藝康 (ECL) 2008 Q4 法說會逐字稿

Welcome to the Ecolab fourth 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 will turn the call over to Mr. Michael Monahan, Vice President External Relations. Sir, you may begin.

Thank you. Hello, everyone. Welcome to Ecolab's fourth 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 a review of the quarters 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 include estimates of 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 10-Q under item 1A risk factors in our fourth quarter earnings release and in slide two.

Starting with slide three in the fourth quarter we delivered a strong performance despite increasingly challenging market conditions, unfavorable currency trends and substantially higher delivered product costs as we aggressively drove new account gains, new product sales, pricing, and cost reductions to achieve double digit pro forma earnings growth. Looking ahead, we expect to continue to outperform our markets and deliver superior growth once again in 2009.

Starting with some highlights from the quarter, as we move on to slide four, reported fourth quarter 2008 EPS were $0.33. On a pro forma basis excluding special gains and charges, and discrete tax items from both years, fourth quarter 2008 earnings per share rose 13% to $0.45. We delivered good organic earnings growth. This organic growth more than offset higher delivered product costs. We also benefited as tax and shares more than offset unfavorable exchange. These helped fund our investments in Europe and acquisitions. In the US, we achieved double digit sales growth from our K, food and beverage and health care businesses with modest gains in most other US businesses as we worked hard to offset slow downs in our full service restaurant and lodging markets.

International showed good sales gains as Latin America rose double digits, Canada was strong, and Europe and Asia Pacific both reported moderate growth. To drive results in this more challenging environment we have continued our aggressive sales efforts emphasizing our innovative products that provide customers with labor, energy, and water savings and using them to help deliver new account acquisition among our national, regional and independent prospects. We have also focused on cost savings emphasizing productivity and efficiency improvements and increased pricing to recover significantly increased raw material costs and offset unfavorable currency.

We took more aggressive action on costs last month when we announced significant restructuring to redeploy our resources toward our best growth bets in this tough economy. We will add sales firepower to key areas like corporate accounts, health care, pests, Kay and Latin America while reductions were made in areas that have seen volume slow downs or functions that did not align with our long term strategic priorities. We reduced G&A support and will also close some plants.

Looking ahead, we continue to expect our full service restaurant and lodging markets which represent about 30% of our sales to be weak in 2009. However, we expect resilient trends to continue in 60% of our businesses including the quick service restaurant, food processing, health care, grocery, government and education markets where forecasts call for growth in 2009. In 2009, we will also change the way in which we implement our distributor incentive promotions in the institutional division. This will have a negative impact of approximately $0.03 in the first quarter, be close to neutral in the second and third quarters, favorable in the fourth quarter, and be neutral to slightly favorable for the full year. We expect pro forma EPS for the first quarter to be in the $0.30 to $0.34 range compared with pro forma EPS of $0.39 in the first quarter 2008. As mentioned, the quarter will include approximately a $0.03 impact from the distributor promotion change. The quarter is also expected to see a $0.03 to $0.04 per share hit from currency.

Looking a little further ahead, our forecast remains consistent with that given in January. We expect modest fixed currency sales growth over the remaining quarters of 2009. However, easing delivered product costs and the impact of cost savings actions should provide significant benefit to operating margins. This should yield improving pro forma earnings per share comparisons as the year progresses. We expect the remaining nine month period of 2009 to show double digit pro forma earnings per share growth as these impacts benefit earnings. We expect good earnings growth in 2009. We look for a full year pro forma diluted earnings per share which exclude special gains and charges and discreate tax items to be up 5 to 10% and be in the $1.95 to $2.05 range.

In summary we continue to expect yet another superior performance for Ecolab in a very challenging 2009 environment as we leverage our markets with strong sales efforts to gain new accounts and better penetration. We will also implement appropriate pricing, cost reductions to deliver steady growth, and shareholder returns while continuing to build for future growth.

Turning to the details as shown on slide five, Ecolab's reported consolidated sales for the fourth quarter rose 3%. Looking at the components, volume and mix were up 2%. Pricing was up 3%. Currency reduced sales by 4% and acquisitions and divestitures added 2%. Slide six include sales growth by segment and division. Sales for our US cleaning and sanitizing operations increased 10% excluding the Microtech and Ecovation acquisitions sales rose 6%.

Institutions sales rose 4%. Our Apex solids Warewashing line finished ahead of plan and showed terrific momentum as heightened customer demand for cost savings and energy solutions drove interest. New business gains continued to be solid and we had moderately favorable impact from distributor shipments. These gains were partially offset by the impact from the business decline among our foodservice and lodging customers. In response to the weaker market, we continue to drive new product and program sales focusing on a cost savings and performance improvement opportunities that our products and service support offer to maximize total operational savings for our customers. We expect another strong year in 2009 for our Apex Warewashing system which provide customers with new standards of performance and cost savings. And we are adding more new products and programs that will help drive growth in 2009.

We are also driving new account growth utilizing improved prospecting tools and software and targeting independent accounts and regional chains with additional and redeployed salespeople and programs. This includes additional salespeople in corporate accounts, distributor sales, regional sales and specialization of salespeople in the field. We expect these aggressive sales efforts along with pricing and market share gains to deliver continued growth for institutional from end customers in the first quarter. However, as mentioned in the press release, we will change the way we implement distributor incentive programs in the US institutional division in the first quarter. This will have a significant negative impact on institutional sales and result in reported sales decline for the quarter. But that should be reversed in the fourth quarter and be neutral to slightly positive to the full year.

Fourth quarter sales grew a very strong 19% 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 food food chain accounts. The quarter benefited slightly from the timing of some shipments but even adjusting for this QSR was still up mid teens. 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 Kay's results. We expect these initiatives along with continued good end market trends to help drive solid gains in Kay's first quarter of 2009.

Textile care sales increased 1%. New plant additions from new and existing customers offset softer volume from existing accounts. We expect somewhat better growth in the first quarter as recent new business gains and new markets offset lower customer volumes. Reported fourth quarter sales for the health care division rose 64% reflecting the impact of the Microtech acquisition in November last year. Adjusted for the Microtech acquisition, health care sales rose 11%, even as it compared against a strong quarter a year ago. Growth reflected continued solid end market demand for our traditional health care business which we now call infection control products and expanded penetration within our existing base of group purchasing organizations and health care purchasing systems. Microtech rose double digits led by strong sales of infection barrier products across all channels.

Looking ahead, first quarter sales should show a modest growth as we compare against another strong quarter last year. However, we expect stronger reported growth in subsequent quarters as comparisons normalize. Food and beverage delivered a strong fourth quarter, reported sales were up 15%, adjusted for acquisitions sales rose 11%. The quarter was led by strong gains in the dairy, beverage, agri, food and water care markets as better pricing, corporate account wins and new products drove sales. Looking at the segments, dairy plant was up double digits as pricing, customer penetration, and market share gains led the increase. Beverage also saw a strong growth in the quarter, led by new product sales.

The agri segment delivered another solid quarter reflecting new account sales, pricing and favorable agri market conditions. The food segment saw better growth, boosted by new accounts and pricing gains. Meat and poultry saw mixed results with customer gains largely offsetting weak market conditions. Water care sales experienced healthy growth in the quarter, with continued focus on our corporate account opportunities, particularly in food and beverage.

As previously discussed the uncertain economy has caused a number of Ecovation projects to be delayed. Customers continue to be very interested as they need for Ecovation's affluent management and energy systems remains strong. However customers are reluctant to commit to significant capital projects in the current economic turmoil. While we expect slow results until the market confidence firms up we remain excited about its potential and the $4 billion market opportunity it addresses.

In the first quarter of 2009, we expect continued good sales trends for the food and beverage business, as we focus on new account acquisition, pricing and continued expansion of our water management platforms. We will also focus on account profitability and cull those that do not provide sufficient returns based on the new raw material cost realities. Ecovation will compare against a strong quarter last year and is likely to see lower sales.

Vehicle care sales increased 17%. The market demand declined dramatically due to the rescission 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 and new market opportunities to drive sales in what we expect will be a continued very challenging and likely lower sales environment in the first quarter. Sales for US other services decreased 1% in the fourth quarter. Pest elimination sales rose 3% as gains in the fast food and food and beverage plant markets offset weak conditions in restaurants and lodging. New account activity and add on business slowed in the quarter. Both were affected by increased customer caution in food service and hospitality where core services grew but customers reduced the purchase of ancillary programs. In response, we are focused on selling in basic programs to new accounts as well as regional and local chain accounts.

We are also targeting growth markets like QSR and food and beverage processing. We are enhancing the field salesforce effectiveness of new training and hires to more aggressively pursue contract business. We expect pest elimination to show a modest growth in the first quarter as it focuses on expanding market segments and emphasizes its high quality and reliable service results to drive new business. GCS sales decreased 11%. Service sales were off as the economic downturn has resulted in customers showing continued caution and deferring kitchen equipment repair. Chain customer interest remains very good as we are able to demonstrate the value of service programs which reduce customer down time and emergency repairs. However, the weak economy has resulted in new customers being slow to commit and existing customers deferring repairs. These combined to get a lower fourth quarter revenues.

GCS profitability improved as gross margins and SG&A ratios improved shrinking the operating loss despite the lower sales volume. The new business systems are fully in line and we are seeing the benefits of the new system through better business transparency, customer and market segment profitability, dispatching improvements, better tech utilization and improved working capital management. All of which helped our business decision making and operating efficiency and worked to improve profitability. Looking to the first quarter we expect sales to be off due to the weak economy and decreased customer repair activity.

Measured in fixed currencies, international sales increased 6%. Europe, Middle East and Africa sales rose 4% in the fourth quarter at fixed currency rates. Europe's institutional sales showed good growth. New products and progress with the salesforce were partially offset by slowing markets. Food and beverage sustained market share and introduced new programs and systems to offset slow markets and industry consolidation.

Textile care showed modest sales growth in the quarter and health care sales showed strong growth led by skin care sales. Adjusted for the divestiture of our property services business last year, past Europe sales continue to improve. Europe's business information systems development work continues to move forward. We went live in two countries in September and it was successful. We continue the roll out with the remaining system locations over the next 24 months. The system will be critical in helping us achieve better growth and profitability in Europe. And we remain confident regarding the value the systems will provide. Salesforce training is going well and we are beginning to see the improvement in the sales teams performance metrics. Lastly our new regional headquarters in Zurich is up and running. We look for Europe's first quarter fixed currency sales to be flattish.

Asia Pacific grew 6% in fixed currencies. From a divisional perspective institutional solid sales gains were driven by account wins in casinos, catering, hotels and restaurants as well as food retail markets. New products include the launch of a new Warewashing platform in Japan and by growth in the market for our program for retail stores. Food and beverage sales had moderate growth. Both the beverage and brewing sectors continued to show good growth in Asia due to increased product penetration and account gains. Looking ahead Asia Pacific expects continued good sales growth in 2009. Fourth quarter sales for Ecolab's Canadian operations were up 7% at fixed exchange rates. Institutional and pest elimination sales were strong benefiting from corporate account gains, accelerated street growth and the roll out of Apex. Food and beverage sales also improved.

Latin America reported yet another outstanding performance with sales rising a very strong 12% at fixed exchange rates, all divisions again rose double digits. Institutional growth was driven by new account sales, 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 but a double digit gain in the first quarter.

Turning to the margins on the income statement and slide seven of our presentation. As we expected fourth quarter gross margins decreased reaching 48.1% compared with 50.2% last year. Higher delivered product costs along with the impact of acquisitions more than offset pricing and cost savings initiatives. SG&A expenses were 36.5% of sales, 220 basis points below last year. The SG&A ratio reflected stronger leverage from pricing, cost controls, and lower variable compensation which included lower bonuses.

Operating income for Ecolab's US cleaning and sanitizing increased 17%. Excluding dilution from recent acquisitions, operating income grew 22% as adjusted margins excluding acquisitions expanded by 210 basis points over last year. The increase was driven by pricing gains, improved cost efficiencies, and variable compensation reductions which more than offset higher delivered product costs and investments in the business. Operating income for US other services grew 88%, continued pest profit growth again led the improvement. GCS profitability also improved compared to the year ago period. International fixed currency operating income decreased 11%. The moderate sales gain in pricing were more than offset by higher delivered product costs and investments in Europe.

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 fourth quarter were $32 million. As previously announced $19 million was for the write down of investments in an energy management business and the closure of two small non-strategic health care businesses. The remaining $13 million was primarily from nonrecurring costs that were part of our plans to optimize our business in Europe and included head count reductions taken in 2008. Corporate segment also includes $7 million of investments primarily related to the development of business systems and other corporate investments we are remaking as part of our ongoing efforts to improve our efficiency and returns in Europe.

Ecolab's reported fourth quarter consolidated tax rate was 35.6%, up from last year's reported 29.7%. Excluding discrete tax items, the tax impact of special gains and charges the adjusted effective income tax rate for the fourth quarter 2008 was 30.6% and compared with 34.3% in the fourth quarter 2007. The substantial decrease in the adjusted fourth quarter effective tax rate was primarily due to tax planning efforts involving optimization of our international tax structure, international rate reductions, and benefits associated with our European headquarters move to Zurich. We've repurchased 11.7 million shares during the fourth quarter. As previously disclosed 11.3 million shares were purchased during the Henkel secondary offering in November with the remainder purchased earlier in the quarter. The note of this performance is that reported diluted net income per share for the fourth quarter was $0.33 compared with $0.45 reported year ago. Pro forma earnings when adjusted for special gains and charges and discreate tax items were up 13% to $0.45 compared with $0.40 reported a year ago.

As mentioned in our opening comments organic growth more than offset delivered product costs. We also benefited as tax and shares more than offset unfavorable exchange. These help fund our investments in Europe and acquisitions.

Turning to slide eight, Ecolab's balance sheet and cash flow remain strong. Total l debt to total capital is 42% at December 31, compared with 34% reported year ago and reflected the purchase of shares as part of the secondary offering in November and the unfavorable impact of currency on reduced pension assets on equity. Our net debt in December 31, 2008, was 40%.

Slide nine shows our forecast for the first quarter and full year 2009, and the press release includes line items forecast for our first quarter P&L. As previously discussed we look for slower markets in 2009 and are taking appropriate actions to drive both the top and bottom lines in these markets, raw materials in currency present formidable head winds in the first quarter as they compare against the prior year though we look for better comparisons for both in the second half. We know this is an opportunity to use our products that help customers reduce their costs and improve their efficiency along with our customer strengths to capture market share and drive growth.

In the first quarter we look for our US operations when adjusted for the distributor change to show sales gains in the face of challenging conditions. We will continue to emphasize products that provide unparalleled performance and energy and cost savings for customers, 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 Canada as they enhance moderate gains from Europe and Asia Pacific. We believe this will result in overall good, fixed currency international sales growth.

As mentioned earlier we are changing the way we implement our distributor incentive promotions in the institutional division during the first quarter. So we'll have a negative impact of approximately $0.03 per share in the first quart that will be reversed in subsequent quarters and be slightly favorable for the full year. We also expect currency to be an unfavorable$0.03 to $0.04 per share in the quarter. Net including the [$0.06 to $0.07] impact from the distributor change and unfavorable FX we expect pro forma diluted earnings per share for the first quarter excluding special gains and charges and discrete tax items to be in the $0.30 to $0.34 change compared with the pro forma earnings per share of $0.39 earned a year ago.

Slide 10 shows some detail on our 2009 outlook. Building from 2008's results. As shown, the first quarter is heavily influenced by raws, freight and fuel, exchange and the distributor change. These penalized the quarter by $0.16 per share. Consistent with our prior comments regarding the year our raws and freight present a big challenge in the first quarter and first half which should benefit us in the second half. Currency exchange is expected to present a head wind most of the year with the fourth quarter showing a much easier comparison. The distributor change hurts the first quarter but because of the effect through the quarters benefits the fourth quarter. Along with our business pricing growth, pardon me. Along with our business, pricing, growth, restructuring and other cost savings and other actions we expect to continue to generate good growth in 2009 and lead to a 5 to 10% EPS gain.

Please note these are pro forma numbers which exclude special gains and charges and discrete tax items. In summary we are proud of our accomplishments in the fourth quarter as we delivered effectively against tough conditions and achieved double digit pro forma EPS growth while building for the future and despite the increased challenges from the weakened full service restaurant and lodging markets and increased raw material costs, we continue to expect an attractive performance in 2009. And now here is Doug Baker with some

Well, good afternoon. I want to offer an overview and I will start with Q4 but I am going to have very little to say about it because I think Mike covered it in detail and I imagine that most of the emphasis needs to be on 2009.

First of all we feel very good about the Q4 performance. The businesses held up well. Our new growth initiatives performed well, and the things that we aimed to get done got done. As I talk about '09, I really want to talk about three areas, market our situation and the outlook.

First to market, the F&B, health care, food retail, QSR, government and school markets are holding up quite well. They are continuing to grow if you look at the underlying conditions, they continue to provide a very good platform for us to perform in line with I think almost historic growth patterns. If you look at the foodservice and hospitality markets, they're also performing as we expected however our expectations there are that the markets would be challenged and they are. So you are seeing declining foot traffic in restaurants and you are also seeing declining rooms sold in lodging. The foot traffic issues in foodservice are principally a US issue. You don't see the same types of declines globally but you didn't have the same type of, if you will foodservice market development over the years in the rest of the world, hospitality is more a global story. But with this, this is a manageable piece of the business we believe.

In total, when you add up the markets, and you sum it we really have a flattish market situation for Ecolab in total for the year plus or minus a point or two. But we anticipate what I will call and characterize as lousy market conditions through all of 2009. We don't anticipate a second half recovery in these markets, and honestly we aren't planning on a V-shipped rebound even in out years. We think it is going to be a different type of rebound. The implication here is that it is very important that companies are able to manufacture their own growth under this type of a scenario. The good news is this is a skill that Ecolab has, we have demonstrated it and I believe you will see that we will continue to demonstrate it as we go forward.

So our situation, clearly better than most companies. We certainly have challenges, a number of them we share with everybody else but we have fewer challenges than other companies. We chase the $50 billion market. If you want to argue that that $50 billion is now $47 billion, so be it. It is not going to determine our success. It wasn't the next $3 billion that evaporated. We have plenty of opportunity to get out and grow this business and it is not lost on our team. They're after it.

We have also taken difficult steps to react and reposition ourselves in this market situation. We announced in January that we are reducing our head count by 1,000 people. We have done that. We are watching every penny. And we are using, if you will the money that we are conserving to continue to aggressively invest and to make this Company better. So we are all over new account activity. Our goal is to gain share in every business and every market. We are continuing to invest in growth. We have added corporate account positions, and institutional, F&B, QSR, food retail and pest. We are continuing to invest in our health care platform which continues to perform quite well. We are all over water and energy technology investment. Pest global expansion. China and India businesses.

We are also taking this time to retool our cost structure. This is getting after SKU simplification because it untaps our plant capabilities, we have a lot of underutilized facilities but we have got to simplify the product line to get after that capacity. We are also looking at our raw material cost streams and realigning them to benefit us in the coming years. We believe we know where the pressure is going to be on the raw material markets and we want to make sure, if you will that we lower our exposure to what we think are going to be inflationary pressures on some of these raw material streams.

Finally, we got a strong balance sheet and we are looking for M&A opportunities. We are going to be patient. I don't think prices go up in this environment. I think they probably go down as people get real with what the multiples are in the M&A world. So we will be prepared to move on M&A when the opportunities are right.

We have clear plans. The team is very energized. And the team is moving forward. Outlook forecast. We have talked about $1.95 to $2.05 range. It is a forecast that we first communicated as part of the November secondary offering and reiterated that forecast as part of the January restructuring announcement. This remains our best estimate of where the year is going to fall going forward.

Also as we discussed in November and January, it is a tale of two halves, 2009. It's going to be a stronger second half than first half. It is going to be driven by several factors. Raw materials flip from a big negative to a positive from first half to second. There's a sequential decline in the prices we are paying for raw materials, but the other big factor, is there's a big comparison difference when you look at 2008's base have to have. The raw material run up last year was principally a second half phenomenon. And we had peak raw material prices on average globally in the fourth quarter.

FX headwind abates in Q4 simply because you had the big dollar move in Q4 of 2008. Restructure savings grow throughout the year as we start seeing the benefits from the actions taken t get full quarter benefits and some of the actions that we identified in January are going to be follow-on activities in subsequent quarters. Distributor promotion moved $0.03 from one half to the other. Finally if you take the cumulative sum of volume pricing et cetera, it all remains fairly constant contributors quarter to quarter as our efforts and improvements offset continued market decline. We do not have a market turn around in our forecast, that's not what drives the second half to first half change in performance. We have got a larger range than normal. This reflects a difficult forecasting environment. However we are confident we are going to grow. The question is how much. Things are fluid and our commitment is we will keep responding and we'll keep you updated as things move forward throughout the year.

So while I can't tell you exactly to the $0.01 what the year will be I can tell you this. Our team is responding remarkably well. The market's tough. It is tough on everyone but they're taking exactly the steps that I hoped they would and that you would hope they would be taking. They're out aggressively prospecting for new customers, we're getting them and putting pressure on competition. Competition is under tremendous pressure right now. We are are all over costs and we are still taking care of our customers. So our goal for '09 is the same as it was in '08, '07, '06, '05. It is to grow and improve the business. I am very confident we are going to deliver against both of those objectives. Those are my comments. I will hand you back to Mike.

Thanks, Doug. A final note regarding upcoming Ecolab events. We plan to hold a tour of our booth at the National Restaurant Association show in Chicago on May 19. We will have more details as we get closer. In the meantime if you have any questions, please contact me or Nicole at my office. That concludes our remarks. This conference call and the associated slides will be available for replay on our website. Operator please begin the question-and-answer period.

(Operator Instructions). Our first question is from Andrea Wirth from Robert Baird. Your line is open.

Good morning.

Morning, Andrea.

I'm sorry, actually afternoon. Just wanted to clarify a little bit on your institutional segment just in terms of the promotion impact. Did I hear you right that you are expecting because of the change that your institutional business will actually -- revenue will be down in the first quarter?

Including the impact of the promotion reduction, yes. We would look for it to be flat to up slightly adjusted for that change.

Including that change, you mean; correct?

No, excluding -- yes. Excluding the change we will look for it to be flat to up. Including the change we look for it to be flat to down.

Okay. Just wanted to then verify. You say in your press release that you expect moderate growth in the first quarter. I'm assuming that excludes the promotion then because with the promotion having your institutional business, down, I think it would be tough to still see moderate growth for your overall business?

Andrea, Doug, I think we still expect to have modest growth. We are taking this at its most literal point. But we expect to have, to have at management rates or at fixed rates to have growth in the first quarter even including the impact.

Okay. But it is probably fair to say including the impact? Maybe even further can you maybe try to quantify what kind of revenue impact is built into that $0.03 a share EPS impact?

Yes. It is about $18 million.

All right.

In sales. And fundamentally, what we are doing here because I imagine there will be another question following this is we have, we have had a pattern and been promoting in advance of what I will call peak season for a number of years. And this is we increase if you will distributor inventories through promotion dollars, through, if you will, at th very end of Q1, we continue to carry those or have distributors carry those higher inventory and then we let the inventories decline in Q4. This is a pattern that we have had for a while. The rationale for the pattern historically was the number of them. It is a different competitive environment, right. High pile moves faster you wanted to make sure that you were, if you will dominating the slots in a number of things. A lot of these strategies were very, they were right for a number of years. I would just say fundamentally we think the calculus has changed. As we look at the amount of money that we invest in this versus the benefit that we get, we don't believe that this is the right business move anymore. We spent 2008 studying this, we we understand it. We understand it very deeply. We have all of the out information from all of the distributors. We know precisely where our products go. So we can can track quite clearly the results of these promotions for those distributors that take part and those that don't. We know, I mean I think to the dollar how this is going to translate and fundamentally, what we are going to do is if you will more normalized the sales shipment is we don't think the money invested to increase these inventory levels makes any sense anymore given the change in the market environment. So that is why the change. And we know we will see this money back in the fourth quarter.

Great. No, that's very helpful color. And then just one follow-up then. In your press release that you had last month talking about the restructuring and reiterating the guidance you had mentioned that you expected earnings during the first half of 2009 to essentially approximate the first half of 2008. Do you still view that to be the case especially in light of these promotional activities.

Maybe excluding the promotional activity. The promotional activity may skew it a little bit more now second half to first half. But aside from that, that's largely right.

Okay. Great. Thanks. Nice quarter.

Our next question comes from [Bob Quirt] from Goldman Sachs, your line is open.

Thanks, guys. A couple of quick questions if I might on Kay. Mike I think you talked about some new accounts. It looks like you might lap those so have one more big quarter in the first quarter and then back towards a more moderate run rate. Is that fair?

Well, no, our new account activity continues so I think that we will have not only additional new accounts but also the underlying run rate for QSR remains quite strong. Our food retail business is looking good. So, I don't think you are going to see a sharp fall off in the growth rates. Clearly 19% is not sustainable. But we have always run, we are lately run in the low double digits. So that is kind of a good baseline to look at.

And Bob we have a very strong innovation pipeline. We are running out new programs to several of their largest customers right now which also is anticipated to generate growth and they have got other innovation that we plan to launch mid year that I think they shared with me yesterday. I think it is a home run. I think Kay's got a strong pipe.

And could you give me a little sense on what the residence time is between your procurement guidance in St. Paul putting in an order for raw material and it actually showing up on the cost of goods line in the financial statement?

Yes. I guess, it is probably not the order but let's say price change takes months to flow through the system which I think is fundamentally getting to the root of your question. So decline in price can take several months to flow through simply because you have got inventory, you've got raw material inventory, finished good inventory and in some countries you have got balance sheet you are working on.

Okay. Thanks.

Our next question comes from Edward Yang from Oppenheimer your line is open.

Thank you. Doug, you mentioned that bookings longer term that it is going to be a different type of rebound on, and no V shape recovery in the outer years. What does that mean for your historical growth rate of 15% and 20% plus ROE targets? Are those types of metrics achievable at the new base?

Yes. I would say, I don't think we relied on underlying market growth to determine our performance in the past. You have to look. We got $6 billion of $50 billion I just don't think market growth is key determinant of our success of growing or not. And I think all of the evidence supports that. So we don't, we have not changed our outlook that this is a business that can sustainably generate 15% EPS. We got huge share. We have got you are seeing the resilience in our markets right now. You got some markets that are halving and our markets are softer but we are talking points at this point in time. Fourth quarter we generated if you break the whole thing down 5% type growth, if you take out acquisitions and FX and all the rest of the stuff, and while that is not the number we look for on a continuing basis, it is lower than we want. I think it is still the resilience of the business and of an economic melt down. So I don't know, we still like the 15%. We got I think the right growth businesses and the right areas and we have got plenty of leverage in this business to unleash as well.

Okay. That's good to hear. On the, bringing it back more to the short term, again, are you seeing any bad debt issues and if you have any data by end market that would be great.

I mean you watch bad debt very carefully. It is a good question in this market. Certainly we expect to see -- you are going to have more bad debt concerns in this market. I think we are all over it. We don't have any significant trends right now that alarm us. But I will tell you we are watching payment patterns, we're making sure we understand the customers of our customers and we are doing all of the things that I think you would hope we would be doing in this environment.

Thank you.

Our next question cops from PJ Juvekar from Citi. Your line is open.

This is [Eric Hansen] in for PJ today. As raw material costs decline, do you think you can hold on the pricing or even if your typical 2% price increases?

I think we have a lot of it is because we have, we needed to and went after pricing very aggressively in the second half because there's such a wild run up if you will on raw material costs. So we have a carry-over effect this year. Because we didn't realize it all if you will in 2008. I guess here is what I would say, the pricing environment right now is clearly not as good as it was, say a year ago or even in 2007. With that said we don't anticipate going backwards on price which I think is consistent with what we've said in the past. We haven't completely linked it, if you will, to raw materials in any fashion. But are we going to -- we're not going to be seeing the 3.5, 4 points of pricing for the foreseeable future. Will we get backed out of the 1 to 2%? I think that's probably the right range for your model.

Okay. Thanks. Can you provide a little more detail on the underutilized facilities, where are they and can you quantify how much cost savings you expect in '09 rationalizing plants and (inaudible)?

It is really not a facility by facility comment. It is simply this. We have got roughly 50 manufacturing facilities, and probably 150 warehouse facilities around the world. And if you look at that infrastructure it can hold 2X, at least volume. But to go get after if you will, to unlock that, we are going to have to simplify the line which we know. And the line complications that we have today aren't driven by market need. Some of them are just driven that we, I don't think have done a good job optimizing our product lines as we need to. That's the work that we are doing. So it is really unlocking the capacity that exists out there but that we somewhat choke off because of our overly complex product line.

Thank you.

Our next question comes from Lawrence Alexander from Jefferies. Your line is open.

Good afternoon. First on the end market trends that can you walk us through how you are thinking about the education and Government markets particularly I guess the education in the US given what is happening at the state budget level?

Yes, Lawrence I haven't spent a bunch of time on it. It is probably a couple of percentage points of sales.

Okay.

In total. It is not a huge driver for us in total. Education for it certainly does include some K-12 but probably more importantly it is university feeding and some of that area. It is also feeding that we do out of the US in some of those markets. So I imagine there's going to be some pressure there, but honestly I have kids in public school. They got a credit card, they seem to ring it up fairly regularly and I don't think this is funded by schools as much as it used to be in the past. You have a lot of the large contract feeders doing this work now in schools and a smaller percentage of that is the old $0.45 meal. It is more like $6 a meal.

Has this environment affected your time line for the restructuring targets in Europe?

You mean when we are going to see the benefits?

Yes.

That I wouldn't say we have got a crystal clear answer on that. Certainly, volume I think as we stated, we expect to grow on a fixed currency basis, but we don't expect our growth rates to be as robust as they were last year. So, I expect that to start growing again as we move forward, move out of this, say in '10 and '11. So I think you are going to still see them maybe be delayed six to 12 months perhaps. We really haven't gone out and recalculated that at this point.

And then lastly, with the all other category, the various tail winds that you have for Q2 to Q4, the run rate appears to drop off versus the Q1 run rate. And are there any factors in there besides just volume comps that you had in mind? Was that--?

Principally--.

Are there any issues with operating leverage at this point?

Well, the drop off in the tail wind was really principally tax consulting expense.

Okay. Thank you.

That was moving.

Our next question comes from Mike Harrison from First Analysis. Your line is open.

Hi. Good afternoon.

Afternoon, Mike.

In the F&B business you mentioned that poultry was weak, obviously, we have seen some bankruptcies there. But how big of a piece of the F&B business is poultry, and I was wondering how long you would expect that weakness to persist?

You know what? I will get back on exactly what percentage of our F&B business is poultry. I don't know offhand. I think poultry has been a cyclical industry forever. And we have gone through these ups and downs. I guess what I would say more broadly is this. We feel good about, very good about the F&B business in total including the impact of poultry. The market is fairly strong. We have got great innovation. We are growing and I just have gotten somebody hold up their hand that poultry represents 10% of our F&B business. So I don't think it is going to be the driver of our F&B performance.

Got it. In terms of the pricing versus raw material gap, obviously you are still working on pricing at least during the first half. Any confidence interval around seeing you guys get back to the 50% gross margin level as the year progresses?

I mean we expect margins to start recovering as the year progresses. We are probably going to get halfway back there this year, we would expect this to probably take a couple of years to get back to the full 50.

All right. And then last question on the M&A front, obviously you commented on you're happy with where you are on the balance sheet. Some of your competitors are struggling right now. Can you comment whether you are talking to any of those competitors about potentially acquiring them and then maybe overall on the acquisition environment, what kind of opportunities you mig be pursuing out there?

I have my Chief Counsel next to me. He's going to art me off with handcuffs if I comment on that. We don't comment about M&A targets specifically and I am sure you can understand why. I will say this. We purposely are conservative on our share buyback in the secondary market. As we stated then we wanted to leave room on the balance sheet to take advantage of what we felt would be an attractive M&A market. We are happy we did that. We still believe the M&A market is coming our way and I guess we will make a smart move if it comes up. We aren't going to do it just to do it. But my guess is there are going to be some good opportunities this year.

To sneak in one more. On SG&A you said there were some lower bonuses can you quantify the impact of lower bonuses in the fourth quarter?

The bonuses were lower. They were fairly material. It is not something hat we have publicly announced. It is probably about $6 million.

All right. Thanks very much.

Our next question comes from Nate Brochmann with William Blair and Company. Your line is open.

Good afternoon, gentlemen. Nice quarter.

Thank you.

Just to ask the pricing question as well as the competition question from maybe a different angle but are you starting to see any more aggressive pricing from some of your competitors who may be struggling a little bit more to stay in business and are you seeing that show up anywhere.

That's, I would say that has been with us as long as I have been in the business, and I've been here almost 20 years. I don't think it is dramatically different in this environment. I think we are probably just muting it is two factors. One their raws are even higher than ours and so they have just gone through a period where their whole cost structure is changing. What we see more from competition is that they're changing their service patterns, they're letting service people go, they're saying we only service three days a week. There's a number of those moves out there as they try to mitigate, if you will lower costs because they're having a hard time getting pricing in the environment. So we see more of that. Competition still exists, it is going to be a challenge as long as we are in business, but I wouldn't say it has been materially different. They're under pressure and feel it absolutely.

Are you seeing that as you guys look to kind of hire some more experienced sales people, are you seeing that opportunity out there as maybe some of those other sales people are let go from other competitors?

That opportunity exists. Traditionally we would prefer to hire and train our own is more our pattern. That's going to be more our pattern going forward.

Fair enough. Last question, I would assume that maybe some of your smaller competitors or customers might be going out of business here and there either on the lodging or restaurant side. Are you seeing some of your larger customers gain some share from that and would that actually probably be a net positive for Ecolab as you already have an established position with some of those larger customers?

I would say I think if there are fewer competitors it will benefit us.

In terms of customers though.

Oh, if customers go out?

Yes, I mean if some of the smaller mom and pop restaurants or--?

Yes. I mean assuming, yes, I don't know, foodservice traffic, there's a lot of changes in foodservice patterns. But half of it's in practices that consumers are hard. I think people are continuing to eat out. They're doing it in a different fashion. They're trading down in many instances. So I mean if these guys move into our customer base. I don't think that's the trend you bet on our Company. I think the trend is we have $50 billion to chase and we are $6 billion. To be honest, that's how I feel.

Great. Thanks very much.

Before we go on in the interest of time since we are running short could you please limit yourselves to one question. If you want to ask another one come back on, but I want to make sure we get through everybody before the top of the hour. Thanks.

Our next question comes from John Roberts from Buckingham Research.

Afternoon, guys.

Hey, John.

Qualitatively would you say almost all of your growth is coming from share gain? It seems to me even hospital operations and so forth are flat or down, and so most of the markets don't seem like there's any end market growth and basically this is all share gain related.

Well, the top line gain, John is clearly pricing and all volume that we are manufacturing is share.

Great. Thanks. I will get back in the queue.

Our next question comes from Gary Bisbee from Barclays Capital. Your line is open.

Hi. Good afternoon. Guess I'm wondering about the margins the other services, US other services business. Obviously you had a huge gain this quarter, and you have been talking about GCS losses falling. Is that something that can continue to happen with a negative revenue environment or is that going be some place in '09 it is going to be, would be more realistic to not expect continued margin gains until we get maybe toward the end of the year and some of the cost saving works its way through?

If -- we expect to have if you will, smaller losses, certainly in the early part of the year. It is going be important that we start getting volume moving in the right direction to have sustained improvement in bottom line performance in the second half. So I would, which we are on. But that is probably the best answer. I would say this, the work we have done to, if you will lower the water line in GCS has been quite effective. And we didn't anticipate running into this economic environment and clearly that type of repair business is more adversely impacted than other of our businesses. The fact that we are still having improvement in OI in spite of the top line pressure I think really goes to a lot of the work that the team did to improve if you will the fundamental business model of that business. So we got to get the top line moving.

Just a quick follow-up to that. Do you have a lot of the big chain customers that you have in your core business there or is there still a lot of opportunity to sell this into the existing base, especially, I'm thinking about the large one.

We have sold a few. We have a lot to go.

Thank you.

Our next question comes from Richard Ong from Eagle Capital Management. Your line is open.

Good afternoon, thank you. To follow-up on the GCS question you mentioned profitability in the fourth quarter, do you expect profitability for the rest of the year in '09?

No, I think Richard we went out and said when we started seeing the top line pressure at the end of last year, that what really the GCS equation is quite simple right now with volume, and as we put volume, you are going to see pretty direct correlation to OI improvement, that's what is going to need to happen. I don't think is going to be a market where we are going to see the type of volume increase we need to get there. But I do anticipate that we are going to start seeing an improvement in the top line as the year progresses.

Okay. But for the full year do you expect to at least break even or you expect to be--?

It will be a loss for the year, it will just be a much lower loss than last year.

Okay. Thank you.

Our next question comes from Jeff Zekauskas rom JPMorgan. Your line is open.

Hi. Good afternoon. I will try to compress it all into one question. When you look at Ecolab historically your first quarter is usually stronger than your fourth quarter. And on a pro forma basis you earned $0.45. What you said is that the first quarter of this is a $0.03 hit from the distributor change. Incrementally from currency comparing the two negatives, maybe there's another $0.01 or $0.02 which gets you to something like $0.40. So how do you go from $0.40 to a range of $0.30 to $0.34? In your slides you talk about this raw material hit but your prices are up 3% which more than offsets a 10% raw material hit. So what is the difference between the fourth quarter and the first such that your earnings drop so much?

Well, first off, first quarter is always our lightest quarter, Jeff. Fourth quarter is better than the first historically. And in terms of going from fourth to first you have a big FX hit. Raw materials continue to be a strong impact. And last thing is we have got greater pressure on our end markets as we have talked about all along that we are facing in the full service restaurant and the lodging industry.

So basically the difference is volume then?

Q4 is a higher volume quarter than the first quarter and I think it has always been seasonally, when you look at it. And I think if you look at the moves, there's a, one of our charts and the webcast presentation we put together tries to show if you will the first quarter impact and the remaining nine month impact. And these things are principally driven by -- the direct product cost are going to be declining sequentially. All right. You have also, you have got our restructure benefits are going to grow as time goes on simply the way that we structured the deal. So really the math isn't that complicated. I think if you get down to it, I think what you worry about, I worry about when I see what people call hockey stick plan, is that you are hoping for a miraculous turn around. Our plan is not based on a miraculous turn around. In fact, it's based that we have fundamentally about the same contribution from volume and pricing even though we do think we are going to probably get more effective in terms of turning up more business as the year goes on but we haven't really weighted that in our forecast. It is simply direct product cost, restructure benefits as they increase over time and the fact that you have got a very unfavorable first half comparison and a much more favorable second half comparison period in your base. Right. Those are the issues.

All right. Thanks very much.

Our next question comes from Dmitry Silversteyn from Longbow Research.

I'm glad I was able to sneak under the wire. Good afternoon guys, and congratulations on finishing the year strong.

Thank you, Dmitry.

Can you go through -- well, if I am limited to one question let me ask the foreign exchange question. I was a little bit surprised at the magnitude of foreign exchange impact on the operating profit line since I was under the impression that a lot of your international operations are more or less self hedging in the sense that you produce where you sell, particularly in Europe which seems to be the largest unit within international. Obviously that's not the case. Can you give us an idea of how much your asset base is dislocated versus where you're selling your product so that foreign exchange does have an impact of $0.03 to $0.04 on earnings?

Dmitry, this is Doug. Your basic assumption going in is correct that we do really procure and manufacture locally. What the FX impact is is really a translation of operating income or income from outside the US back in US dollars. It is not an issue of or selling in or manufacturing in dollars. It is simply a translation issue on foreign earnings.

All right. Then if I may follow-up on the raw material costs, can you give us an idea of what are the, I don't know pick a number, top however many raws that are giving you the most brief grief in the second half of '08 and that we should be paying attention to in '09 as far as pricing is concerned?

The biggest guides are plastics in general because almost every one of our product has got a plastic packaging component. It is surfactants which are going to probably move more in line with fuel through oil derivative. It is plastic and it's phosphates.

Cost of phosphates. Okay. All right thank you.

Our next question comes from [David Ridley Lane] from Banc of America. Your line is open.

Yes. Just really quick the cost savings you are going to get in Europe, those would typically since a lot of them are labor and European labor those would typically lag the benefit, the cost saving benefit in the US, is that a way to think about that?

I would say the raw I am not -- the raw material move in Europe lagged in the US. It is about a quarter behind in terms of when we see peak raws in Europe versus US and so when you are going to see recovery there as well. I'm not -- the on the, the cost savings the only other I don't know if you are talking about the work we are doing in Europe around restructure or I'm not sure--.

The restructuring as well.

What we said in the restructure is that really in '09 and '10 that -- or excuse me in '08 and '09, the benefit you're going to see is principally on tax, it is not going to be that easily attributable to Europe because of the way we report but you are seeing an improvement in our tax line. You will see late '09 '10 and '11 you will start seeing improvements in SG&A and cost of goods. It wasn't anticipated we would see that in '09.

All right. Thank you very much.

Our next question comes from James Sheehan from Deutsche Bank. Your line is open.

Can you give us your updated thoughts on what pension expense might look like in '09?

Yes. Pension expense will be up in 2009. We think it will be a manageable number but it will increase somewhat?

Okay. And real quickly what was the GCS loss for the quarter?

It was $5 million.

Thank you.

Our next question comes from Rosemarie Morbelli from Ingalls Snyder. Your line is open.

Thank you for hanging on so long. Could you--.

Pleasure for you, Rosemarie.

Thanks, Michael. I thought you were going to say that in French. You had threatened me. You have 50 plans and 100 warehouses, and you have announced some restructuring. Am I correct in guessing that there is much more restructuring coming down our way with additional charges and future benefits or do you think you are happy with those two numbers?

Rosemarie, that's not the plan as we sit here. I mean the restructuring announcement that we made in January was really designed to position us for this environment. And so no I wouldn't say that our plans are to have a bunch of follow-on restructuring events.

The reason I am asking this as a follow-up is many companies have already announced restructurings and then suddenly everything is falling off a cliff in terms of the demand for their markets. While you do have a certain amount of, you are more, you have more resilient markets you could still see the environment for your products hurt some more. As people not only postpone killing a few bucks, but they will postpone cleaning, they will keep the unoccupied rooms certainly locked as opposed to doing anything to them and keeping them waiting for the potential new customers. Do you think that you have done enough in order to face adequately a market demand going down another 20% let's say?

Well, I guess we don't forecast our market decline to reach a 20% negative level. We haven't done enough for that scenario but I honestly don't believe that scenario is a realistic one to contemplate. What I think we did do was be very proactive and go after it in a way that put us in a position to do this, the one and done. That's the goal. I mean recall fourth quarter we had 5% sales growth if you take out acquisitions and we had 12% underlying earnings growth. The business is performing quite well while we were planning this. We really took this, took a proactive stance to get after this so that we could be more in charge of how we did this and weren't just in a reactionary mode to market moves. I think the market that we have today is the one that we thought we would have, not the one we wanted but it's the one that we thought we would have as early as third quarter announcement when we were fairly dark on our '09 underlying economic outlook and I think honestly some people thought we were too dark. So I mean right now, I think we are in good position. The plan isn't to come with move after move. It's not healthy for the organization and I don't think it is necessarily healthy for the confidence in the Company.

Thanks a lot. That's helpful.

Our next question comes from Robert Feliz from Gabelli and Company. Your line is open.

Guys, thanks for taking my question. Just a quick follow-up on a previous pension question, your health care and pension liability increased quite a bit both sequentially and year-over-year not much many much of a surprise given the financial markets but I was hoping you can discuss whether you will have to step up your cash contribution? If so to what extent and will that occur in 2009 or 2010?

We are not required to make a cash contribution until 2010, Rob. We may make a voluntary contribution but there's none required in 2009.

Okay. Given the increase in the liability what's the magnitude of that contribution?

We haven't announced that, Rob.

Okay. I guess I will hang on and wait for it then.

Right. Thanks. It is going to be in the $50 million, $75 million had dollars range.

Okay. That's helpful.

Our last question comes from John Roberts from Buckingham Research. Your line is open.

Just a follow-up on the distributor kind of situation. If you have a distributor that's carrying say floor care cleaning products from you and JD, Procter & Gamble and 3M, are they rationalizing consolidating and maybe that's occurring across multiple products or are they continuing to carry everyone?

Seen a lot of that I wouldn't mind seeing more of it because that would clearly benefit us in almost every circumstance. I would say there are conversations but I haven't seen any move there yet.

Do most of your distributors carry multiple supplier products and similar categories or are there a lot of exclusive distributor arrangements?

I would say principally they carry multiple.

Okay. Thank you.

Well, if there's no more questions, I'll thank you for your time today and have a terrific day. Thank you.

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