藝康 (ECL) 2009 Q3 法說會逐字稿

Welcome to the Ecolab third quarter 2009 earnings release conference call. At this time, all participants are in listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). This call is being recorded. If you have any objections, you may disconnect at this time. Now, I would like to turn the call over to Mr. Michael Monahan, Vice President, External Relations. Sir, you may begin.

Thank you. Hello everyone, and 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-and-A session following a 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.

During this teleconference, 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 third quarter earnings release, and in slide two. We also refer to you our earnings release, which includes supplemental diluted earnings per share information.

Starting with slide three in the third quarter, we delivered results at the top end of our forecast range, despite continued challenging market conditions and unfavorable currency trends, as we aggressively drove new account gains, sales of new product that deliver effective cost savings for customers, cost reductions, and pricing to recover margins. 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 third quarter 2009 earnings per share were up 20% to $0.60. On a pro forma basis excluding special gains and charges and discrete tax items from both years, third quarter 2009 earnings per share were $0.61, compared with $0.55 last year, an increase of 11%. The pro forma earnings per share growth was driven by new products and account gains, pricing, and cost savings, which more than offset key investments in our strategic growth areas.

Operating margin showed good recovery, as moderately favorable delivered product costs and shares offset unfavorable foreign exchange impact and higher taxes. To drive results in this challenging environment, we have continued to be aggressive focusing on top-line growth as we emphasize our innovative products that provide customers with labor, energy, and water savings. We are using these product 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, to help increase margin following a period of significant raw material cost increases.

Looking ahead, we have not yet seen an upturn in our major marks and are not counting on a recovery in the near term. We expect we will need to continue to work hard to drive sales, and will closely manage our costs to deliver EPS growth this year. If markets do pick up, we will clearly benefit from our extra efforts.

We expect pro forma EPS for the fourth quarter to be quite strong, up 20% or more, to the $0.54 to $0.57 range compared with pro forma EPS of $0.45 in the fourth quarter 2008. We look for a modest fixed currency sales growth in the fourth quarter, with favorable delivered product costs and cost savings actions providing significant benefit to operating margin.

We also tightened the top and bottom ends of our forecast pro forma EPS range. We look for pro forma earnings of $1.98 to $2.01 per share, representing a 6% to 8% gain over last year. In summary, we expect 2009 to reflect yet another strong performance by Ecolab in a very challenging environment, as strong sales efforts to gain new accounts and achieve better sales penetration, along with improved efficiency and cost savings, enable to us again deliver attractive growth in shareholder returns while continuing to invest for future growth.

Turning to the details as shown in slide five, Ecolab's reported consolidated sales for the third quarter declined 5%. However, sales were flat at fixed currency rates. Looking at the components, volume and mix declined 3%, pricing was up 3%, and currency reduced sales by 5%.

Slide six includes sales growth by segment and division. Sales for the U.S. Cleaning and Sanitizing operations were flat. Institutional sales were off 4% as new account gains, new products, and pricing once again enabled to us outperform lower demand from Lodging and Food Service customers. We have not seen improvement in Institutional's major end markets and do not expect a significant pickup in the near term.

We remain focused on driving sales using innovative products, like our Apex Warewashing System, Wash n' Walk, and the new Laundry program that provides superior performance, while delivering demonstrable water, energy, and labor savings, as customers look for cost savings and efficiency in this tight economy. Our Apex Warewashing System, which enables us to help customers reduce total dish room costs and lower their environmental impact, continues to show strong growth and help lead sales for new accounts. Further, Ecolab's customer support plan for H1N1 flu has resulted in additional sales of infection prevention products, such as disinfectants and personal hygiene hand care products.

We are also targeting independent accounts and regional chains with additional and redeployed sales people and programs. This includes additional sales people in corporate accounts, distributor sales, regional sales, and specialization of sales people in the field, as well as more sales tools to make them more productive. These actions have resulted in good new account activity, and we're continuing our efforts to drive more sales and margin gains. We expect these aggressive sales efforts, investments in our sales team, and new account gains to help to us continue to outperform our markets in the fourth quarter and show a sales increase.

Kay's third quarter sales grew 4%, and compared to a very strong quarter last year, when sales grew by 21%. Kay offset growth slower QSR growth through new product introductions, better penetration, and growth in Food Retail. QSR sales grew moderately in the quarter, benefiting from existing customer growth and pricing.

The Food Retail business continued to show strong growth, with double-digit gain as it benefited from new account growth. New products and programs, like the introduction of solids for QSR, along with customer wins, continued to bolster Kay's results. We expect these initiatives, along with continued good end market trends, to help drive stronger gains in Kay's fourth quarter.

Textile Care sales increased 5%. Customer gains, along with pricing, offset depressed industry conditions. Customers have shown increased interest in the operational savings Textile Cares products and services can deliver in this tough economy. We look for modest growth in the fourth quarter, as business gains and new products continue to offset lower industry volume.

Health Care sales rose 11% Excluding acquisitions, sales increased 8%. Continued solid growth in our Infection Barrier business and Skin Care products led the results. We also enjoyed good demand for H1N1 Hand Sanitizer products in the quarter. Looking ahead, fourth quarter sales should show continued good growth, again led by Hand Sanitizers and Infection Barrier sales.

Food and Beverage reported sales rose 2%. Our core Food and Beverage business enjoyed good gains in the Dairy, Beverage, and Food markets, as increased pricing, corporate account wins, and new products offset soft results in Agri and Meat and Poultry. In the fourth quarter, Food and Beverage will continue to focus on new account acquisitions and new product sales. However, we will compare against the very strong quarter last year, and we expect weakening markets in Agri and Meat and Poultry, and softer pricing to impact revenues and yield a flattish sales performance.

Vehicle Care sales decreased 5%. The division is focused on pricing and new, more sustainable product, and operational cost efficiency programs to gain new accounts and drive sales. However, these efforts were more than offset by weak market demand due to the economy. We expect the fourth quarter will continue to be a challenging environment, but we expect a modest sales increase.

Sales for US Other services decreased 6% in the third quarter. Pest Elimination sales were off 4% in the quarter, as gains in the Fast Food and Food and Beverage Plant markets were offset by soft conditions in Restaurant and Lodging. We continue to focus on selling basic programs to new accounts, as well as regional and local chain accounts.

We're also targeting growth markets, like QSR and Food and Beverage Processing, and are working to build contract growth. However, we expect the continued soft economy will result in slightly lower sales in the fourth quarter. GCS sales decreased 11% in the quarter; however, profitability once again substantially improved over a year ago and the prior quarter.

Service and Parts sales were weak, but appear to have stabilized. Sales pipeline and chain customer interest in the value proposition GCS offers remains good, as we are able to demonstrate that our service programs can reduce customer down time and emergency repairs. However, slower Food Service business conditions have resulted in longer decision timelines for new sales. As a result, new account wins were more than offset by general market weakness.

Despite the lower sales volume GCS profitability was substantially better compared with last year and the prior quarter, as we continue to see productivity and efficiency improvements from the new system. The new ERP system is providing the operating information that has led to improved customer and market segment profitability, dispatching improvements, better tech utilization, supply chain improvements, and improved working capital management. All of these have helped our operating efficiency and improved overall division profitability. Looking to the fourth quarter, we expect the sales decline to narrow as we invest in sales force additions to drive growth, and we expect GCS will again report significantly improved profitability over the prior year period.

Measured and fixed currencies, international sales increased 1%. Europe, Middle East, and Africa sales declined 1% in the third quarter at fixed currency rates. Europe's institutional sales were off modestly. Food Service and Lodging trends appear to have bottomed and stabilized, but as in the US, we have not yet seen a return to growth.

Focused sales efforts, targeting new business with regional and local customers, and new products that offer customers cost savings, help to drive new account gains in the soft economy. Food and Beverage sales were slightly lower, as gains in product sales and major accounts were offset by weak equipment sales. Textile Care sales declined, reflecting reduced Lodging and uniform volume. Europe's Health Care sales reported strong growth, as H1N1 Sanitizer demand and increased hand hygiene compliance benefited sales.

[Pest] Europe sales were lower, as customers reduced ancillary product sales. Europe's Business Information Systems Platform work continues to move forward. We have successfully implemented the system in 30% of our European business, including our largest country, which is Germany. We will continue the rollout to the remaining system locations over the next 18 months.

Asia Pacific sales grew 2% in fixed currencies, reflecting the impact of economic uncertainties and low levels of business travel and tourism in the region. Institutional sales were flattish, as the recession hurt hotel occupancy and slowed overall catering in the high-end hotels. Food and Beverage sales rose modestly. Both the Beverage and Brewing sectors continued to grow, benefiting from increased product penetration and account gains. Looking ahead, Asia Pacific expects better sales growth in the fourth quarter, reflecting recent account wins and stabilization of the marks.

Third quarter sales for Ecolab's Canadian operations increased 6% at fixed exchange rates. Food and Beverage, Health Care, Vehicle Care, and Pest Elimination all recorded double-digit sales growth, driven by new account gains. Institutional sales rose, also benefiting from new accounts.

Latin America reported a solid sales gain, rising 8% at fixed exchange rates, as all divisions increased. Institutional growth was driven by new accounts, increased product penetration, as well as continued success with global and regional accounts. Food and Beverage sales reflected good demand in the Beverage and Brewing markets, as well as the benefits of new accounts. Pest Elimination continued its excellent performance throughout Latin America. Overall, we expect healthy growth trends to continue in Latin America, with another solid gain in the fourth quarter.

Turning to margins and the income statement in slide seven of the presentation, third quarter gross margins increased 190 basis points and were 50.6% compared with 58.7% last year. Gross margins are continuing their recovery towards levels that existed before the run up in raw material costs. The quarter's gain was driven by pricing, cost savings, and improved delivered product costs.

SG&A expenses were 35.8% of sales, 20 basis points above last year. The higher SG&A ratio reflected savings from our January restructuring, price leverage, and closely managed spending, which were more than offset by higher costs and increased investments in our business.

Operating income for Ecolab's US Cleaning and Sanitizing segment increased 17%. Margins expanded by 310 basis points over last year. The increase was driven by pricing, favorable delivered product costs, and cost savings.

Operating income for US Other services grew 3%. Margins expanded by 120 basis points over last year. Growth was driven by improved pricing, productivity, efficiency gains, and cost reductions.

International fixed currency operating income increased 6%. Margins expanded by 50 basis points over last year. Pricing gains and cost savings efforts more than offset easing delivered product cost comparisons, and continued investments in the business. Delivered product costs are expected to provide a favorable comparison in the fourth quarter.

The Corporate segment includes special gains and charges, which are reported as a separate line item on the income statement. Special gains and charges in the third quarter 2009 of $7 million included a restructuring charge of $5 million. The Corporate segment also includes $6 million of investments in the development of Business Systems and other corporate investments we are making as part of our ongoing efforts to improve our efficiency and returns in Europe. These investments are included in pro forma results.

Ecolab's reported third quarter consolidated tax rate was 30.2%, compared with last year's reported 32.1%. Excluding discrete tax items and the tax impact of special gains and charges, the adjusted effective income tax rate for the third quarter 2009 was 32.0%, and compared with 30.4% in the third quarter 2008. The increase in adjusted third quarter 2009 effective tax rate was primarily due to lower tax benefits from our international operations, which increased the third quarter 2009 adjusted tax rate, as well as tax benefits in the prior year, which reduced the third quarter 2008 adjusted tax rate. We expect the full year 2009 tax rate to approximate 2008's 31.6% rate.

The net of this performance is that Ecolab's reported fourth quarter diluted net income per share was $0.60 compared with $0.50 reported a year ago. When adjusted for special gains and charges and discrete items in both years, pro forma earnings increased 11% to $0.61 when compared with $0.55 earned a year ago.

Turning to slide eight, Ecolab's balance sheet and cash flow remains strong. Total debt and total capital was 33% at September 30, compared with 32% reported a year ago, and 42% at year end 2008. Our net debt at September 30 was 29%. We also made a voluntary cash contribution to our pension plan of $75 million in September, bringing our total 2009 voluntary US pension plan contributions to $125 million.

Slide nine shows our forecast for the fourth quarter and full year 2009. The press release includes line item forecasts of our fourth quarter P&L. As previously discussed, we look for continued slow market conditions, and are taking appropriate action to drive both the top and bottom lines in these markets.

We have been successful in using our new products that help customers reduce their costs and improve their efficiency, along with our service strengths to capture market share and drive growth. Further, margins are recovering, and we are using them to continue to make investments in key areas like corporate account sales, R&D, Health Care, Water and Energy, and Global Pest Elimination to drive future growth.

In the fourth quarter we look for our US operations to show a modest sales increase, as new account gaines and the reversal of the first quarter Distributor Incentive Program change more than offset continued 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 and help drive results.

We look for international sales to be similar to last year at fixed exchange rates, as good growth from Canada, Latin America, and Asia Pacific are offset by soft trends in Europe. Net, we expect pro forma diluted earnings per share for the fourth quarter, excluding special gains and charges and discrete tax items, to increase 20% or more to the $0.54 to $0.57 range, compared with the pro forma earnings per share range of $0.45 earned a year ago.

In summary, as noted on slide 10, we performed effectively in the third quarter against very tough conditions and delivered on our forecast, as we also invested in our future, and despite the expected challenges from weak markets, we continue to look for strong fourth quarter gain and expect to deliver a very attractive performance for the full year 2009.

That concludes our remarks. This conference call and the associated slides will be available for replay on our website. Operator, would you please begin the question-and-answer period?

(Operator Instructions). We will pause for just a moment to compile the Q-and-A roster. Your first question comes from the line of Bob Koort with Goldman Sachs.

Thanks, good morning, Mike. Hello.

Bob, please go ahead with your question.

Can you hear me? Hello?

Operator, it seems we have a problem.

Mike, can you hear me?

I can hear you now. Bob, can you hear us?

Absolutely. My question for you is on the Institutional business. Early in the year, you guys talked about changing a program with the distributor and that it should have a back end benefit. Did we see it in the third quarter, and are we going to see it in the fourth?

Yes, Bob, Doug Baker. We exactly did talk about the first and fourth quarter. We have not seen it in the third quarter. We didn't expect to. We will see it in the fourth quarter, and we anticipate Institutional sales will be positive, and part of that positive is clearly going to be the promotion impact.

And then the US margins that you guys are delivering now, do you think there's upside to that as you go forward, or is most of the upside going to be around demand resuscitation and revenue growth?

I think our conversation around margins has been, we've got two sizable opportunities in front of us. Clearly there's a top line opportunity. We chase a big market and have a 10 to 11 share.

And the other is within the business, we've got a number of opportunities in terms of driving improved margins by driving efficiency within the Company. So our expectation, over time, is that we will continue to grow our margin, but a lot of it is going to come through work within the Company.

And then lastly, if I might ask, the raw material outlook, I know it's been somewhat volatile into this year. What would be your expectations next year for that and the pricing response you might implement?

I think our view on the raw material market, at least our momentary view, we expect that raw materials will be favorable next year versus this year, particularly in the first half, simply because you have to remember the base that they're going against.

Great, thank you.

Your next question comes from the line of P.J. Juvekar with Citi.

Yes, hi, good afternoon. How big are your sales of Disinfectants and Sanitary and Washing products targeted to H1N1, and what kind of growth are you seeing and where could the sales go?

Yes, P.J., they aren't overall a huge percentage of our sales. Call it the 4% range of total sales. We've got certain categories that are up quite dramatically, Hand Sanitizer, et cetera, is probably the most impacted. But overall that segment is up double digits in most markets.

Okay. And then you cited pricing several times. Can you just quantify what kind of pricing did you put through recently, and what are the expectations for 2010?

P.J., a lot of this pricing was pricing that we put in place over the last 12 months, and much of it was in response to right the writeup in raw materials that we've seen over the years. As we've always said, we don't try to catch up in any one period that we do this and [mete] it out over a period of time, so that we eventually get there but don't shock our customers as we go through. I think our expectation, as we've said previously, into next year is you are not going to see the same level of pricing as we had, say, the back half of last year, nor throughout this year. It's going to be much more in the, call it, the 1% range, or traditional range.

What kind of price did get in the last 12 months, if 1% is your traditional?

I'd say about 3%.

We left the year last year at a run rate around 4%, moving into this year, 4%. Probably for the year this year I think 3% is probably the right number.

Okay, thank you.

Your next question comes from the line of Mike Harrison with First Analysis.

Hi, good afternoon.

Hello.

Looking at that time Kay business, I think there's a little bit of concern on the QSR side about the sustainability of customer traffic in a recovery, given what you guys posted here, just 4% growth year-over-year. Can you talk about what you're seeing in terms of customer order patterns here so far in the fourth quarter, and maybe share some of your expectations for growth rates going forward over the next few quarters in that business?

Mike, I would say a couple of things. One, the key result this quarter was going against the 21% growth last year in the third quarter. So it was a very high base number. I would say our confidence in Kay remains quite high as a growth vehicle.

You've got two main focus points underneath what we report as Kay, one is QSR, the other is Food Retail. Both, if you will, are highly influenced by our ability to capture new chains, and we have done a good job there, and look to have nearly double-digit again in the fourth quarter in this business.

And then, I was wondering if you could give us an update on the relationship with Cisco and increasing sales to some of their top-tier customers. Do you feel like that potential share gain has been mostly captured, or is there still a little bit of room to go?

We believe there's sizable room to go. I think we've been very pleased, and Cisco is as well, with the progress we've made year to date. But with all these initiatives you learn quite a bit as you go through it.

Our team has just in fact relaunched an initiative with Cisco, to go, if you will, double down on this effort within the last three weeks, so we like the prospects going forward. We do not believe that we've fully mined that area.

And then a question on Food and Beverage. Was wondering if you could talk about the Ecovation business, how that performed during the quarter and whether you're starting to see some of the customers come back, or give us an update there?

I would say the Water business is doing better, Ecovation specifically, we have not seen what I would say the turnaround that we anticipate, because you've still got people watching their money, and any business tied to credit is still fundamentally impaired moving in here. And Ecovation is one of the few businesses that we have that depends on free flow of credit.

But it's a very small piece of our total business, and long term, Ecovation is exactly the right opportunity, so I would also point out that the conversations we're having with the large players, the push for finding ways to recycle water, use less water, consume less water, find ways to generate energy, are only heightening, they're not going away. So long term this is exactly the right technology to own. It's not exactly the best time to own it.

Would you say in that general you're seeing maybe an increase in the number of sales leads, it's just closing those sales that the customers are dragging their feet on?

I think there's two things. One, if we look at the F & B and Water space in total, I think we feel very bullish about that business over the near and mid-term, for precisely what you touch on. It will depend on the technology they need or where they want, but there's huge interest from our customer base in helping them maintain a high level of hygiene but do it using less water and less energy, and Ecovation plays into that.

So I would say the lead list is long; there are other technologies that we are deploying as well to go meet some of these needs. And I think as credit becomes more available, I think you will start seeing Ecovation [stuff] pop, too.

Alright. Thanks very much, guys.

your next question comes from the line of Laurence Alexander with Jefferies.

Hi, this is Unidentified Participant on for Lawrence. Was wondering if on the Health Care side, you could give us an update after doing the initial service protocol trials, how that's going there?

Look, the Protect model continues to look extremely promising. I would say all the work that we're doing in hospitals is proving the concept that if you actually clean and reduce bacteria loads then you have an improvement long term in infections. I don't know if you saw it today, the Wall Street Journal, in section R-6, there's "10 Steps to Preventing Infections in Hospitals". We're referenced as step one. So I think the word is getting out, and there's a lot of, I think, interest in this area, and we remain quite bullish on our Health Care initiative. and [Protect[.

Okay, and then just a second on demand trends in Europe. Could you just expand a little bit about what you are seeing there, as far as competitor behavior?

I don't know that we've seen any significant change in competitive behavior in Europe. What I would say about demand in general in Europe is it's stabilized, and I think we're pretty confident that we have seen the bottom in terms of demand destruction in Europe. So if anything, that business appears to be firming up.

Thank you.

Your next question comes from the line of Gary Bisbee with Barclays Capital.

Hi, good afternoon. First question, how much benefit do you think you are likely to get in 2010 from the cost action taken early this year? Obviously it seems like the benefit your margins this year are back loaded so there would be some flow-through in the first half of next year, but I guess I'm trying to get a sense if you think that you've done enough now to position yourself for, without a big volume spike, it continued up year-over-year margin story next year?

Yes, Gary, so if you are talking about the activity that we undertook beginning in January, we talked about roughly a $75 million annual benefit, we're going to realize roughly $55 million of that this year and another $20 million incremental next year as we go through. So the year on year delta will be about $20 million, and you're right, it's going to be principally in the first half that we'll recognize this. We have a number of other initiatives underway within the Company, that simply aren't part of, quote unquote, the restructuring efforts, but they're all designed to help drive efficiency or lift margin in both a up sales cycle or a flat sales cycle. So I think we're completely aware.

My assumption next year is, I don't think the economy is going to be nearly as rosy as some of the other predictions. So our expectation is that it's going to be what I would call another difficult demand year, not in all markets. Lodging probably gets marginally better. Food Service I think is going to be a difficult year. And I think Health Care and Food and Beverage, Government, et al, will remain fairly healthy like they were this year, but we aren't planning on any big boomerang effect next year or big spike up in demand from an economic turnaround.

One of the things that I think was a key take away from your Investor Day was just this focus on all the margin opportunities you have, and I guess you said earlier, some are volume driven, some are just efficiencies. Is the right way for us to think about, that this is more of an evolutionary process, where you'd love to get some number, say it's 50 basis points a year over the next five years, is that how we should think about ? If not, how should we think about that 1,000 points of margin potentially you

Gary, it will be more evolutionary, and so as we discussed in that Investor Day, this will come over a period of time, and this year we maintained our significant investments in this area. So EBS in Europe remains on track. We ended up spending exactly what we planned to spend on EBS. We now have over 30% of the business, two more countries going on in the next few weeks.

In that geography, we're doing a number of things in terms of efficiency studies, which is a one time spend in the second half, so that we understand more clearly how to go capture a number of these opportunities. We've invested in key talent in a number of positions, so that we could go capitalize on it once we understand the path, so I think there's been a lot of work done this year, very beneficial work, to enable us to capture this. It won't all come at once. We frankly don't want fixed eclipsed growth; we are a growth Company first, but we are a growth Company with terrific up side in terms of margin opportunity within the business within our control.

Okay, and then just lastly, it's probably too early to say, but do you expect any real change either in competitive investor strategy, due to the recap of Johnson diversing, and as part of that, just any general update on share gains, how that's trended over the last quarter? Thanks a lot.

Yes, well look, our focus remains the same, which is at the end of the day, we're the leader in this business, our focus of responsibility is to our customers and gaining new ones, and that's exactly what we're going to continue to do. We chase a big market. We've got a relatively small share, and our focus is increasing that share, period.

In terms of how are we doing there, I would say we talked earlier in the year that, even in spite of the downturn, we wanted to continue to up our investment in our corporate account selling talent. We've done exactly that. That we've got I think a great team, a stronger team. It's stronger in every region, much better I think, and we are very actively pursuing what I consider a great list of customer opportunities around the world. Probably the best list we've looked at in a long time.

And with turn downs you have some unique opportunities that we're working to capitalize on. We already have gotten a number that have said yes. We don't announce who, and we have not installed them, but we are trying to get many more. It is the way we're going offset what we consider a soft demand cycle. We really want to grow share and grow share units aggressively.

Great, thanks.

Your next question comes from the line of Chris Shaw with Ticonderoga Securities.

Hi, how is it going? Ticonderoga. When you just talked about the Hand Sanitizing opportunity, was it even an EPS impact, or it $0.01, was it nothing?

It's non-material.

I mean, we're glad we're able to help the communities that we serve and the customers meet the challenge that H1N1 represents. It certainly helped sales during that period. You would not say H1N1 negated soft demand from the overall economy, by any stretch, and I think the team has done a very good job. We got on supply back in May and built it all through the summer, so that we were able to meet the demand when many other people frankly are out at this point in time, Hand Sanitizer, et al.

But I said earlier, I don't think this is a reason to go buy Ecolab. I think you've got look at the long-term sustainable macro trends. That's the reason to invest in this Company.

Right, and then in your Fast Casual [Metron] customers what are you seeing there, are they coming back with better ordering yet, or are they sort of strapped?

I would say the general view on North American Food Service, and you are going to have to separate this somewhat, Europe Food Services has probably bottomed and moving in the right direction, I mean, it was never as big a business as North American. Asia and Latin America continue, or are starting to move forward as well.

When you look at North American and Fast Casual, Mid Casual, all those segments continue to be under real pressure. For them, it's going to be a share game. I think that market has changed and probably changed for the future. I think it's changed in a way that works quite well for us, but our customers are going to need us to help them run their units more efficiently, and that's going to be a key focus in that industry going forward.

We do quite well in industries that have gone through this, so we look forward to the challenge, but they're not going to be growing through just wild unit expansion anymore. So, they're changing their game. We're ready and understand it and have changed ours, and are already out there with things like Apex and other programs that help them minimize expense in operating their restaurants.

Just quickly, in Europe, is there any geography that's doing better than the others?

Yes I think Spain is having a spell of difficulty, obviously. I think our performance probably mirrors what you read broadly about the economy in Europe.

Okay, thanks.

Your next question comes from the line of John McNulty with Credit Suisse.

Yes, good afternoon. Just two quick questions. You had mentioned you have a pretty big new account list that you're really going after and targeting, and it looks like new accounts have definitely been helping you this year. Have you gained more accounts than you've lost over the last, say, six to nine months, and in terms of the ones that you are losing, whether they're going broke or maybe looking for cheaper alternatives, have you seen that decline there slow at all?

Yes, I'd say yes to both questions. So if I focus on probably the most impacted areas, U.S. Institutional, we closed the quarter with more accounts than we started the quarter, and the situation is the same for the year. Now, we also had, I think, to your point, as we talked about earlier in the year, quite a few accounts who went out of business or were closed, and we always go through these cycles.

We have seen, I guess, a slowdown of the what we call declining business or lost business line in the Institutional business, which is what we would expect and what we predicted. So that's acting as it's acted in past recessions.

Okay, that's helpful. And then, just one last question, recently you just made a small acquisition in Pest in the UK. Your balance sheet is in pretty solid shape. Can you give us an update in terms of what you're seeing in terms of acquisition opportunities out there, if there's more coming down the pike and what we should be thinking about going forward?

Yes, John, the list has been pretty long for a while. I would say our point on remaining disciplined, I think, continues to be the headline. We think we will be able to leverage this balance sheet. I think these opportunities will pop, but we aren't going to go chase them with dollars to accelerate a growth process. We still believe time remains on our side, and we pursue a more active. There's a number of them we'd very much like to add to the Company, but we want to do it in a way that makes sense for shareholders.

Are you seeing prices out there starting to get to maybe more appropriate levels, or ones that you would be more interested in?

You know, I guess there are some signs, but the ultimate sign is closing the deal. And until we close them, I have to say I've seen signs, but not the only sign that matters. But we've had some people that we've both walked away from a discussion and we've started talking again. But until we close it, there's nothing really to comment on. I'll be disappointed if in the next 15 months we don't have some successes under our belt there.

Great, thanks for taking my question.

Your next question comes from the line of Ed Yang with Oppenheimer.

Hi, Doug. Just to expound on the earlier questions in terms of getting efficiencies from your business, your CapEx spending in the quarter was down about 27% year-over-year, and it was down over 30% in the first half of the year. So short-term, first question, how are you doing that, and from a longer term perspective, 15 years ago, if I look back, you were spending like 8% of your revenue on CapEx. That came down to more like 6% in recent years, and now you're down to 4% of revenue on CapEx. Is this basically a long-term secular trend in terms of spending less CapEx relative to revenue growth?

Yes, you know, I think when we were heading into this, we clearly took a hard look at how we were spending capital and what were the areas that we could get after that would be a positive from a cash generation. And so we made some shifts during the year where we ended up spending more money on refurb, refurbing dish machines versus buying new ones, which clearly has a very positive effect on your capital spend. It has somewhat of a negative effect on your immediate P&L, but it was a smart move to make from a business standpoint. I think the crisis caused us to relook at it some of the patterns that we have on spending.

I would say, if you want from a model standpoint, we think 6% is more the right number than 4% over the long haul. But with that said, we have an ROIC focus. We want to make sure we're doing the right thing with capital. We have reorganized how we manage our merchandising equipment procurement and manufacturing growth, with the specific goal in mind of helping drive down the cost of each unit, which is only going to further improve capital spending and return on invested capital, so that's one of the areas we believe we've got opportunity in as well.

So I just think it's part of the overall focus. I'm not ready to declare 4% as the new run rate. I think that's premature. But I do believe that we're going to improve in this area over the long haul.

Okay, that's helpful. On the Pest of the business, revenues declined year-over-year, and they had been kind of hanging in there, especially relative to what you were seeing in the Institutional side of that business. Does that business lag, or when do you expect Pest Elimination to return to growth?

I think Pest typically lags, in terms of it moves a little later than some of our direct consumption businesses. And as customers, I think, experience longer periods of economic challenges, they start going after different areas. And Pest is one of those businesses where if you do a good job, you don't have a problem in units, so there's an assumption that all of a sudden nature has changed and cockroaches have vacated, but they tend to come back. So typically we go through this period where we see people go away, and then we will see people start migrating back.

I would expect our expectations is for Pest to grow next year. It's not going to be a double-digit business next year, but we expect it to the be growing.

Okay, thank you very much.

Your next question comes from the line of Rosemarie Morbelli with Ingalls & Snyder.

Good afternoon. The margin, the 24% operating margin on your U.S. Cleaning and Sanitation business, is really [I believe] the highest point, even for third quarter. Was there anything special in that particular number, meaning that the [20.4] is kind of the high end, or can you reasonably get it higher than that?

Yes, I would say third quarter in that business is always a seasonal high from a volume standpoint, so you will naturally see some margin lift from the peak volume quarter. But I wouldn't say there's nothing unusual, i.e., one-timer, that improved it or anything like that. It was more, I think, a recognition of a lot of the work has been done in that area to recoup margin, quite candidly, that had been lost over the number of years that we've seen raw material inflation.

There's a natural governor on margin probably in all business. I don't feel like you've seen it in our businesses, simply because we know of the inefficiency within the businesses, at this point in time. And so I don't think we're here to declare that we've seen the peak in U.S. Cleaning and Sanitizing.

In that number, if you don't mind my pursuing this, excuse me, in that number, there is a certain amount of maybe incentives that you are not paying and other temporarily eliminated costs that will come back when volume will come back. So when this does occur, can we still look at a strong third quarter in around those levels?

Rosemarie, are you talking about, let's be clear on these incentives, or, can you be clear, what incentives you think we're avoiding this quarter?

Well, I am assuming that, given while you have done very well throughout the year, given the environment, maybe some bonuses have been reduced, that sort of thing, which, travel may have been cut, which eventually will have to come back, those kinds of expenses which may come back when demand actually picks up again.

You know what, I think there are, I think, in fairness, there are some puts and takes in terms of, I guess, a normal operating environment. Certainly we've been down on Travel and a number of other areas, but that's not an overwhelming number. From an incentive standpoint and a pay standpoint, we've got, both bonuses are in place but we've got other bonuses.

Frankly, bonuses for this year are likely going to be up over last year, particularly in the second half, because last year we started ripping them down because we had this very unforeseen crisis hit the business, as we go. So I think if you start putting these puts and takes together, it's more normal than you might imagine.

Okay, that is very helpful. Thanks. And on the international margin, have you made as much progress as you were anticipating, or do you expect to do much better in the fourth quarter even though the demand will not have picked up yet?

I think the margin rebound in international, and Europe is the main driver of that segment was pretty much as we, I think, laid out in the last call, where I think there was a lot of question given what happened in the first and second quarter. But Europe rebounded, as we said, and we said I think it was going to be 8%, 9%, it was on the north end of that for the quarter. And I think for the half we stick with that forecast, even with a little lighter demand in the fourth quarter, which is natural.

Sticking with the 8% to 9%? (inaudible - multiple speakers) I'm sorry, Doug. You mean you are sticking with the 8% to 9% for the second half, or are we raising it actually to the third quarter margin level for international.

No, I would stick with the second half number.

Okay. And then lastly, Meat and Poultry were actually hurting in the last few quarters. What do we expect to see in 2010, is it question on the big animals, the size of the herd, and the cost of feeding all of those animals, and so on, and therefore people were raising fewer of them? And can you go over what is going on on the Poultry side and whether you see an improvement or pickup in 20 10 in both categories?

I think the only thing we know for certain is long-term, Beef is going to rise considerably just because of how people are managing their herds at this point in time. I think Poultry is going to be a big issue, and a lot of it is going to depend on what happens from an export standpoint and how the U.S. is going to manage through some of the barriers that are temporarily put in place or threatened in place.

I think our outlook, we compete in all these segments. There is always switching between protein sources. We would expect that to continue.

I think our outlook for the Food and Beverage space in general, you don't want to get too specific about which protein, is fairly positive through 2010, really in almost all regions. And I think it probably strengthens throughout the year as things settle down, because fundamentally there are still going to be more people on earth, and they are going to eat.

All right, thank you very much.

Your next question comes from the line of David Ridley-Lane with Banc of America Merrill Lynch.

Yes, can you rank the items you're spending discretionary SG&A dollars on right now? Is the ERP system the number one use of cash, or is it more sales force increases? Just sort of go through your top three or four spending items. Thanks.

Yes, I'll focus it on second half, if that's helpful.

Yes, that's very helpful.

Absolutely. I mean, EBS would be one of the major spend areas and probably the largest in terms of dollars, because as we roll out things from the balance sheet and start flowing through the P&L.

And David, that's Europe - -

ERP.

Yes.

That's the ERP system in Europe, [SAP], however you want to refer to it. We've got a number of what I will call R&D, technical acceleration projects that are also occurring in the second half. We've got a number of technologies, some that we're licensing, and the way the licenses are structured they have one-time impact in the second half that we're taking on, because we like the technology and feel confident it's going to help us moving forward in 2010.

Health Care remains one of the large investment areas for the Company. We talked the Protect model earlier. There's a number of other technology bets that we've made and put into this business, and I think the team is managing that area quite well. R&D is up in the second half. (inaudible) referred to the R&D acceleration that I discussed.

And then we've got a number of one-off efficiency studies, which are really one-timers that we've also put in place to help build the road map to get after some of the margin opportunities that we know exist. And so there's a series of those that we've also conducted in the second half. So all in all, I think we went into this year protecting investments. If anything we've increased the investments as we moved throughout the year with 2010 and 2011 in mind, not just 2009.

Great, thank you very much. That was very helpful.

Your next question comes from the line of Dmitry Silversteyn with Longbow Research.

Good morning, or good afternoon, I should say. Just wanted to follow up on the top line impact of H1N1 that P.J. asked about. I understand there wasn't much of a bottom line impact, but do you expect that to carry over and perhaps even get stronger into the fourth quarter, and have some carry over into the first month or two of 2010 first quarter?

Well, I don't know how far out we can see on H1N1. It's roughly probably $10 million incremental sales in the third quarter. We would expect, excuse me, I'm getting - - we would expect it to be maybe up to $20 million incremental in the fourth quarter.

Okay.

These are year-in-year. What happens in the first quarter, I don't know, really depends, I think, how fast the governments are able to get the vaccinations in place and how successful we are controlling the virus spread, and that's not an easy thing to predict. I won't pretend that we can do it. The governments are behind where they had hoped to be in terms of getting this out, and you can see a fairly significant acceleration in the virus spread, perhaps as this gets out. So we can give you our picture through the fourth quarter.

Okay, that's helpful, thank you. Excuse me. We've seen a pretty meaningful improvement in margins of the international business to double-digit levels here. Was that driven more by regions outside of Europe, or have European margins improved as well?

No, there's definite improvement in Europe in the quarter, Dmitry, so it was a leader in driving the quarter.

And that's coming from reduced ERP expenses relatively speaking, to the levels previously, or is that a function of the initiatives that you took over the past 12 to 18 months to improve the profitability in the business? Or is it just mix happened to be richer this quarter?

Yes, I would say it's a couple things. Actually, the ERP implementation costs move up as you move throughout the year, because they go up as you pay up and roll out. I would say what's happening is we took a number of pricing actions, mix actions, efficiency actions, to respond to the DPC, or the product cost runup, that we talk about that peaked in the first quarter, and we've also seen, as we expected, a reduction in raw material costs in Europe from the peak.

Got you. And then to follow up on the question on pricing, you talked about having expectation of a 1% price component on the [depressed] component in 20 10, we've seen basic raw material costs or basic costs start to move up fairly aggressively in the second half of the year. It remains to be seen what they do in 2010. Europe raw material pricing is delayed by several months or quarters. So would you expect raw materials to be still positive in 2010 versus 2009, and so the profitability should be augment by that 1% pricing rather than having to fight through a high raw material cost? Is that the way to think about that?

I think what we said earlier is we expect 2010 to be favorable, i.e., we will spend nominally less on raw materials in 2010 for the year versus 2009. So I guess the answer then is yes. I would also point out that the way we go after margin is twofold.

Traditionally, and we're going to be much more in the traditional model, we bring out new technology, which has meaningful benefit to customers, and within that technology rollout, we also try to have expanded margin. And that's traditionally how we drive margin improvement, not through what I call naked price increases. The real move to naked price increases was a result of really runaway raw material costs during a period of time where technology waives alone wasn't going to enable to us maintain margin, given the raw material increases. So I think what we're seeing is we're going to be going back to more traditional model as Ecolab, which is driving margin enhancement through new technology.

I understand. Okay, thank you very much. That's all the questions I had.

Your final question comes from the line of John Roberts with Buckingham Research.

Hi, can you hear me?

Yes.

On GCS, are there any metrics you can cite that would show progress there? Obviously it's not in the gross numbers, but I'm thinking about number of pieces of equipment maybe including contracts, even if the customer doesn't need service on them, are you at least broadening the scope with existing customers, maybe some that you have had for 12 months, adding more equipment under the contract?

John, Doug. Look, we almost made it through a whole call without a question on GCS. So it's appropriate. Here's what I would tell you. Look, the first metric is in the quarter, our loss was around $1.5 million.

So we continue to bring down, if you will, the loss. We've talked that it's cash flow positive at this point in time; that remains true. So, we've continued to see, I think, much improved profit performance.

GCS is shifting gears to start getting after how do we go expand the customer base now that we know incremental customers need incrementally positive dollars, and that's exactly the phase that they're in at this point in time. So I think in a tough economy, that team has done a very good job leveraging the investments we made to improve the profitability which are obviously masked by the impairment on the top line, due to the economy. But we like the work that's going on there.

Thank you.

And we have no further questions. I will turn the call back to management for closing remarks.

Thanks, everyone. That wraps up our third quarter conference call. As mentioned, this call will be posted on our website along with the associated slides, so thank you for your participation, and our best wishes for a great day to all of you.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect.