藝康 (ECL) 2010 Q1 法說會逐字稿

Welcome to the Ecolab first quarter 2010 earnings release conference call. At this time all participants are in a listen only mode. After the presentation we will conduct a question and answer session. (Operator Instructions). This call is being recorded. If you have any objections you may disconnect at this time.

Now I would like to turn the call over to Mr. Michael Monahan, Vice President, External Relations. Sir, you may begin.

Thank you and hello everyone and welcome to Ecolab's first quarter conference call. With me today is Doug Baker, Ecolab's Chairman, President and CEO. A copy of our earnings release and slides referenced in this teleconference are available at Ecolab's web site 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-K under item 1A Risk Factors, in our first quarter earnings release and in slide two. We also refer you to the supplemental diluted earnings per share information also in the release.

Starting with slides three and four, we delivered strong earnings results and sequentially stronger sales growth in the first quarter, despite generally challenging market conditions, as we aggressively drove new account gains, sales of new products and benefited from favorable delivered product costs and cost reductions to drive improved margins. Looking ahead we raised our forecasted EPS range for 2010 as we expect to continue outperforming our gradually improving markets and deliver superior growth once again in 2010.

Starting with some highlights from the quarter, reported first quarter earnings per share were up 67% to $0.40. On an adjusted basis excluding special gains and charges and discrete tax items from both years, first quarter 2010 earnings per share increased 24% to $0.41. The adjusted earnings per share growth was driven by better volume, new products, new account gains, pricing, favorable delivered product costs and cost savings which more than offset higher operating costs and continued investments in our business.

Looking ahead, our US and European foodservice markets appear to be starting a slow recovery. Lodging room demand has increased and is showing recovering trends worldwide. Food and beverage and healthcare are seeing steady growth trends and we continue to see good growth across all market segments in our Asia Pacific and Latin America businesses. We continue to be aggressive focusing on top line growth as we emphasize our innovative products and service strength to help drive market share growth in our core businesses and deliver new account acquisition among our national, regional and independent prospects and we are making significant investments in key growth businesses to drive future growth.

We also remain focused on cost savings emphasizing productivity and efficiency improvements to help increase margins. We expect to show another quarter of sequential sales growth improvement in the second quarter with adjusted EPS increasing 8% to 14% to the $0.54 to $0.57 range compared with an adjusted EPS of $0.50 in the second quarter 2009. We raised our forecasted range for 2010. We now look for a double digit EPS growth in 2010 with adjusted EPS in the range of $2.21 to $2.26 per share representing an 11% to 14% gain over last year. In summary, we expect 2010 to reflect yet another strong performance by Ecolab as we use aggressive sales efforts to gain new accounts and achieve better sales penetration along with improved efficiency and cost savings to again deliver attractive growth and shareholder returns.

Turning to the details as shown in slide five, Ecolab's reported consolidated sales for the first quarter increased 6%. Looking at the components, volume and mix increased 1%, pricing was up 1% and currency benefited sales by 4%.

Slide six includes sales growth by segment and division. Sales for US clean sanitizing operations rose 2%. Institutional sales improved rising 1%. New account gains and new products benefited first quarter sales. We continue to outperform soft consumption from foodservice and lodging in the first quarter. While still in the nearly stages we believe the markets and our customers have an improving tone to their business and we continue to expect gradual improvement in demand through 2010. We remain focused on driving sales using innovative products in warewashing, laundry and housekeeping that provides superior performance while delivering water, energy and labor savings for customers. We are also targeting independent accounts and regional change with additional and redeployed salespeople and programs. These actions have resulted in good new account gains and we are continuing our efforts to drive more sales and margin growth. We expect these aggressive sales efforts, investments in our sales team and new accounts to help us continue to outperform our markets in the second quarter and the year.

Kay's first quarter sales grew 13% led by strong growth from both QSR and food retail. We enjoyed good demand from existing and new fast food chain accounts. The food retail business also showed continued good sales growth driven by new account wins. New products and programs like the introduction of Scrub-N-Go, the floor cleaner for QSR restaurants, bolstered Kay's results. We expect these initiatives, along with continued good new account growth, to help drive strong gains in Kay's second quarter.

Textile Care sales were up 1% as customer gains, new product launches and additional sales with existing customers offset continued weak industry conditions. Ecolab is focused on innovative products and services, operational savings and service excellence to bolster results but industry conditions remaining weak we look for sales to remain flattish in the second quarter. As expected healthcare sales were impacted by the reduced concern regarding H1N1 and the associated decline in demand for H1N1 sanitizing products. Sales were down 1% in the quarter. Excluding the H1N1 impact and a small acquisition, sales would have increased 6%.

Continued growth in skincare products and equipment drapes lead the results. During the quarter we launched several new products including a new line of central sterile solid products as well as a program for patient room cleaning. Looking ahead, second quarter sales are expected to improve as H1N1 inventories stabilize.

Food and Beverage sales were flat. Sales grew in the food and beverage markets as corporate account wins and new products offset soft results in dairy, agri, meat and poultry. In the second quarter of 2010, Food and Beverage will continue to focus on new account acquisition and new product sales. However the slow markets and softer pricing when compared to last year are expected to yield flat sales.

EcoCare sales decreased 10%. The division remains focused on new more sustainable products and operational cost savings programs for cost efficiency programs to gain new accounts. However, these efforts were more than offset by weak market demand. We expect current growth efforts to benefit second quarter and look for improving trends in Vehicle Care.

Sales for US other services decreased 2% in the first quarter. Test elimination sales were off 2% in the quarter as gains in fast food and food and beverage plant markets were offset by slow conditions in restaurants and lodging. We continue to develop new products and program solutions to better serve customer needs in the current environment. For example, we recently introduced a new bed bug program that reduces room down time for treatment cycles and thereby helps to lower customers' total costs. We also recently introduced our first EPA exempt pesticide which poses a minimum risk to humans and the environment, yet still provides an average kill time for common cockroaches of less than five minutes compared with eight hours for other liquid applications. Both have enjoyed a good start. We are working on other programs to provide improved service, efficacy and efficiency. We continue to target specific growth markets like food and beverage processing to improve our service delivery and are working to build contract growth. We expect these efforts to help offset the soft economy and yield improvement in the second quarter.

GCS sales also showed signs of stabilizing as they decreased a modest 3% in the quarter. Once again, profitability improved substantially over last year and the fourth quarter. New account wins were offset in the first quarter by the impact of slow foodservice business conditions and by general market weakness especially among independent accounts. Despite the lower sales volume, GCS profitability was substantially better as we continue to see productivity and efficiency improvements throughout the business. The sales pipeline is improving and chain customer interest remains good. We are using some of the improvement in profitability to invest in regional salesforce additions to drive future growth and have seen account wins resulting from that investment. Looking into the second quarter, we expect sales to be flattish compared to the prior year with better profitability. Longer term, further significant profit improvement for GCS will depend on improved volume gains as well as continued productivity and efficiency improvements.

Measured in fixed currencies, international sales increased 2%. Europe, Middle East and Africa sales declined 1% in the first quarter at fixed currency rates. Europe's institutional sales were off slightly. Foodservice appears to be stabilizing in most European countries but we have not yet seen a return to growth. On the other hand, lodging demand has picked up. Focused sales efforts targeting new business with regional and local customers and new products help drive new account gains in a soft economy. Food and beverage sales were flat reflecting reduced beverage consumption and plant consolidation. The business continues to focus on new customer growth emphasizing cost savings benefits of our leading products like Dryex and Water Care.

Textile Care sales declined, reflecting reduced volumes from central laundries and lower equipment sales. Europe's healthcare sales increased modestly despite reduced demand for H1N1 product as concerns about the potential pandemic abated. Europe sales were off slightly. However we continue to improve operations and drive profitability. Europe's business information systems platform work is nearly complete. At this point, we now have the critical mass and the tools with which we can begin to work to unlock costs and complexity to drive faster sales growth and higher margins. While we expect to realize sales growth and margin improvement from Europe as we exit 2010, we look for more significant improvement in the following years as the range of growth and profitability actions we will be taking begin to take effect. We expect new account focus and recovering business trends to result in sales improvement in Europe's second quarter fixed currency sales. Asia Pacific sales grew 10% in fixed currencies as recovery in the region accelerates. Institutional sales showed a good gain with growth strengthening as occupancy levels improve and economies recover. Food and beverage sales enjoyed strong growth. Both the beverage and brewing sectors continued to grow benefiting from increased product penetration and account gains. Looking ahead, Asia Pacific expects good sales growth in the second quarter reflecting recent account wins and better markets.

The first quarter sales for Ecolab's Canadian operations increased 8% over last year in fixed currencies. Institutional showed a good increase as we leveraged our strengthened distributor partnerships. Food and Beverage and Vehicle Care recorded strong gains delivered by new account gains. Healthcare sales growth slowed reflecting the decline in H1N1 demand. We expect continued good growth in the second quarter for Canada.

Latin America reported a solid sales gain rising 6% in fixed currencies, as all divisions in that region increased. Institutional growth was driven by new accounts, increased product penetration and 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. And pest elimination showed continued good growth. Overall, we expect attractive growth trends to continue in Latin America with another solid gain in the second quarter.

Turning to margins on the income statement and slide seven of our presentation. First quarter gross margins continued their recovery increasing 250 basis points to 50% compared with 47.5% last year. The increase was driven by volume gains, pricing, improved delivered product costs, and favorable comparisons against 2009 which included a restructuring charge. SG&A expenses were 39% of sales, 70 basis points above last year. The increase in the SG&A ratio was due to continued investments in our business and systems and other increases which more than offset cost savings actions and leverage from sales gains. Operating income for Ecolab's US cleaning and sanitizing segment increased 11%. Margins expanded by 140 basis points. The increase was driven by volume gains in favorable delivered product costs which more than offset cost increases.

Operating income for US other services grew 11%. Margins expanded by 160 basis points over last year driven by pricing and cost savings actions. International fixed currency operating income increased 46%. Volume gains and favorable delivered product costs more than offset additional pension and systems amortization costs as well as people investments in growth areas especially in Asia Pacific and Latin America.

The corporate segment and tax rate are discussed in the Press Release. We repurchased 3.3 million shares during the first quarter. The net of this performance is that Ecolab's reported first quarter diluted earnings per share was $0.40 compared with $0.24 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 24% to $0.41 when compared with $0.33 earned a year ago.

Turning to slide eight, Ecolab's balance sheet and cash flow remain strong. Total debt-to-capital was 36% at March 31 compared with 43% reported a year ago. Our net debt at March 31 was 33%. Looking ahead, we expect continued gradual improvement in our key end markets in 2010. Against that backdrop, we are taking appropriate actions to drive both our top and bottom lines.

As outlined in slide nine we will continue to drive new account and market share growth using our product and service strengths that combine to help customers reduce their costs and improve their efficiency. We will continue to focus on investment in growth businesses like healthcare, global pest, China, and Latin America, as well as new products and acquisitions to accelerate the top line. And we will expand our sales and service force and invest in their field technology to make them more productive. We expect fixed currency sales to rise in the low to mid single digit range in 2010 and look for gross margins to show continued good improvement. SG&A will reflect the investments we are making in our salesforce and systems. Corporate expense should moderate slightly as we near completion of the systems implementation in Europe. Interest expense is expected to be comparable to 2009 and the tax rate is forecast to be in the 30% to 31% range. We raised our forecast range and now look for full year adjusted dilutive earnings per share to increase 11% to 14% and be in the $2.21 to $2.26 range in 2010.

Looking at the second quarter 2010, we expect another quarter of sequential sales growth improvement and look for low single digit year on year fixed currency sales increase as new account gains more than offset continued challenging foodservice market conditions. We look for international sales to lead the growth at fixed currency rates as good growth from Canada, Latin America and Asia Pacific are offset by modest sales gains in Europe. Gross margin should increase. Our growth investments in sales fire power and technology will be reflected in the higher SG&A ratio versus last year. SG&A will also compare against the second quarter last year when we aggressively cut costs and implemented a restructuring that significantly reduced that quarter's SG&A expense. The Press Release includes line item forecasts of our second quarter P&L. Net we expect adjusted diluted earnings per share for the second quarter, excluding special gains and charges and discrete tax items, to increase 8% to 14% to the $0.54 to $0.57 range compared with adjusted earnings per share of $0.50 earned a year ago.

In summary, as noted on slide ten, we had an excellent first quarter and delivered above our forecast while still investing in our future. We continue to look for a solid second quarter gain and expect to deliver double digit EPS growth for the full year 2010 reflecting gradually improving markets and reduced downside risk.

A final note. We will hold a tour of our booth for the professional investors at the National Restaurant Association show in Chicago on May 24th. If you have an interest in attending or any questions about it please contact me or Nicole in my office.

That concludes our formal remarks. Operator, please begin the question and answer period.

Thank you. (Operator Instructions). Our first question comes from Nate Brochmann from William Blair.

Good afternoon, gentlemen. I wanted to talk a little bit specifically in terms of the additional growth you're seeing in some of the other regions in Asia, Canada, Latin America. You talked about some of the individual segments but is there anything you're doing different in those regions to spur any growth or is it more on the macro side?

Nate, it's Doug. I would say the answer to that I think is a little of both. Certainly those markets have been performing better than, say, US and Europe. At the same time, as we started talking last year, we have invested in additional corporate account selling capacity in each of those regions in both F&B and institutional, and I would also say that we are picking up share there too.

And just along with that question, do you think that once Europe gets going in a better economic position an we get the full system in place that it's possible maybe not to see those same magnitude of increases but to see more substantial growth similar to that?

I don't think Europe's going to have the same macro trends lifting that you're going to see in Northeast Asia or Latin America obviously. But I would expect this. We expect Europe sales growth to be meaningful. We think we can get it back to the mid single digits and we'll start arguing what's up from there. But we think that's realistic. At that level, with the work that we've done, we believe we will have a very healthy business in Europe.

Thank you for that. And then also wanted to talk a little bit in terms of pricing, what you're seeing in general in terms of the ability to push through some pricing going forward for the remainder of the year.

I guess our view on price is pretty much as it was in the last call which is we expect to be more in the normalize our historic range of about 1% going forward. We think that's the type of environment we're in. I would also point out that pricing isn't either the principal or sole way that we drive gross profit. A lot of it is by introducing new technology which has both enhanced benefits for customers as well as margin benefits for us, and that has been our traditional tool for driving margin, particularly environments like the one we're in.

Great. Appreciate the color, Doug.

Our next question comes from Andrea Wirth from Robert Baird.

Good afternoon guys. I wonder if you could first address Europe a little bit more in terms of the ERP system being pretty well completed towards the end of this year. Where do you start first? You've identified a lot of complexity and essentially where do the savings start coming first, specifically, and how do we evaluate what the risk profile of those next moves are going to be to the business?

Andrea, it's Doug. I would say first of all, we are done with the waves in terms of SAP or ERP rollout in Europe at this point in time, and have the system in place that was originally first seen when we started this initiative. We are still stabilizing the last wave but it went quite well. So the great news is here on forward, all the steps we're taking are improving the business from here.

So focus areas, I would say the first is there is incremental costs that you layer on simply to roll this out, and we are going to work to take those out first. So you have incremental shipping costs, you have incremental temporary headcount costs as you go through this and you lose productivity temporarily in the back office and other parts of the business. So that's priority one. The next priority is getting after supply chain efficiencies. One, we've got transparency on purchases across the continent, so making sure that we're buying at the best possible price and then it is adjusting inventories, looking at our warehouse distribution, et cetera, and making sure that we capitalize on all those gains. Obviously we've always talked that we want to continually drive more of our investment in Europe towards sales and towards acquiring new accounts. So we will look at then shifting and balancing our SG&A so that we've got increased sales capability and spend less on G&A over the long haul. That will be the next wave.

During all of this, we continue to invest in top line productivity. We have much more clarity as to what's going in our business now that we have the system up. Forever, we had very limited sales data, very limited customer profitability data, very limited data as to what products were penetrated where in terms of customers. So we've got a lot more data to go run this business successfully like we run the business in other regions, so we're excited about the potential and now it's about unleashing it.

Got it. That's very helpful. And then just on raw materials, wondering if you could quantify more specifically what the actual raw materials benefit was in the quarter and then how do we think about raw materials going forward? I think prices on plastics and phosphates, as well, have been starting to creep up a little bit so when does that potentially start becoming a headwind for you?

Andrea, year on year it was about $20 million but remember last year is a very high point, so a lot of this is comparison to a very high base. We expect to have some raw material inflation in our business. I'd say there's a bit of a natural hedge and so ultimately it will come out. We have a modest recovery in our forecast and if the recovery is more bullish it's going to push raw material prices up probably more aggressively than we have forecast but that would be a trade we would be very willing to take.

Got it. And then just final question, housekeeping. What's your FX impact assumption on an EPS basis for your full year guidance? I believe it was roughly neutral previously so just wondering if that's changed at all.

I think it's $0.02 for the year.

$0.02 for the year?

Yes.

Okay, thank you.

Our next question comes from David Ridley0Lane from Banc of America. Your line is open.

I had a question on sales growth and the headcount there. Could you give us an update on your 2010 plans and what particular areas you're most focusing on and where you can drive growth. Thank you.

Our plan is still to add significantly to the sales headcount. And the plan for the year is in the 300 range of additional heads which is in the 3% to 4%, 3% additional heads.

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

Hi, good afternoon. Doug, your international margins were up year-over-year but were down sequentially. I was wondering if you could just add some color on why they were down sequentially. Was it raw materials that came into the picture?

PJ,, it's principally just seasonality. First quarter and particularly for our international operations, where we run international operations a quarter ahead, so their first quarter is December through February. And December-January are seasonably low months. We like our margin progression.

Do you provide the same level of service internationally as you do in the US? And do you think there should be a different service package internationally?

I would say, of course, that depends but broadly if we are talking to global players, the answer is yes, we do supply the same level of service. We certainly have the same level of capability internationally. There are some subsegments that we serve in certain markets that require different levels of service, but by and large if you're going to look at the food and beverage or institutional, global hotels, et cetera, we supply the same level of service.

And just finally on institutional sales, you're up only 1% in sales despite easy comps. Given the increase in foot traffic at restaurants and hotel occupancy, we would have thought you got better leverage on sales. Can you talk about what's holding that growth back?

Yes, I would say two things, PJ. We always want more growth too. My view on it is a couple. One, the first quarter is going to be the hardest comp we have for this year. The business last year sequentially went down. And if you look at foot traffic, it still remains negative in foodservice in the first quarter. So I would say the improvement you saw really wasn't market driven but was performance driven. We no longer have a declining or sinking market. We have a stable market, by and large, and you're starting to see the impact of the new customers that we picked up. As the recovery unfolds, foodservice tends to be a laggard, but we would also expect to pick up business as the market picks up which includes better penetration, more robust consumption across the line, inventory and all of the other things that happen as things recover but that's later.

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

Hello. Two questions. Can you give us an update on what you're seeing in terms of M&A multiples, are multiples starting to come down towards the levels you'd be more interested in?

I don't know about broadly. I would say we feel very good about our specific pipeline and I don't know if it's the exception or not but feel like we're going to have a successful year in M&A, which means, by default, we are going to buy businesses where we think the price is out of line. So we think we will successfully come to a conclusion meaning meaning meet eye to eye on price.

And secondly, a couple of markets on the dairy and food and beverage side, can you talk a little bit about how you're thinking about those businesses over the next two to three years. And also are there any businesses within the portfolio where you feel they just don't really fit at this point?

That's a trick question. I'll answer F&B first and dairy and the food market. Those markets are fairly steady growth markets and you look at the long term macro trends we like those markets a lot. We're doing a lot of work in that space around water and energy specifically because we believe it's a great way to further leverage our position which is quite significant in that industry. And help our customers which will also, by the way, help us grow our sales there quite handily. So we view that market as very promising in terms of its long term potential for the Company. In terms of the portfolio, I would say we are overall quite happy with our portfolio and until something is announced, I think that's the standard but if you look at it, by and large, we think it matches up quite well with the long term trend.

And then lastly, as you think about the energy and water markets, you've discussed in the past trying to establish a review of your strategy in those areas. Should we be thinking about this as something that will be a multi-year process, or is there an inflection point where you have a clear strategy and then it becomes a matter of trying to execute it and benchmark against particular targets?

I think it will be multi-year but I think the latter is how we're going after it. We've been on a pretty extensive review of how we want to go after this market and have what I would call a very good blueprint right now and we're flushing it out. But it's something that's going to take a period of time to fully realize because it's a big, ambitious and I think pretty significant plan.

Thank you.

Our next question comes from John McNulty from Credit Suisse. Your line is open.

Good afternoon. Just a few questions. At the beginning of 2010 when you gave guidance, you had a couple projections for some of your end markets like foodservice in the US being down 1%, lodging being up 3%. Now that you're a quarter in and it looks like the consumer may be coming back a little bit do you have an update as to what you're looking for in some of these end markets?

The quick line would be lodging which is about 10% of our sales is doing better than we projected at the last call. Clearly rooms in the end is higher. And this is really a global story so lodging has bounced back faster. I would say foodservice, by and large, we had right which is a stabilization I think towards the end of the year. We would expect to see traffic and others move to the positive and that's consistent, frankly, with most of the third party projections, as well.

Okay, great. With regard to Europe, can you give us an update as to what the actual margins were for the quarter?

John, Europe ran a very small loss.

Okay, and then last question, if I remember correctly, you had a pilot program going on with two large hospitals for your healthcare platform. Can you give us an update as to what you're seeing and when that might come to a close?

John, that was part of our beta testing for what became the Encompass program. We've got two of the hospitals which we've got, I think we're very near a contract, and another one is evaluating it. So I think we're pretty close on those but that was a beta test leading to the Encompass program which was rolled out in the first quarter.

We have a very rich pipeline of Encompass targets and tests right now.

Okay, thanks for the update. I appreciate it.

Our next question comes from Mark Gulley from Soleil Securities.

Good afternoon. Two questions please. Doug, back to lodging versus restaurant. Can you give us a feel for how historically has the restaurant business lagged a recovery in the lodging side?

Mark, I don't know that I have the specific answer there. The one thing I would say is I don't know if there's any great past history that will indicate how we're going to come out of this particular recession. What I would say is restaurants typically lag in terms of coming out of economic challenges. I would say the lodging bounce back obviously surprised us in its intensity and I think it also surprised some of the lodging players. So business travel is really what's been driving the lodging recovery and it's bounced back, and obviously business travel plays a larger percent of the lodging market than it does of the overall foodservice market. So consumer is going to have to keep getting strong and remain strong for the foodservice market to fully recover.

Okay. And then sometimes I've asked this question on this call in the past. The NRA show is about a month from now. Would you care to give us a preview of some of the key things you'll be highlighting on the floor at that time?

We've got a couple of new initiatives which are going to be showcased in terms of most innovative new idea over there. We will unveil those at the show. But there is going to be a lot of showcasing the technology that we have that we think is particularly relevant in these environments. So while we do expect modest recovery and improvement in our customers' underlying business, they're still going to be very focused on how do they both get great food safety results and do it cost effectively, and we think we've got very good stories along those lines and that's the stuff we'll be highlighting.

Okay, thank you.

Our next question comes from Mike Harrison from First Analysis.

Hi, good afternoon. Doug, I was wondering if you could help me understand why healthcare sales are declining year-over-year given the expected top line synergies that you talked about when you bought Microtek and you've done a couple of other small acquisitions since then, you've rolled out new cleaning and sanitizing program offerings. I think Mike mentioned that you saw H1N1 boost last year. I don't think anybody had ever heard of H1N1 in Q1 of '09 so I don't really see how that could be a year-over-year headwind or tough comp, so help me understand this negative 1% number.

Mike, you're right. H1N1 was not part of the story last year in Q1. The H1N1 impact this year was the trade reduced high inventories by not purchasing virtually any of these products for a period of time in the first quarter because the inventories had become inflated in the fall during the H1N1 peak. So that's the adjustment impact that we're talking about. It's not going against a base and it's really distributor inventory take down during the first quarter. Now that's largely behind us. It's very easy to pinpoint that. The healthcare business was in the mid single digits when you take out that impact. We expect it to perform around mid single digits next month with or without whatever H1N1 in terms of reported number and will be back to high single digits, possibly double digits in the second half, even though it won't be going against tough comps in the second half because that's when H1N1 inventory builds and consumption was at its peak. The business, all of the fundamentals, the new customer work, the innovation, all that is on track so we're just going through a little adjustment period and we feel very good about the future of our healthcare business this year.

I appreciate the additional color there. In Food and Beverage, are we still seeing a year-over-year negative impact related to Ecovation, or has that turned positive year-over-year?

More positive on Ecovation, modestly. They were in the third month. We've got a bunch of people peeling through a deck. They were down 5%, up in the latter part of the quarter. Down 5% for the quarter but up. But that wasn't a really material story.

If you excluded Ecovation though, you might have been up a percent in Food and Beverage?

It's de minimus.

Okay. Was wondering if you could talk on pest elimination. Are those services something that lodging customers will cut back on when times get tough similar to what you see in foodservice? And in that context, what sort of improvement might you be expecting from pest elimination services to lodging customers and what kind of traction do you expect with this new bed bug program?

The answer is yes, lodging customers will also cut back on certain services when times get very tight, and our lodging industry went through an incredibly difficult period last year. So we anticipate that the underlying market demand will start increasing for these services. And in fact, if you look at our underlying metrics which aren't all reported, we see building demand in our service businesses as we would expect, so we feel better about pests growth prospects through the year. Bed bug programs will be one part of the story but so will other traditional programs. We've rolled out a new program designed after pests in restaurants which has got significant sustainability and health benefits. So there's a number of things we've got going on in pests besides the market lift that makes us feel like we've turned the corner and are moving in the right way there.

Our next question comes from Gary Bisbee from Barclays Capital.

Hi, guys. Good afternoon. The first question, after not doing a whole lot of buybacks for several quarters, you accelerated a bit the last couple quarters. Is there anything I should read into that in terms of thoughts around strategy for your cash and inability to get the right acquisitions done? Or is it just more maybe after the big slug you did after the Henkel, as part of the Henkel transaction you just took it easy for a few months and you're now getting back to more normal state?

I would say it's much more the latter. It does not reflect any change in use of cash philosophy but obviously we made a big purchase in the fourth quarter of '08 and took a few quarters off as a result of that, which was planned. Our principal or primary use of cash is going to for M&A and when M&A is not there, we've said that we will go do share buyback. As I alluded to earlier, we are pretty confident that the M&A opportunities are going to be here in the near term.

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

Good afternoon guys. When I look at the developed markets, US, Europe, plus minus percent, Canada up 8%, is there a significant mix difference in Canada than the other developed markets?

No, I guess the history lesson would be if you've got minerals and gas, things are going to be rosy. The Canadian economy is it's fundamentally healthier than either the US or the European economy. They didn't have the banking crisis, they didn't have the housing crisis, they skipped it. I would also say they are fairly rich in minerals so it's not a bad economy.

Back to the pest elimination question you just got. I thought that was typically a relatively temporary phenomenon, that after six months or so the bugs come back and the customers really have to come back to usage levels they had pre their hiatus. Are you a little surprised you haven't seen that yet? You're down and comping against weak year ago numbers.

The only real answer is, yes, we're surprised about a lot of things that happened in the last 18 months. At the end of the day, yes, it's lasted longer than it has previously but I would also say we see the type of underlying metrics that we expect to see and we expect this business to be coming back. Clearly last year was unique on a number of levels.

Thanks.

Our next question comes from Edward Yang from Oppenheimer.

Hi, thank you for taking my questions. Doug, you mentioned inventory destocking hurt healthcare comparison. Conversely, are there any other businesses that you operate where there's some potential for inventory restocking?

I don't know that it's quite at the level you might have seen in more industrial companies, by any means. But certainly as demand picks up, just the way ERP systems work, it drives a pick up in inventory levels. This isn't any new phenomenon. We didn't spend much time talking last year about significant erosion in terms of inventory levels but it's a natural occurrence in a decline and an increasing economy.

It sounds like in the healthcare business there's more of a middleman that maintains inventory. In your other businesses like institutional or Textile Care, et cetera, is there a middleman that is significant in terms of being part of the supply chain? I know you've had some change in inventory incentives last year that provided some volatility.

If you want to go through it, F&B the answer would be it is different. F&B largely is going directly to the end use consumer, ie, food production facilities. However, in institutional, a large percentage of sales goes through distribution which means there's an inventory plus/minus equation there, as well as in healthcare and some parts of our textile businesses and some parts of our Vehicle Care, et cetera. So it exists and I would say as the economy picks up one of the things you see is underlying consumption picks up which starts triggering increased inventory levels and distribution.

Okay. And your overall volumes swung positive this quarter. Is that more a function of getting new customers or are existing customers buying more solutions from you?

It was a piece of both in a year on year basis but I would say I don't think we fully felt the market impact yet. A lot of the recovery were seeing were our own efforts last year.

Okay, thank you.

Our next question comes from Robert Koort from Goldman Sachs.

Thanks. Doug, I'm just curious, as you took a more critical look at the cost structure in the downturn as we've come into this recovery phase, how much leverage do you see at the operating margin line, or do you think it will stay in this high teens range in the US and 13% range globally?

I would say we certainly did learn about areas where we had improvement and we capitalized on some of that and we expect that to continue to show up in the business. Obviously the biggest margin play that we have is in Europe and we've just gone through a period of sizeable investments which are largely in the base now in Europe and we're going to start capitalize and moving that. That's our third of our business so obviously, every hundred basis points, a third of that accrues to the total margin improvement, so we see steady improvement in our margins over the next few years primarily fueled by the improvement in Europe. But there's still margin opportunities in the other regions. AP and LA it's principally volume on an existing infrastructure base, and in the US it is continuing to refine our business model.

And on Europe specifically, what metric should we hold you accountable for success or lack of success in terms of that margin progression?

Do you need another one? I think we've said that we believe we can get Europe up to the 13% to 14% and we would be disappointed if the progress wasn't at least 100 basis points a year.

Great. Thank you.

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

Thank you and good afternoon. Congratulations on the strong first quarter. Following up on the margin in Europe, Doug, when you talk about getting to the 13% to 14% operating margin, can we see that as soon as we see top line growth of 5% or do you require a multi-year process?

I hope we see 5% top line before the time it takes us to recover margins fully. That would be the short answer. The 5% is not going to come magically in a quarter. It takes us a while in any region to rebuild sales growth but yes, my hope and belief is that we'll see 5% well before the time it's going to take to get to 13% to 14% margin.

Okay. Have you seen any change in trends since the end of the quarter or when you addressed the fact that markets were stabilizing and so on, that was actually talking after the end of the quarter or was it a trend going through between January and March?

It's even a legal question at this point in time, isn't it? I would say yes, I think clearly we incorporated the most recent data we had in terms of market performance, so that comment is what we've seen to date.

Okay, and back to the number of shares. What was the number of shares at the end of the quarter? That is one question. And then if I look at last year between the beginning of the year and the end of the year the number of shares went up by 3 million. Is that the kind of outlook for this year or are you going to buy much more and therefore you will more than offset the impact from options by the time 2010 rolls around?

If you look at the number of shares, basic number of shares declined. The increase in the diluted shares was due to the stock price causing more shares to be in the money. And for the full year, with the 3.3 million shares bought in the first quarter, we would expect the number of shares would decline in the following quarters.

But you are going to have more options in the money most likely between now and the end of the year, so if you buy more shares we are going to have the same pattern we had last year.

It's not a dramatic impact. With the stock price rise there's not too many shares left under water.

Okay, that is helpful, thank you. And Doug, in the past, new technologies are what really drives this Company and you had this big leap from liquid products to solid products. What is coming up the pipeline that will have a similar impact?

As you know, we have moved our solid concept to a new platform level and are only partially, if you will, launched on this concept. So Apex, which is really taking the old solid and making this in an extruded form, which also allows us to reduce significantly plastic, get out cost, it can do a number of other things from a formula, is now launched in warewashing. We're starting to extend it in the line products. We have been using this technology as a platform in QSR. This has only so far been really launched in the United States, so we will be expanding this globally throughout institutional. If you go into the F&B space there are a number of technologies that we have that are rolling out that follow the trend line that dry lube took which are technologies that significantly reduce water and enhance performance. We are looking at recovery vehicles in terms of finding ways to make the products we use even more efficacious without adding more chemicals to the process and reducing water. I don't want to get into too much detail because it's a public forum for F&B.

So we're very excited about the number of platforms we have there that we think are going to boost sales long term as we move forward. We've talked the water area, we have a number of applications there that will fit our large businesses. Pests, we have some very innovative sustainable ideas. We feel very good about our platforms and our innovation technology. We did not stop investing in our R&D anchor technology platforms at all during this crisis. In fact that was one of the areas that was in the bright line of protect-no-matter-what that investment because we knew we were going to be sitting here on the other side needing to stimulate and drive growth the old fashion way which is start getting after organic sales. So we feel pretty well equipped candidly.

Our next question comes from Dmitry Silversteyn from Longbow Research. Your line is open.

Good afternoon. A lot of my questions have been answered but I do want to talk about the GCS business. It sounds like you're going through another investment cycle there with expanded salesforce coverage. My understanding was that you were done investing in this business until you started seeing some positive profitability out of it and then make a decision whether or not you can continue to grow it or scale it back. Have you seen enough of a recovery to justify continuing investment in this business and stepped up investments, as a matter of fact?

Dmitry, probably to be more clear about what we were talking about, a lot of what we did is we transferred resources to give us more selling resources in that business. So we've been doing a lot of work. I guess you could argue, you could have just taken it out of the business but we felt taking some of the heads that we have saved in that business and applying them towards regional sales efforts made sense and it's looking like in fact it does make a lot of sense for us. The GCS business is moving in the right direction. We continue to lower the breakeven point. We would estimate that around $140 million at this point. I think the last time we articulated a number it was around $155 million so we continue to make good progress there. Sales have absolutely stabilized in the business so we're looking to start driving this in a positive direction which is what needs to happen to close the remaining, now increasingly small, gap that we have in terms of OI there. So we like the promise of this business. I think there's been a lot of work that's gone on. This business is in a lot better shape than it's been for years.

Okay. And then the second question I have is actually a follow-up on the healthcare comment and the 1% decline you're seeing in year-over-year sales. I just want to make sure I understand what you've answered directly because I agree with the previous caller in that H1N1 should not have been a year-over-year impact. But what you're saying is that with H1N1 concerns, there was a lot of inventory building of product stores at the end of 2009 that may or may not have something to do with H1N1, just a general desire to be cleaner and safer. And now that that inventory correction look place, not necessarily in products directly tied to H1N1, but in overall cleaning and sanitizing market dealing with healthcare, is that what you were saying, or did I misunderstand?

No. I'll try it again. And I understand. Basically what happened, Dmitry, is distributors serving this market built their H1N1 related product inventories. There was high demand and then the demand went down after the H1N1 scare went away. But the way ERP systems work is they look behind and keep building inventory for past demand, not immediate demand so they ended the year with very high inventories compared to immediate demand. Once this is recognized by the systems, they basically go on a full stop, so they stop ordering the products until the inventory adjusts to the current consumption pattern. That's the adjustment we went through in Q1 of 2010 and it had nothing to do with 2009 Q1.

And Dmitry, these are hand sanitizers that have other uses. They aren't uniquely for H1N1.

They will continue to buy these products and they continue to move. There's just an adjustment in inventory so consumption was higher than sales as the inventories adjusted. If you take out the inventory adjustment, sales would have been mid single digits for the quarter. Not a great quarter. We would have been beating our chest but by no means a disaster and we feel very comfortable that the business underlying growth metrics are on the right trajectory.

Okay. So if you look at the previous three years, you had double digit growth in that business in nine out of 12 quarters. The fact that even without inventory correction you would have been in a single digit growth does not necessarily signal any kind of a trend. It could be just one quarter in a year which you would experience that type of growth so there's nothing fundamentally different about the business in 2010 versus 2009 as far as maturation or market penetration or stiffer competition?

No. There's nothing fundamental. The growth is a 13 week period. And as I signaled earlier, we would expect this business to have a reported growth rate in the mid single digits in the second quarter. The inventory situation will be behind us fully by then and it will be upper single to possibly double digit in the second half. So we are spending our time doing what we should do is figuring out how do we drive innovation and new customer acquisition in this business.

And Dmitry, that second half, remember, will be going up against the H1N1 demand which was heightened demand at that point so we feel pretty good about the growth rates.

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

Hi guys. Just one more follow-up. When you talk about the system in Europe being online and the long term margin plan, what should we expect this year? I assume you're starting to amortize some of the capitalized cost there. Is that going to offset the Europe margin gain this year or should we think about it beginning to get it and then it really starts ramping?

Gary, good question. We absolutely are taking on increased cost as the system is now fully online and you amortize the investment fully. And we've always talked, you're going to be at a period where you are fully paying for two systems. And what we expect is fourth quarter will be the first quarter you start seeing year on year margin improvement and we would expect that to be the trend moving forward. For the year, the margin is going to be roughly flat, maybe modestly up from last year.

Great. Thanks a lot.

There are no further questions at this time.

Everyone, thank you for your time today. We appreciate your interest. Have a great day and take good care.

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