藝康 (ECL) 2010 Q3 法說會逐字稿

Welcome to the Ecolab third 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.

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

Hello, everyone, and welcome to Ecolab's third quarter conference call. With me today is Doug Baker, Ecolab's Chairman, President, and CEO. A copy of our earnings release, and the slides referenced in this teleconference, are available on Ecolab's website at ecolab.com/investor.

Please take a moment to read the cautionary statement on slide two stating this teleconference and the slides include estimates of future performance. These are forward looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent Form 10-K under item 1-A, risk factors, in our third quarter earnings release and in slide two. We also refer you to the supplemental diluted earnings per share information that is also in the release.

Starting with slides three and four, we continue to deliver solid earnings growth in the third quarter despite mixed conditions in our end markets. The sales increase was fueled by our aggressive actions to gain new accounts using our innovative new products, our industry-leading sales and service force, margins improved on the better volume, and cost reduction actions. Looking ahead, we expect to continue outperforming our gradually improving markets, and deliver double-digital EPS growth once again in 2010.

Starting with some highlights from the quarter. Reported third quarter earnings per share were up 23% to $0.74. On an adjusted basis, excluding special gains and charges, and discreet tax items from both years, third quarter 2010 earnings per share increased 8% to $0.66. The adjusted earnings per share growth was driven by better volume from new products and new account gains, which more than offset higher operating costs and continued investments in our business.

From an end market perspective, we continue to see good growth across all market segments in our Asia-Pacific and Latin America businesses. Lodging, room demand has increased, and is showing good trends worldwide. The global food and beverage market is enjoying steady growth. Our US and European food service markets remain soft, but have shown modest improvement from prior periods. And the US healthcare market has seen a modest slowing.

We continue to be aggressive, focusing on top line growth, as we emphasize our innovative products and service strengths to help drive market share growth in our core businesses, and deliver new account acquisition among our national, regional and independent prospects. We're also making significant investments in key growth businesses and acquisitions to build future growth. We also remain focused on cost savings, emphasizing productivity and efficiency improvements to help increase margins.

Looking ahead, we expect fourth quarter adjusted EPS to increase 7% to 11%, to the $0.59 to $0.61 range, compared with adjusted EPS of $0.55 in the fourth quarter 2009. We tightened our estimate range for the full year. Despite the generally slow economy, we continue to look for double-digit EPS growth, with adjusted EPS of $2.22 to $2.24 per share for the full year 2010, representing a 12% to 13% gain over last year. That would represent yet another year in our decades long performance of fixed currency sales growth, our ninth consecutive year of adjusted EPS growth, and the eighth double-digit EPS gain in the last 10 years. 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 once again deliver attractive growth and shareholder returns.

Turning to the details, as shown in slide five, Ecolab's reported consolidated sales for the third quarter increased 1%. Looking at the components, volume and mix increased 3%, pricing was positive but not significant, and currency decreased sales by 2%. Acquisitions were negligible.

Slide six includes sales growth by segment and division. Sales for the US cleaning and sanitizing operations rose 4%. Institutional sales rose 3%. New account gains, increased sales to distributors, and some pipeline building for new products and programs benefited third quarter sales.

We continue to outperform mixed market trends, which showed continued soft food service foot traffic, and strengthening lodging room demand in the third quarter. We remain focused on driving sales growth using innovative products in warewashing, laundry and housekeeping that provide superior performance while delivering water, energy and labor savings for our customers. We're also targeting new accounts with additional and redeployed sales people 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 actions to enable institutional to once again outperform its markets in the fourth quarter, though some of the third quarter distributor inventory build-up will likely soften the fourth quarter gain.

Kay's third quarter sales grew by 8%, led by strong growth from both QSR and food retail. We enjoyed good demand from existing and new fast food chain accounts. Sales to food retailers improved, 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 solid gains in Kay's fourth quarter.

Reported sales for textile care increased 19%. Adjusted for the Dover acquisition, sales were up 2%. Customer gains, new program launches, and additional sales within existing customers more than offset continued challenging industry conditions. The Dover acquisition complements Ecolab's existing business very well, bringing a strong sales and service team, and strong customer relationships. It also brings innovative monitoring, technology and products, as well as added scale to our textile care business that will improve our growth, and returns on investment. While the textile care industry conditions remain difficult, we look for better sales from our strengthened textile care business in the fourth quarter.

Healthcare sales increased 1% in the quarter. Gains in infection barriers and central sterile continued to more than offset comparison to the prior year's spike in demand due to H1N1 fears, and slowing healthcare market trends this year, including fewer patient visits and surgical procedures. Excluding the H1N1 impact from both years, sales would have increased by approximately 4%.

During the third quarter, we continued to build our product portfolio. We launched a new line of specially patient drapes for robotic procedures, and launched Virasept, the first non-bleach, EPA-approved, ready-to-use disinfectant that kills C. diff spores. Installations of a new hand care dispenser platform, and the OptiPro line of sanitizers for central sterile are going well. And our encompassed patient room sanitation program is getting a good response. Looking ahead, fourth quarter sales are expected to continue to show modest reported sales growth, as it compares to the strong H1N1-related sales recorded in the fourth quarter of last year.

Food and beverage sales grew 4%. Sales increased in almost all segments, as corporate account wins and new products offset soft results in meat and poultry. Food and beverage will continue to focus on new account acquisition, and new product sales, to offset slow end markets and softer pricing. We look for food and beverage sales to show similar growth again in the fourth quarter.

Vehicle care sales decreased 4%. The division remains focused on new, more sustainable products, and gaining new accounts. However, these efforts were more than offset by continued weak market demand. We look for vehicle care to continue to outperform its markets in the fourth quarter, but sales are expected to fall short of last year's level.

Sales for US other services were flat in the third quarter. Pest elimination sales were also flat, as gains in fast food, retail grocery stores and health care, and food and beverage plants were offset by slow conditions in other major end markets. We continue to develop new product and program solutions to better serve customer needs in the current environment. Our new bed bug program, that reduces room downtime for treatment cycles, and thereby helps to lower customers' total costs, is doing well, and we are broadening the market applications for our bed bug program. We also continue to work on additional new solutions that fit our sustainability profiles and goals. We expect these efforts, along with others, to help offset soft markets, and yield somewhat better fourth quarter sales.

GCS sales increased 1% in the quarter. Once again, profitability improved significantly over last year, and the prior quarter. New account wins offset the impact of slow food service business conditions. GCS profitability continued to improve as productivity and efficiency gains were realized throughout the business. We remain focused on developing chain account relationships, and driving sales through their regional and franchisee organizations. We have used some of the improvement in profitability to invest in regional sales force additions to deliver current and future growth. As a result, we expect GCS to show continued sales growth in the fourth quarter.

Measured in fixed currencies, international sales increased 3%. Europe, Middle East and Africa sales were flat in the third quarter at fixed currency rates. Adjusted for divestiture, sales would have increased 1%. Europe's institutional third quarter sales declined slightly. New account gains were offset by soft market conditions in central and southern Europe.

Food and beverage sales improved. The business continues to focus on winning new customers by emphasizing the cost savings benefits of our leading products like DryExx, Inspexx and Water Care. Textile care sales showed modest growth, as new accounts offset reduced central laundry volumes. Europe's healthcare sales declined, as gains in equipment, drapes, and strength in eastern Europe did not offset last year's surge in H1N1-related sales. Pest Europe sales increased nicely, as we continue to improve operations and profitability.

We are starting to work with Europe's new business information systems platform to unlock costs and complexity in our operations to drive faster sales growth and higher margins. We continue to expect significant improvement starting next year, as the range of growth and profitability actions we will implement begin to take effect. We look for Europe's fourth quarter fixed currency sales to be similar to last year.

Asia-Pacific sales grew 8% in fixed currencies, as the region shows good recovery from last year's low levels of business travel and tourism. Institutional sales were solid, as occupancy levels improve, and economies recover. Food and beverage sales showed strong growth. Both the beverage and brewing sectors continue to increase, benefiting from improved product penetration and account gains.

Last month, we announced that we agreed to acquire Cleantec. The business provides products, sales and service for the food and beverage, food service, and textile care industries in Australia and New Zealand. They have sales of about $55 million US dollars. We are awaiting clearance from the Australian antitrust authorities, and expect to close before year end. Cleantec will help us expand our Australian customer base, improve our positions in food and beverage processing, hospitality and textile care, and create opportunities to offer additional services to customers. Looking ahead, Asia-Pacific expects continued good sales growth in the fourth quarter, reflecting recent account wins and stabilization of the markets.

Third quarter sales for Ecolab's Canadian operations grew 5% when compared to last year at fixed currency rates. Food and beverage in Kay reported strong growth. Institutional, vehicle care and pest also reported good sales gains in the quarter. We expect the solid sales trends to continue in the fourth quarter.

Latin America reported a strong sales gain, rising 7% in fixed currencies, as all divisions in that region increased. Institutional growth was driven by new accounts, increased product penetration, and continued success with the global and regional accounts. Food and beverage sales reflected good demand in beverage and brewing markets, as well as the benefits of new accounts. Overall, we expect attractive growth trends to continue in Latin America with another solid gain in the fourth quarter.

Turning to margins on the income statement and slide seven of our presentation, third quarter gross margins continued their recovery, increasing 50 basis points to 51.1%. The increase was driven by volume gains and cost savings actions. SG&A expenses represented 35.8% of sales, the same ratio as last year. Leverage from sales gains and cost savings actions offset continued investments in our business, people and systems, and other cost increases.

Operating income for Ecolab's US cleaning and sanitizing segment increased 5%. Margins expanded by 30 basis points. The increase was primarily driven by volume gains. Operating income for US other services grew 7%. Margins expanded by 120 basis points over last year, driven by pricing and cost savings actions. International fixed currency operating income increased 1% versus last year, while margins were off 20 basis points. Volume gains, pricing, favorable delivered product costs, and cost savings efforts were more than offset by investments, including European systems expense, as well as Asia-Pacific and Latin America investments in personnel.

The corporate segment and tax rate are discussed in the press release. We repurchased 2.9 million shares during the third quarter. The net of this performance is that Ecolab's reported third quarter diluted earnings per share was $0.74, compared with $0.60 reported a year ago. When adjusted for special gains and charges, and discreet tax items in both years, adjusted earnings increased 8% to $0.66, when compared with $0.61 earned a year ago.

Turning to slide eight, Ecolab's balance sheet and cash flow remain strong. Total debt to total capital was 33% at September 30, compared with 33% reported a year ago. Our net debt was 28%.

Looking ahead, we expect continued mixed end market performance in the fourth quarter, but with still gradually improving trends. As outlined in slide nine, we 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 continue to focus our investments in growth businesses like healthcare, China and Latin America, as well as new products and acquisitions to accelerate the top line. We will also expand our sales and service force to invest in field technology, to make them more productive. We expect these actions to yield sequential organic sales improvement in the fourth quarter.

The press release includes other line item forecasts of our fourth quarter P&L. Net, we expect adjusted diluted earnings per share in the fourth quarter, excluding special gains and charges, and discreet tax items, to increase 7% to 11% to the $0.59 to $0.61 range, compared with the adjusted earnings per share of $0.55 earned a year ago. This would yield full-year EPS growth of 12% to 13%, to a $2.22 to $2.24 range.

In summary, as noted in slide 10, we had a solid third quarter performance while still investing in our future. We look for a strong fourth quarter gain, and expect to deliver double-digit EPS growth once again for the full year 2010, representing our ninth consecutive year of adjusted EPS growth, as we continue to outperform mixed or gradual improving end markets.

On a closing note, we thought you might be interested in some recent recognition we received. We placed 26th on Newsweek's greenest companies in America list, that was in last week's issue. And during the quarter, our China business was named one of the top 21 companies for driving sustainability in China, as well as one of the best human resource management companies in that country. It was great recognition for our global team and the work they do.

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

Thank you. (Operator Instructions). Our first question is from PJ Juvekar of Citibank. Your line is now open.

Hi, good afternoon. Despite some recovery in the end markets like hotel occupancy rates and improved air traffic, your top line is still struggling and still quite weak. I was just wondering if you can explain the difference between the end market growth and your top line growth.

Yes, PJ, Doug. I would say, one, we've talked about expectations around a 1 point improvement per quarter sequentially. And that's what we've been seeing. If you talk lodging, it's 10% of our overall sales. We have certainly seen a pick up in our sales to lodging.

But just as when lodging was troubled, we were not saying you should be worried about our overall enterprise, I would say lodging alone is not going to move the top line substantially. However, lodging is performing well, and overall our business continued to pick up momentum. And the number one focus this year was to make sure that we grow volume momentum, which is precisely what we're doing right now. And we are in a position to leave the year in a very good position in terms of volume growth momentum.

And Doug, more broadly, you think the time has come to shift Ecolab business model more towards emerging markets where sanitation is likely to become even more important? The emerging markets I think are about 15% of your sales. You see an opportunity there, or you think still it's not quite right for your products?

Well, I think the question is, I agree with the premise that emerging markets, sanitation levels, expectations, and spending in this area is going to continue to increase. And that's exactly what we're seeing. So our expectation is that the emerging markets continue to play an increasingly large role in our growth story. I think you're seeing that now, they are outgrowing the rest of the world, and we would expect that to continue for a long time. And I would also say, I think this thing plays out over a fairly long period of time.

Great. Thank you.

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

Hi, guys. I missed the first couple of minutes of the call, so sorry if I ask about something you've already gone over. But it looks like, I think it was the third or fourth quarter in a row where you've done some share repurchases. Should we read anything into that about, you're feeling like you needed to do that to get to the full-year guidance because something had changed in the business, or maybe separately, it's just about the availability of attractive acquisition opportunity?

Gary, Doug. I guess how we've talked about this is, M&A is our number one priority for cash. And we've just announced that we've made two acquisitions. Certainly prior to that announcement, we hadn't made one in quite a while. And so we said our secondary use of cash is to use it in share buyback. So, I think what you've seen is exactly that being playing out.

The truth of the matter is, we generate excellent cash flow, and I don't believe we're going to be in a position where it's absolutely binary, one or the other. We like our M&A portfolio. We've made two acquisitions. We have a very robust pipeline, and expect to continue to be making acquisitions moving forward. We will also continue in our model, to continue to do share repurchase, as well.

Okay. And then just a follow up question on the US cleaning margins. A bit less momentum in terms of the year-to-year gain there. How should we think about that? I know the thought process has been that over time, particularly with a volume growth environment, that there remains some upside in that. Should we think about, without a much more significant revenue acceleration, that it's going to be somewhat difficult over the next couple of quarters to do much more than you did this quarter, or is there anything else going on? Thanks.

Yes. I guess I would start by saying that our expectation is gross margins continue to improve, in virtually all regions. The most significant improvement we will see in Europe over the next several years, as we fully deploy EBS and the benefits that it's going to drive for us. Certainly, ultimately if we don't drive volume, you're going to stall in your capabilities to drive margin. However, as I mentioned earlier, we are accelerating volume at this point in time, and feel very confident we can continue to do that. Our expectation is margins continue to improve.

Okay. Thank you.

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

Good morning, or good afternoon. As you look at sort of the success that you've had with Apex, which is a much more dramatic -- much faster rollout than most other new products you've launched, are there any other applications which you can see also getting to this similar sales run rate, three to four years into the launch?

Yes, Laurence, Doug. As we've talked in previous calls, we have a great innovation pipeline. You're right, we have a strong warewashing portfolio highlighted by Apex, but there are other initiatives as well. We have a new breakthrough laundry program coming out, which is very much following the principles that Apex followed. We think, frankly, it's even stronger because we learned from Apex.

In F&B we have CIP and loop programs going, more new healthcare launches underway, and also expanding solids in quick serve and food retail. So, we like our innovation pipeline, and it's one of the reasons that we're seeing volume growth even though, with the exception of lodging, the markets really haven't, if you will, flipped to positive for us, so we are still doing this in what I will call a lousy environment. But we have a very terrific innovation pipeline.

Laurence, as we look down that pipeline, they are products that are all focused on reducing costs for customers, improving value relationship for them, better results at lower use costs, labor costs. So, we're taking some of the lessons from Apex, and bringing those to our other product sets, as well.

Now does that -- also, is that leading to a change in how customers view your product solution compared to your competitors? Or are you finding that some competitors are still able to come in with the price point competition that they've always done?

Well, Laurence, there's several types of buyers out there. I would say, I think customers have always expected us to have leading innovation, and we continue to do that. That bar is always raised. But certainly, our goal is to continue to create distance between ourselves and regional competitors, and even other global competitors. That's really what we strive to do.

Thank you.

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

Good afternoon. Just a couple of quick questions. The margins in the US other category look like they've kind of taken a noticeable turn up. I'm wondering if this is the GCS business finally hitting profitability yet, and how should we think about that business in terms of margins going forward here?

Yes, it was principally GCS. GCS lost about $400,000 in that quarter versus, I think, $1.6 million the prior year. So, it was a substantial improvement. And as I've mentioned before, GCS has been on the positive side of adding cash to the Company now for a couple of years. So, it's certainly continuing to improve. I guess our expectation for GCS, as we mentioned, is we are really focused on driving GCS top line. As we continue to grow the top line, GCS will flip to profit, even fully loaded with corporate overhead and everything else, which is the number I gave you.

Okay, fair enough. Just a follow up question. On the healthcare business, I think you would -- Mike had indicated that you were seeing I guess a reduction in procedures being done. I mean, given that health care doesn't normally seem to be overly cyclical, I'm wondering what's driving that, or if there's certain end markets that you're exposed to, whether it's the plastic surgery side or what have you, that we should be thinking about in terms of how that business moves kind of over the long term.

Yes. I guess I would consider this year a strange year for healthcare, broadly. Particularly in the US, right? There's been a lot going on as a result of the legislation, and other issues. And so we really don't view this as any kind of long-term trend.

But during this year, and I think there's plenty of outside third party facts, other medical companies who have been reporting, the number of procedures overall is down this year. Doctor visits are down. A number of this has to do with people rolling off of medical coverage as unemployment has been sustained for a long period of time. However, what we really look at health care, and we like our business to launch as we have are doing well. This business is improving. If you start looking underneath, and get out of the H1N1 noise, which is in the base from last year, we're quite confident that this business is going to start performing like we expect it to, which is high single digit to double digit organic growth in the near future.

Okay. Great. One last question. With regard -- what we're seeing across a lot of the chemical space seems to be a lot of raw material prices starting to move higher. And we've seen caustic moving, as well as some of the plastics. I'm wondering if you're starting to see some raw material pressures at all, and what we should be thinking for in terms of pricing. I know it was flat this past quarter, but how should we think about that going forward?

Yes. I would say what's happened this year in raw materials is pretty much the story that we talked about beginning in the first quarter, which was you would see significant year-on-year improvement in the first half, and it would be relatively flat in the second half. And so that story has panned out. I would say certainly there is some pressure. I would say it is nowhere near the type of inflationary pressure we saw in 2006, 2007, 2008. I don't think it's going to be a headline story for us. It's certainly not going to be as favorable as it was for the second half of 2009 and the first half of 2010. But I don't think it's going to be our headline story.

Okay. Great. Thanks for the color.

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

Hello, everyone.

Hi, Nate.

Hi, Doug, I was wondering if you could talk a little bit more about the investment. I know that you talked a little bit about that last quarter in terms of stepping up the opportunity, particularly with the headcount in Asia and Latin America. But I was wondering if you could help us think about the balance in terms of the international margins rights now, in terms of what's still coming from the training, et cetera, going on in Europe versus the new headcount additions and other developing areas.

Well, if you look at our international margin, certainly Europe is by far the biggest piece of the international business, and has the most influence. I would say what we're seeing in Europe is, what we would expect is sequentially improvement in our profitability as we start transitioning from rolling out EBS, to stabilizing EBS, to leveraging EBS. And so we completed the rollout of EBS in the second quarter. We have now the full cost of the amortization in our mix. Plus, some stabilization costs early in the third quarter, which are starting to subside. We expect to continue to see improvement in profitability to a relative in the fourth quarter on, because we are now fully on leveraging EBS. That is going to be the principal story when we look at international margins.

Now aside from that, in terms of Asia-Pacific and Latin America, as we've mentioned, that is principally a volume story. We will continue to invest. We're investing in headcount. We want to invest -- we're making outside investments in the emerging markets that we think have the best near and long-term opportunities. We're going to be building a new plant, are adding our third plant in China, which we're underway with. We've added a number of headcount, key resources in these regions. All of which we like very much these investments, and believe they're going to bear fruit as early as 2011. But that's what's going on in those. The principal story is going to be Europe for the next few years.

So, I would assume that, as that being the bigger part of the mix, that overshadows in terms of the investment on the other side of the ocean there, in terms of the opportunity for those margins to continue to creep up then?

Yes. I guess what I would expect is, we think margins in all regions are going to continue to grow. But they're going to grow at a much more significant rate in Europe because the low level we're at, and the EBS story, which was, they're artificially low right now as we've layered on a second, if you will, operating system on top of the old system, and we haven't dismantled the old system. We are starting that process right now. So, those margins are going to be moving up faster than the other regions.

That's very helpful. Thanks. Then my second kind of question is along with pest, was wondering if you could just give a little bit more detail in terms of where that business is, and where you're looking to take it. Obviously that has continued to be a growth opportunity for you. I know the environment's kind of pushing against you right now. But was wondering if we could get a little bit more detail in terms of where that business is today, and where you're looking to take it.

Yes. The pest business is still a fantastic business. I would break this into two points. Internationally, that business continues to grow. It's accelerating. It's accelerating in Europe, we're improving the profitability there. We have very, very strong momentum.

In the US, which is obviously our largest pest business, we are seeing the underlying trends improve. So, that is account retention, we are starting to get much stronger on new contract growth, what we call one-shot or one-time attempts, particularly bed bugs would be an obvious one that you would look at. But there is certainly more in that category than simply bed bugs. All those signs are improving. So, we expect this business to turn to top line growth, starting early next year, and expect it to grow throughout 2011 in all regions.

Great. Thank you very much.

Our next question is from Edward Yang of Oppenheimer. Your line is open.

Good afternoon. My question is delving a little bit more into pricing. Doug, as your volumes have moved up, pricing on a year-over-year basis has been steadily ticking down, and it was up 0% this quarter. I would think that there's a natural level price increase built into your business model as you introduce new products like Apex, which are priced higher than the traditional warewashing product, your prices should go up. So, are there any areas where you've been cutting price, and areas where you're raising price? Would like to get some better granularity there.

Yes. Well, a couple of things. One, prices were up this year versus last year. But you're right, it was not a significant rate. It was about 30 basis points. Now, importantly, that does not include any technology upgrade. We have that mix, and that would be in margin.

So, the example you used is we move a client from, say, SolidPower to Apex, and Apex would be priced at a significant premium per pound, that would not be reflected in the pricing number that we give, that would be in the overall margin. And that is historically the number one way that we drive margin. It's not through what I call naked price increase. It's simply moving a $50 box to $51. We will do that, and certainly when we're in inflationary environments, we do more of it than when we're not in inflationary environments.

But the number one drive is the new technology. And as I listed earlier in response to another question, we have a very robust portfolio of new innovation, all of which is at a margin premium versus existing programs.

Okay. That's helpful. And on your earlier comments about some of the commodity chemicals inflation, I agree that it's nowhere near to the extent that we saw a couple of years ago. But there seems to be some echoes of that. If you look at caustic soda prices for example, they look like there's price increases on the table that are up 30% from current prices, similar I think with phosphate and resins. How quickly can you raise prices? I know you don't like to shock the customer, and you like to phase it in over time. But are you starting to think about price increases, and getting ahead of some of these raw material increases?

Well, look, we certainly pay very close attention to raw material pricing, and its projected impact on our business. And we learned a number of important lessons, and persevered in a very inflationary period just in 2006 through 2008. So, the same team is in place. In fact, I would say if it got to that point, which we're not predicting in our business, and we've been through this a number of times, and I think have a good handle on it, but if it did get to that point, we are in much better shape today than we were, say, in 2005 at the beginning of the last ramp-up. Simply because we've changed the way we contract with customers, where we have annual provisions, and much easier way to impact pricing than we did going into the 2006 through 2008 period. So, I think we are in a good position here, should all this pricing manifest itself. We'll see.

And then -- .

Ed, the thing I would add, as you know, we don't buy typically on the spot market. We're buying on contracted. So, we're going to have less volatile raw materials than that. And for example, caustic is on a roller coaster. That can be pretty volatile. But ours are contracted, so it's pretty steady.

Okay. That's great. And maybe just a final question, longer term focus. I know Circle the Customer is such a key element to your business strategy. Can you share some progress in terms of your efforts at cross-selling in terms of how you track those metrics?

And also, as you focus more in the near term in terms of account wins, does that set you back somewhat in terms of how you calculate the number of solutions sold by customer? And in terms of the P&L impact, as you add new customers, are there customer acquisition costs associated with that? And how quickly do those new customers get to the same level of profitability as your underlying base of customers?

Yes, okay, CTC, Circle the Customer, is absolutely a key part of our strategy. As we said, typically during tough environments like we've been in, we shift to a larger emphasis on new customer gains, which is what we've been doing. And when you're successful, as we've been, this ultimately increases the CTC opportunity going forward.

One of your other questions was, do new customers somewhat dilute your average solution sold per customer, and the answer would be yes. Because typically when we bring on a new customer, it is with fewer solutions than we sell to, say, customers who have been with us for five, 10, 15, 20 years, as we build out that set. So, that is a natural outcome as we move forward.

Thank you.

Our next question is from Justin Hawk of Robert W Baird. Your line is open.

Hi, guys. Most of my questions have been answered. I did have one quick question on the share repurchases, just revisiting that. It does look like you're getting somewhat close to the end of your authorization. I think you have about $2.6 million remaining. I guess any thoughts on extending that program into, beyond that? And also in 2011, do you expect your cash uses to be the same, or do you have any incremental costs that are coming on or pension obligations or anything of that nature?

Yes. I think we have still 5 million, 5.5 million shares left in our authorization, is where we are. And so regarding uses of cash for 2011, and pension specifically, we are not obligated to make any pension contributions in 2011 or remainder of 2010. We may choose to do so, but that will be out of choice, and because it's the right use of cash.

In terms of other uses of cash, as I spoke to earlier, it is smart M&A number one, share repurchase would take a back seat to that, but we are a very successful business in terms of generating cash. So, my expectation is you'll see both in 2011.

Great. And then just one more clarification question on 4Q expectations for Europe. I mean, I think you're expecting volume growth to be essentially flat. Raw material costs, obviously, are a headwind now. And your price contribution is lower. Can you clarify, are you expecting margins to improve in Europe year over year in 4Q, or really not until 2011?

The big benefit is going to be in 2011, and I would say the wild card in Q4 right now is relatively new news, but it is baked in our forecast, and all the rest is the strike in France. And France is about 20% of our volume in Europe, and so while we're working to serve customers, you might imagine it's a little more challenged than it is in normal times.

Sure. Great. Thank you very much.

Our next question is from David Ridley-Lane of Bank of America. Your line is open.

Sure. Can you give us a rough idea of the trend in Japanese revenue, and then maybe how Asia-Pacific would look ex-Japan?

Yes, well, Japan has always been the slowest growth origin of our Asia-Pacific market. And so Japan's been growing at low single digits for quite a while. If you exclude it, so I have somebody hurriedly doing the math here, so if you give a minute, we'll come back and give you the number.

Okay. Maybe just one more question. Given the European transition costs falling off here in the fourth quarter, just wondering what are some of the factors that are driving the sequential increase in SG&A in dollar terms and into the fourth quarter?

Could you repeat that, David? Kind of broke up here.

Oh, sure. Just wondering what's driving the sequential increase in SG&A in the fourth quarter, given that some of the European EBS transition costs are falling off?

Typically in fourth quarter, we have some one time costs that flow through SG&A on a lower -- as options expense flows through heavier in the fourth quarter on a lower volume quarter. Almost consider it seasonal.

Okay. All right. Thank you very much.

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

Thank you. Good afternoon, all. I was wondering, since your total revenues were up only 1%, but I understand you also had some good volume improvement, which led to some stronger than I expected margin improvement, did some of the margin improvement come from maybe you slowing down your investments temporarily, given the lack of top line growth?

No, Rosemarie, I would say you have continued impact from a lean six sigma program that's been in place for four years. We have improvements in a number of efficiency ratios, which we believe are sustainable and can continue to be built on. Productivity in the field continues to improve as we roll out field technology. All these things, which are fundamental to our margin, continue to pay dividends for us as we go through.

We continue to have a very sizable investment fund funding the business. We're funding healthcare growth. We're funding water, energy and waste technology in field capability growth. We're funding and looking at a number of M&A opportunities, which now all flow through P&L's at this point in time. We have EBS actually stepping up in cost because it moves from the balance sheet to the P&L when you start amortizing as you fully roll this out. So, I would say if anything, we are fully invested at this point in time and still expanding margin.

Rosemarie, just one technical point. That was 1% was the reported growth. The fixed currency growth was 3%.

Okay, which is still not huge. I would have asked the same question. I mean, if you look at Asia-Pacific, and I understand it is much smaller, but up 8%, 3% is lower than what you normally would expect from Ecolab. I guess that's where -- .

Yes, absolutely. And we said that our expectation is we will get back to 6% to 8% organic growth on a global basis, but it is going to take us a number of quarters. And the expectation would be that we will build sequentially about 1 point of growth per quarter. That's what we've been doing.

The earlier question about what's Asia-Pac look like ex-Japan, its growth is 13%. And that would include obviously Australia and New Zealand, which for us are a pretty large market. And obviously not growing at the same rates as Asia and China.

If I may ask, are we back to me?

Sure, yes.

You said, Doug, that you expected pest to show some growth again in the first quarter of 2011. What is behind that expectation? What are you seeing that's going to be materially different in the first quarter of 2011 than it has been for this year?

We've been in the pest business for a long time, and we have a slew of metrics, which are quite predictive of what's going to happen on top line, as well as margin and other places. And as I mentioned, when we start looking at account retention metrics, new contract volume, and one time sales, or one time event sales, all these areas are showing improvement. So, those things tend to flow through and translate into sales growth, and that's our expectation.

Rosemarie, we've also been targeting some new markets for pest elimination. We've been tailoring programs to better serve our end markets. We've been doing a bunch of stuff on the top line side as well to help drive growth.

Okay. Lastly, if I may, with infestation of bed bugs, are you -- do you think it would make sense to bring your program to the residential market as opposed to just lodging, and I am assuming commercial buildings, or maybe you are not even going there? They are not concentrating in beds.

Yes, Rosemarie, I would say we have a number of innovation activities around bed bugs. They aren't going to go away. And we are looking at what business opportunities this presents for us. At this time, there's been no decision made to move out of our core markets, but we are certainly looking at the opportunities.

Thank you.

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

Good afternoon. A lot of my questions have been answered, but I just want to get back to maybe a little bit more granularity on the pest elimination business. We've seen a little bit of a better result here. We talked about pest elimination being -- if you do a good job and the customer really feels like he can cut it, back on that for a quarter or two or three. Are we still in that frame of mind where the growth now is really coming from new programs and new customers, or are customers returning to more of a scheduled maintenance programs with you in pest elimination?

Yes. I would say we are -- we have moved through, probably the most difficult times for pests are behind us. And so our expectation, Dmitry, is it's going to turn into a more normal environment as we move forward. This isn't going to be a snap-back. This business moves down slowly, and will move back up slowly. So, it's not going to move from one quarter up to plus-10%. It's going to take some time, but we see the underlying metrics are moving us back into the positive territory, and we feel confident that this business is going to continue to improve in following quarters.

You have enough of a critical mass in the US with the acquisitions that you have made previously to build that business, were you really not looking to acquire any white patches on your geographic map. You're really looking -- if you are looking in this business, you're really looking more in Europe and Latin America?

Yes. I would say -- I don't think there's a white spot opportunity or white space opportunity in North America, per se. However, I think as I've indicated broadly on M&A, that bolt-on acquisitions are more attractive to us than they have been in the past given where the market is and everything else. So, we'd be open to smart bolt-on activity, but our white space activity will be in Europe, Asia and Latin America for pest.

Got you. And kind of broader M&A question, beyond pest elimination. Particularly in the US, is this an area where there's still growth through acquisition opportunities, or are you basically going to be looking outside of the US for most of your acquisition dollar spend?

Yes. Well, our first priority is smart acquisition, wherever it is. And beyond that, our priorities remain with healthcare, water and energy and waste technology. It is global expansion of pest, but it also does include bolt-on activity, which could happen both, either in the US like we've just recently done with the Dover acquisition, or outside of the US like Cleantec. And I would expect to see some of both in the future.

Got you. Okay. That's helpful. On healthcare, and particularly in North America and the slowdown that you've seen, even excluding the impact of H1N1, I think you were only talking about maybe 4% growth, if I remember correctly, exclusive of H1N1 impact. Quite a bit slower versus what you've been delivering recently, and what you hope this business can deliver. If this is a slowdown in hospital visits and doctor visits and whatnot, is a function of the healthcare reform that was passed earlier in the year, wouldn't it take a year or more for the market to find its legs, and for the people to learn how to gain the new system and file new forms so they can get reimbursed for what they think they should get reimbursed? In other words, couldn't the healthcare slowdown in the US be a much longer term issue than a quarter or two?

I don't know, Dmitry. Yes, I don't know that many people are forecasting that the new healthcare system is going to reduce costs, right? In fact, it's opening up the system to a wide -- a huge number of new folks coming into the system. And if anything, there is real concern that there's not going to be the capacity or the demand. Not that demand is going to shrink away long term. I think the near-term issues have been somewhat confusion, and also the fact that you have large unemployment and people rolling off. Unemployment is no longer getting worse, and while it's not getting substantially better, we think that impact is going to be in the base as you move forward.

So, our belief is this. Population is aging in this country. Healthcare is going to be under increased demand, not decreased. We don't believe that the new healthcare legislation got after costs in a material way. In fact, it's going to start increasing expectations in the healthcare market that bode well for what we're selling. In terms of having to measure proof performance on infections acquired in hospitals. There's a whole host of things that hospitals are going to be expected to measure, which we anticipate will help drive this business because we'll help them do it.

Our next question is from Jeff Zekauskas of JPMorgan. Your line is now open.

Hi, good afternoon. In the second quarter, your depreciation and amortization charges were $91.8 million. And in the third quarter, they were $81.5 million. How did you do that?

Hi, Dmitry, this is Mike. There's just some differences in -- between quarters in some of the classifications that we have for some of our stuff. And there was some currency. So, it's really nothing much difference between the two.

Principally FX.

So, is the ongoing depreciation number and amortization $81 million or is it $91 million?

The year-to-date average is running around $86 million, $87 million. So, I think that's the number you should look at.

So, did it come out of the amortization total, or did it come out of the depreciation total?

More the depreciation.

I guess secondly, your incremental gross profit margin in the quarter was about 100%. It was about 95%. How did you do that?

Well, I don't think incremental margin would be 95%. We do have a cost of materials.

No, I mean, if you take your sales year over year, and your gross profit year over year, your incremental margin I think was 95%. And you didn't have any pricing. So, is this cost reduction that you -- is that what you accomplished in the quarter? Or is it something else?

Jeff, I'd have to look at the numbers to see where that was coming from. I'm a little surprised at the numbers. I'd want to do a little more research before we answer that one. I mean, we've said that we had some good leverage coming out of our business in terms of the productivity gains we've done, the cost savings we've done, et cetera. But to give you a good answer, I'd want to take a look at what you're looking at.

And the whole volume environment, relatively low volume growth. Those aren't unheard of numbers if you have savings programs across the portfolio. They will swamp small volume.

Okay. Good. Thank you very much.

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

Hi, good afternoon.

Hi, Mike.

I had a question on the F&B business. It sounds like the environment is improving for the Ecovation business. Can you give us an update on how sales for Ecovation have trended this year, and maybe provide a sense of what the backlog or pipeline of new business looks like compared to maybe where it was last year or a couple quarters ago?

Yes. Our Ecovation business was up 35% in Q3. And it's been accelerating, obviously. Our expectation is that it will continue to grow at very significant rates going forward. This is really part of an overall strategy to put together a comprehensive program, Ecovation being one part of it, to help in particular our food and beverage customers deal with what we know is going to be a coming shortage of fresh water, which is going to translate into increased pressure on them, fairly or unfairly.

So, this whole initiative is a very important growth initiative, and is off to, I think, a terrific start. And we have a very, very good long-term game plan to drive growth in this area. And so we're starting to see that. The Ecovation growth is a piece of it, but also just our underlying water care business, when we subtract some exits that we made at the end of last year, is also growing quite nicely.

Then I was also curious on the GCS business, you've been working to get supplier approval from a lot of key chains, sort of a hunting license approach. How is that strategy panning out since you've implemented it?

Yes. We have relationships with a lot of very large customers, and are continuing to grow there. Our growth in the corporate account area has been very strong. What we're starting to see is firming up in what I would call the traditional street business, which is why you're starting to see a little better performance in overall top line.

All right. Last question is on healthcare. Despite the sort of weakish growth or below expectation growth, can you talk a little bit about Encompass, and it sounds like that rollout is going about as planned. Am I hearing that correctly?

Yes, I would say it is. We have four key launches in healthcare right now. Encompass, Protect, we have OptiPro, which is a solids program for central sterile that's also going very well. That one would probably be above expectation. We have a new hand care program as well, which is out there, which is also doing very well, too. So, when you get back to Protect and Encompass, we have about seven sold, and we have 50, if you will, actively and proposals in testing status right now. And we expect to bring a lion's share of those on as well. That is how we expected this to move forward.

All right. Thanks very much.

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

Good afternoon, guys.

Hello, John.

Do you have all the pieces you need for this water, energy and waste strategy, or is that an area that we ought to be looking for more pieces to be added to the Ecolab offering?

I would say we have all the pieces we need to start driving growth right now, which is exactly what we're doing. But as we get into this business, we see additional opportunities, and there are additional technology plays that we think would further strengthen. So, our expectation is, we will have activity in water, energy and waste going forward. But I don't think this is a situation where if we don't get it, we won't be successful, we just believe that that's probably going to be a faster way of moving forward than building it internally. If we need to build it internally, we will.

Thank you.

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

I just wanted to follow up on the growth in Europe, or lack thereof. Your ability to grow in markets regardless, or almost regardless of the external conditions, has been one of the hallmarks of the Company. Yet that has not been the case in Europe. You have the new ERP system in there, you relocated the headquarters. You have a new sales force. Should we at some point, hopefully in 2011, begin to see you grow at faster than the market growth rate, assuming that it's a flat market in Europe? And actually start picking up share at the pace, and as aggressively as you've been able to do it in the US? Or is the, I guess fundamentals in the region are such that you basically are consigned to market growth.

Look, our Europe business is going to be up for the year. But we aren't going to sit here and beat our chests about 1% to 2% growth. I would say we've gotten the 1% to 2%, which is the forecast for the year, in still a pretty sluggish environment in Europe. We firmly believe we will drive this business. We're having a lot of success in Europe in picking up new, large contract business. We know this ultimately translates into top line growth. And our expectation is that Europe, yes, will grow the top line in 2011.

I guess my question is, I understand that there's fundamental reasons why the margins in Europe can never get to the levels or -- I shouldn't say can never, but aren't likely to get to the level you're seeing in the US. I'm trying to understand if there are fundamental regional reasons why the top line growth cannot approach what you're delivering in the US, business for business.

I don't think it's exactly the same. I mean, certainly I would say the European competitive environment is challenging. But with that said, there's no reason that Europe can't recognize, say, 5% to 6% growth if our target globally is 6% to 8%. You're going to get outsized growth from emerging markets. But we believe that is absolutely achievable. We've done that in Europe in the past.

And you think you have everything in place right now that you need to be able to get that growth at some point in the near to mid term future?

Everything is a pretty broad statement. I would say we have the sales talent. We have the organization in place, and we have the technology. Some of the technology has been on hold in Europe as we've rolled out EBS because you have to lock down new product introductions. And so we're starting to roll out our best in class technology in institutional, in F&B and these other places. So, we know that bodes well in terms of accelerating European growth going forward.

And also as part of the SAP system we did, Dmitry, we have a number of sales and sales productivity tools that we'll be developing, that will be instrumental to us achieving better growth in Europe. So, in one respect, yes, we have the SAP system. We still need to develop those tools, and we'll get those in place.

Okay, that's good. One final question. You have to go back to second half of 2007 to see positive growth in vehicle care in -- seems like regardless of the market over the last 2.5 years. Is this business a candidate for reconsideration as far as how attractive it is to be part of your portfolio, or is there something that you're doing internally that we're not seeing, that's going to change the fortunes of this business? Or is there something going on in the markets that we're not aware of that is going to change the fortunes of this business?

Here's what I would say. One, you're right. We do point this out internally, that sales growth in vehicle care has not been strong. It has certainly been one of the most adversely impacted businesses we have, in terms of economic impact. With that said, we're going to make more money this year than we did last year in vehicle care. And we've done a very strong job at improving margins.

So, vehicle care is, I don't know, not even 0.5% of sales, 1% of sales. I mean, it's not a huge piece of it. This business provides a number of advantages for us inside the Company. So we're happy to own the vehicle care business.

So, for right now we should continue to look at this as basically a loss leader for you?

It's not a -- it makes money. I mean, so this isn't a cash drag, and it's a business that returns capital and everything else. It's not a growth engine. But it would be hard to argue that a business that's less than 1% is going to drag the overall growth rate down.

I'm not arguing that. I'm just looking at, you have been very good in the past in weeding out businesses that don't quite work out the way you thought they would. I'm just wondering if vehicle care is a core part of your portfolio, or something that you've tried that if it doesn't work out you may reconsider.

Yes. I would say it's -- we continue to drive margin improvement. We do believe the top line turns around --.

Okay.

How clean's your car?

Mine -- if the wife hasn't washed it, not very.

I'm going to wrap up with this. We are in position, and I'm very proud of our team, to deliver a very successful 2010. Our forecast is 12% to 13% EPS growth for the year. We're building momentum where it counts most. We're accelerating volume. We have strong net new business results in all regions. We've shifted from rollout to leverage in Europe after a successful, but long and very difficult SAP rollout. Our M&A pipeline remains very robust, even after announcing our Dover and Cleantec acquisitions, and this is all done in frankly, still a lousy market. So, we feel good about what we've done this year, and most importantly how we've set the business up for the future.

So, we like our position, we'll continue to focus on the things that matter, which is building the top line, leveraging it successfully, and making sure we do smart things for not only the near term, but for the future. We appreciate your time today. Thanks for your interest. We'll talk to you soon.

Thank you. This concludes today's presentation. You may disconnect at this time.