficult environment, which means that we are taking steps to ensure that we have a successful year next year. You're going to ask what's success defined as. I think you're going to have to allow the time to pass and allow us to get out there and do our forecasts when we think it's more prudent to do it. I apologize I can't answer it directly.

Fair enough. Thanks for taking my question.

There are no further questions at this time.

Thanks, everyone, for your time today a And have a great day.

This does conclude today's conference. You may now disconnect.