藝康 (ECL) 2010 Q4 法說會逐字稿

Welcome to the Ecolab fourth 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, Senior Vice President, External Relations. Sir, you may begin.

Thank you, hello everyone, and welcome to Ecolab's fourth quarter conference call. With me today is Doug Baker, Ecolab's Chairman, President and CEO. A copy of our earnings release and the accompanying 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 2 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 and our fourth quarter earnings release and in slide 2. We also refer you to the supplemental diluted earnings per share information that is also in the release.

Starting with slide 3, we delivered solid earnings growth in the fourth quarter despite mixed conditions in our end markets, as double digit earnings gains in our US services and international segments more than offset what we believe were temporary shifts in US cleaning and sanitizing. We announced plans for a restructuring of Europe to help accelerate the transformation of that business to a higher growth and more profitable entity following implementation of our new systems in that region. Looking ahead, we expect to continue outperforming our gradually improving markets with accelerating quarterly earnings gains as better sales growth, pricing and innovation, and margin leverage work to deliver double digit adjusted EPS growth once again in 2011. Further, we believe these continued improving business trends, along with accelerating benefits from our Europe transformation, will lead to better EPS growth in the years ahead.

Moving to some highlights from the quarter as shown on slide 4 and discussed in our press release, reported fourth quarter earnings per share were up 17% to $0.56. On the adjusted basis, excluding special gains and charges and discrete tax items from both years, fourth quarter 2010 earnings per share increased 9% to $0.60. The adjusted earnings per share growth was driven by better volume from new products, new account gains and cost savings actions which more than offset higher operating costs and continued investments in our business. Lower taxes and share count also benefited earnings. We enjoyed continued good growth in Asia Pacific and Latin America. In the US, we benefited from improved momentum in our healthcare, pest elimination, GCS and vehicle care divisions and saw continued good results from food and beverage. Restaurants were better, but remain slow in the US and Europe.

Slide 5 clearly shows the divergence and improvement we experienced during 2010 in our end markets, as well as the balance they provided. All areas improved from the first half to the second. Our sales to US restaurants rose, outperforming the generally weak industry conditions. Overall, Europe sales also got better during the year, and the rest of our businesses showed good growth throughout 2010. We think these trends will continue and that we will see further improvement in all categories in 2011. We also announced that as part of our comprehensive plan to transform our Europe business, we are developing plans for an estimated $150 million restructuring of our European operations. The restructuring is expected to involve the reduction of approximately 900 positions, a significant realignment of our supply chain including repositioning of our product and warehouse networks, as well as business simplification and a broad number of other actions to make Europe a more efficient, more competitive and higher growth business. The restructuring should yield more than $120 million in annual savings when fully completed over the next 3 years and should accelerate the pace of improvement in Europe sales and profits.

Looking to 2011, our end markets are improving. Asia Pacific and Latin America continue to see good growth across all market segments. Global lodging room demand continues to show good gains. Food and beverage and healthcare are showing steady progress worldwide, and our US and European food service markets remain soft, but have shown modest improvement from prior periods. We continue to be aggressive, focusing on accelerating our top line growth as we emphasize our innovative product and service strengths to help drive increased market share 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 remain focused on cost savings, emphasizing productivity and efficiency improvements to help increase margins, and we are underway with a range of actions to improve growth and profitability in our Europe business where we expect significant margin improvement in 2011 and for the next several years.

Looking ahead, we expect adjusted quarterly earnings to show an accelerating pattern through 2011 as the impact of higher raw materials lessens and as benefits of pricing and our restructuring efforts accelerate. We look for first quarter adjusted EPS in the $0.42 to $0.45 range compared with adjusted EPS of $0.41 in the first quarter 2010. First quarter 2011 adjusted earnings will be impacted by the recent run up in raw material costs as well as $0.01 costs from Europe transformation activities. Adjusted for the Europe transformation expenses, first quarter 2011 earnings per share are expected to increase 5% to 12%. We look for the remaining 2011 quarters to show increasingly better gains as we expect to achieve yet another year of double digit EPS growth in 2011. We look for adjusted EPS to be in the range of $2.47 to $2.53 per share, showing an 11% to 13% gain over last year. That would represent the ninth year in the last 10 of adjusted double digit EPS growth for Ecolab.

In summary we expect 2011 to reflect a strengthening performance by Ecolab as we show accelerating earnings to once again deliver attractive growth and show the returns and as we set the stage for improved results in the years ahead. Ecolab's reported consolidated sales for the fourth quarter increased 1%. Looking at the components, bottom end mix increased 2%, pricing was positive, but not significant, and currency decreased sales by 1%. Acquisitions were negligible.

Slide 6 includes sales growth by segment and division. Sales for the US cleaning and sanitizing operations rose 1%. Adjusted for an acquisition, sales declined 1%. Institutional's underlying sales improved in the fourth quarter, though reported results reflected the impact of distributer inventory changes. Institutional's reported fourth quarter sales declined 2%. As was discussed in last quarter's call, higher sales through distributors and the new product and program pipeline building that occurred in the third quarter reversed in the fourth quarter and hurt the sales comparison to last year.

In addition, we saw a decrease in distributer inventories during the quarter. Nonetheless, total shipments, meaning direct plus distributer shipments to our end use customers, continued their sequential improvement and outperformed the mixed market trends which showed continued decline in full service restaurant foot traffic and strengthening lodging room demand. We also saw a good increase in new account sales as we benefited from targeting new accounts with additional and redeployed salespeople and effective programs that deliver improved value and lower total costs for customers. We expect continued progress in the first quarter as these growth drivers enable institutional to show sales gains in the low single digits and better gains for the balance of the year.

Today's fourth quarter sales were flat, and strong growth from food retail was offset by lower orders in the quarter from quick service in comparison to a strong period last year. We expect continued good new account growth in food retail along with better quick service sales to drive improved gains in K's first quarter.

Reported sales for textile care increased 72%. Adjusted for the Dover acquisition, sales were up 5%. Customer gains, new program launches and additional sales within existing customers more than offset continued challenging industry conditions. The Dover acquisition is going well as the added sales and service team, strong customer relationships and innovative monitoring and technology and products add scale and growth to our textile care business. While textile industry conditions remain difficult, we look for better sales from our strengthened textile care business in the first quarter.

Healthcare sales increased 1% over the first quarter 2009. Excluding the H1N1 impact from both periods, sales would have increased by approximately 6%. Being equipment drapes, hand hygiene, instrument reprocessing and environmental hygiene continued to more than offset comparison to the prior year spike in the band due to H1N1 fears. During the fourth quarter, we continued to build on our expanded product portfolio. Our new line of specialty patient drapes for robotic procedures and Viracept, the first non-bleach, EPA approved, ready to use disinfectant that kills C-Diff spores are doing well, as are the new hand care dispenser platform and the Active Pro sanitizer line for Central Sterile. Looking ahead, first quarter sales are expected to show improved sales gain.

Food and Beverage sales grew 4%. Sales increased in almost all segments as proper account wins and product penetration offset soft results in meat and poultry. Food and beverage will continue to focus on new account acquisition, pricing and better product penetration to yield better growth in the first quarter.

Vehicle care sales increased 2%. The division continues focusing on new products and new accounts. Vehicle care once again outperformed its markets offsetting mixed end market conditions with growth lead by [Invey] and auto dealership volume. We look for vehicle care to continue showing year-over-year sales growth in the first quarter.

Sales for US other services rose 2% in the fourth quarter. Pest elimination sales trends improved slightly, and sales were flat. Gains in fast food, retail grocery stores, healthcare and food and beverage plants were offset by slow conditions and other major end markets.

We continue to develop new product and program solutions to better serve customer needs in the current environment. For example, we launched Guardian Plus, our new program for full service restaurants that provides expanded coverage for the most common pests through an all-inclusive 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 sales improvement in 2011.

GCS sales increased 6% in the quarter. Once again, profitability improved significantly over last year. New account wins helped drive the sales gain. GCS profitability also 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 franchise organizations. We expect GCS to show continued sales growth in the first quarter and for the full year 2011.

Measuring fixed currencies, international sales increased 3%. Europe, Middle East and Africa sales were up 2% in the fourth quarter at fixed currency rates. Europe's institutionals division fourth quarter sales were flat. Our sales teams targeted new business gains with regional and local customers. These efforts were leveraged by new products that offer customers superior results, cost savings and better efficiency and help to offset soft food service environment.

Food and beverage sales improved. The business continues to focus on winning new customers by emphasizing cost savings benefits of our leading products like inspects and water care.

Textile care sales were off in a continued weak environment. While Europe's healthcare sales benefited from higher shipments of infection prevention products. Test Europe sales increased as we continue to improve operations. Looking ahead, we expect Europe's first quarter of fixed currency sales to be similar to last year. Asia Pacific sales grew 6% in fixed currencies as the region shows a continued 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.

The Cleantec acquisition is doing well. Integration efforts are going smoothly, and we remain optimistic regarding Cleantec's benefits to expand our customer base, improve our business position and provide additional services and coverage to our customers. Looking ahead, Asia Pacific expects continued good sales growth in the first quarter, though there will be some negative impact on growth from the Australian flooding.

Fourth quarter sales for Ecolab's Canadian operations grew 3% at fixed currency rates. Food and beverage and pest reported strong growth. Institutional, vehicle care and K also reported good sales gains. We expect solid sales trends to continue in the first quarter.

Latin America reported strong sales gains, rising 9% 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. Overall, we expect attractive growth trends to continue in Latin America with another solid gain in the first quarter.

Turning to margins on the income statement and slide 7 of our presentation, fourth quarter gross margins continued their recovery, increasing 20 basis points to 50.3%. The increase benefited from volume gains and cost savings actions which more than offset unfavorable business mix. SG&A expenses represented 36.8% of sales, 10 basis points below last year. Leverage from sales gains and cost savings actions more than offset continued investments in our business, people and systems and other cost increases.

Operating income for Ecolab's US cleaning and sanitizing segment decreased 10%. The decrease is primarily driven by inventory changes that negatively impact the institutional business, a less profitable mix of business in the quarter, higher delivered product costs and a write down of a customer receivable. Operating income for US other services grew 17%. Margins expanded by 220 basis points over last year driven by pricing and cost savings actions.

International fixed currency operating income increased 13% versus last year while margins expanded 90 basis points. Volume gains, favorable delivered product costs, favorable customer rebate adjustments and cost savings and efficiency efforts more than offset higher costs from Europe systems and pensions.

Corporate segment and tax rate are discussed in the press release. No shares were repurchased during the fourth quarter. The net performance that Ecolab reported fourth quarter diluted earnings per share of $0.56 compared with $0.48 reported a year ago. While adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 9% to $0.60 when compared with $0.55 earned a year earlier.

Turning to slide 8, Ecolab's balance sheet and cash flow remain strong. Total debt to total capital was 28% at December 31 compared with 33% reported a year ago. Our net debt was 20%. Cash was $242 million, higher than normal for us, but lower debt levels and higher cash at year-end reflect anticipation of the purchase of Cleantec and OR Solutions, $100 million contribution to the US pension plan in early January and the retirement of $150 million of maturing debt in February. Our current total debt to total capital is approximately 34% with net debt about 32%.

That's a review of 2010's fourth quarter. With the year now reported, we thought it would be worthwhile to look at a longer term perspective on Ecolab's performance as shown in slide 9. While we have gone through a pretty turbulent period over the last five years, Ecolab has performed well, showing good sales gains, 13% compound earnings growth and 500 basis point improvement in our return on capital. It's a performance we're quite proud of given that rough environment, but it's also a record we're determined to improve upon. And we believe we will. We are well positioned for the next five years. As shown on slide 10, we expect continued recovery in all of our global end markets. We are seeing our investments in growth areas deliver with double digit growth from emerging markets and water, energy and waste management. And after an unusual year, healthcare should be back on a strong growth track.

We have seen increased momentum in the acquisition front, and Europe is ready to deliver improved growth.

A key part of our growth plans for the next several years will be Europe. As mentioned in our opening comments and included on slide 11, following the implementation of our systems in Europe, we're developing plans for the transformation of our European operations. This plan is designed to sharpen our Europe business competitiveness, improve efficiency and effectiveness and accelerate growth and profitability. As part of this larger plan, we will undertake a restructuring to accelerate the benefits of these actions. These activities will likely include those highlighted on slide 12 and will leverage the many opportunities across our supply chain, G & A and within our divisions. We will be working jointly with our various works councils in Europe to develop these plans.

Expected results from the restructuring and our other actions are summarized on slide 13 and should begin to show up in the second half of 2011 and increase over the next several years to more than $120 million in annualized savings when completed. Net, we expect a restructuring will accelerate our Europe margin improvement, increasing operating income margins by approximately 100 basis points in 2011 and more than double that in each of 2012 and 2013.

Turning to our plans for 2011 and as detailed in slide 14, we will continue to take aggressive actions to drive both our top and bottom lines, expanding market share and customer penetration, using differentiated new products and leveraging our investments in our emerging markets and in growth businesses like healthcare and water energy and waste management. We will use targeted pricing and innovation to benefit margins and offset raw material cost increases. Further, acquisitions will be a contributor to 2011 earnings growth, but clearly, this will also be a year where we expect to see margin development from Europe as a significant driver for Ecolab earnings.

Slide 15 shows an EPS bridge for the first quarter and the full year 2011 that details our outlook. We expect much stronger top line growth in 2011, and we see it improving throughout the year. Delivered product cost is expected to be a headwind in 2011, though with a lessening comparative impact in the second half. We will also continue to make substantially higher investments for future growth, including sales and service headcount, customer and field technology and new products and program development, significantly ramping up these investments through the year. We will see costs in the first quarter from our actions to transform Europe, as well as from acquisitions to be split to EPS positives as we move to the second half.

Looking at the first quarter 2011, we expect adjusted diluted earnings per share, excluding special gains and charges and discrete tax items in the $0.42 to $0.45 range compared with adjusted earnings per share of $0.41 earned a year ago. However, excluding the transformation cost impact, first quarter EPS should show solid gain of 5% to 12%, despite the raw material impacts and our growth investments. We look for full year 2011 earnings per share to increase 11% to 13% to the $2.47 to $2.53 range as quarterly earnings show accelerating gains driven by improving sales volume, higher pricing, cost savings, acquisitions and the actions we are taking to improve Europe profits.

In summary as noted on slide 16, we delivered on our forecast in the fourth quarter while still investing in our future. We look for the first quarter to show a good operating profit growth with the following quarterly earnings comparisons accelerating through the year. We expect 2011 to outperform mixed, though improving, end markets and deliver double digit EPS growth, representing our ninth year of adjusted EPS growth of the last 10 years. And we expect the investments and actions we are taking now will yield better sales and EPS growth in 2012 and 2013. And now, here is Doug Baker with some closing comments.

Thank you, Mike. Look, I want to do a couple things. One, Mike has run through our fourth quarter and outlook. I want to take a moment to share my thoughts about the year completed, 2010, and importantly, 2011, and also the actions that were taken in Europe. First, we completed what we regard as another successful year in 2010. And while it wasn't perfect, the fundamentals, I'd say most importantly improved throughout the year and leave us with very solid momentum moving into 2011.

There were a number of highlights in 2010. We had an excellent new innovation portfolio launched. We had great success selling large corporate accounts in our institutional, K, food retail, and F&B businesses. We continued very good progress in our growth initiatives, emerging markets performed very well. Our water, energy and waste business continued to gain traction and also had very good results, and our healthcare business is moving from the H1N1 shadow and now puts that behind them as it enters 2011. Also, our core businesses had very solid performances too. Institutional finished the year with a record number of food service and hospitality accounts, i.e., it continued to add new customers in an environment where accounts were being taken away. They also built solid underlying momentum. F&B had an excellent year, very strong results and entered 2011 with very strong momentum. K building international momentum, and the FRS business continues to perform exceptionally. And importantly, Europe transitioned from systems implementation to leverage, which obviously we talk about in our earnings release and we'll talk more about today.

So, you saw in Europe that we saw daylight in leverage in Q4, which is what we forecasted first half of last year, and so for the first time Q4, operating income margin was ahead of previous years. And obviously, we expect that to accelerate not only in 2011, but in 2012 & 2013 as Mike just talked about. So, we see big improvements ahead.

So, to 2011. I would really point to, there's a few key points. We think we entered the year with strong momentum. We've got recovering markets. The growth investments that we've been making are paying off. Emerging markets are doing quite well. Healthcare, as I mentioned, is coming away -- moving away from the H1N1 shadow, and our water, energy and waste business is doing very well. We have M&A momentum and closed out a number of businesses. And the Europe systems are in place and now in a position to be leveraged. So we're quite excited about that, not only for what it means for 2011, but what it means for 2012 and beyond. So, we like where we are. We still have a huge sales opportunity. We've got significant leverage opportunities. We've got a great track record of performance, and we plan to maintain it moving forward. So, as Mike says, we're very proud of the last five years and looking forward to even better five years moving forward. So, with that, I'll turn it back to Mike for Q&A.

Thanks, Doug. Some final notes. Our updated fact book will be online next week at ecolab.com/publications with updated and thorough descriptions of our businesses and is helpful in providing a deeper understanding of our Company. Also, we plan to hold a tour of our booth at the National Restaurant Association show in Chicago May 23. We'll have more details as we get closer. So, that concludes our formal remarks. Operator please begin the Q&A period.

Thank you, (Operator Instructions)Our first question is from Nate Brochmann from William Blair & Company. Your line is open.

Hi, good morning or good afternoon, everyone. Nice quarter.

Thanks, Nate.

Doug, wanted to dig in a little bit more on the raw materials side. Obviously, across the globe we're seeing raws kind of going up. Could you kind of remind us in terms of the impact that has in terms of the costs that you pay, as well as how long it takes you to adjust your pricing to recoup those?

Yes, Nate, well, we laid out in one of the charts that we just put online that we expect raw materials to have a negative impact of $0.10 for the year. It's very much weighted in the first quarter, precisely for the reasons you laid out. It does take us some time to recover, if you will, when we have very fast moves in the raw material markets. It's exactly what we saw in '05, '06, '07, but I would also point out that we overcame the raw material inflation during that period. It was much more significant, if you will, as a percentage of our total raw material build back in those years, so it takes several quarters for us to overcome this. I would say our expectation is you'll start seeing daylight again on our operating income margins beginning in Q2.

Okay, very helpful. And then if we could talk about the European restructuring a little bit, it seems like if we kind of get through the noise a little bit we're certainly seeing that margin expansion, as you highlighted, start to see daylight in the fourth quarter. Could you talk a little bit in terms of the decision to do this additional restructuring? It sounds like this is kind of above and beyond a lot of the things that we've already done and are just nice added on features in terms of really positioning the business well. If you could just kind of share your thoughts a little more specifically on that.

I guess I would position it this way, Nate. The restructure is a way for us to get to the end point that we've foreseen the whole time. Even when we contemplated the investment in EBS Systems. And it's important for two reasons, we believe. One, it's much better way of doing this from an organizational impact basis, which means you've got to move quickly and make sure that the organization understands what the new structure is and how do you get them from point A to point B as fast as possible because frankly, it minimizes disruption. So, we believe it's the right thing to do from a business operation standpoint. It also adds obvious financial benefits in that it accelerates or brings forward the ultimate benefits that we talked about all along. Which is we've always believed this business to be a 13% to 14% type business, which means you've got a delta. If you take the ending point last year of roughly 1,000 points, we had talked about a pacing of 100 basis points a year, we still believe that's the right number for this year. But what this restructuring enables us to do is more than double that in 2012 and 2013 and likely beyond that.

Great. Sounds exciting. I'll get back in the queue, thank you.

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

Hi guys, good afternoon. I guess I'll just add-on about that. How much of this Europe restructuring effort is really a result of the ERP implementation? It sounded like some of it was, if you're more efficient now, you don't need as many heads and that type of thing. Is a lot of it coming out of that, or is a lot of it incremental> And I guess the secondary question on that, how long has this been in the planning stage?

Well, I would say, the simple answer is I don't know if you can lay this on any one point. I would say we have been discussing and moving forward our plans to improve our profitability in Europe for a number of years. We identified several years ago that we had two principle challenges. One was a structural issue in Europe, and the other was a weak systems environment. They somewhat worked hand in hand. In fact, with weak systems, you almost always get too much structure. And so we wouldn't be able to do exactly what we're doing without the new systems, but there are a number of moves we're doing to improve profitability that are outside of, if you will, are unrelated to the systems move as well.

How long have we been contemplating this? I would say probably as long, in some sense, as we've owned the business. We wanted to understand, how do you do this, improve the business and most importantly, improve our ability to compete in that market effectively? So, we want better customer service. We want better service at the customers' end unit, and we want more efficient back offices so that we don't waste any money, if you will, not creating value for our customers, and that's not the position we've been in. So, we believe ultimately this restructure is the smart way to do it. It's a huge financial payoff. It makes a lot of sense financially. And as I mentioned earlier to Nate's question, it's also the best way to do this from an organizational and a business standpoint.

Okay, and then I guess the follow-up question, can you size at all how much you think the distributer inventory draw down impacted the US institutional business revenue?

Yes, it was in the neighborhood of $5 million or so in the fourth quarter. There is -- here is what I would say. Our fourth quarter, I will probably not give you the politically correct answer. Our fourth quarter wasn't a great quarter, but it certainly was better than it shows up in public reporting. So, you've got, really, if you look at our underlying growth rate organically when we ferret out all the noise, was probably in the 3% range. Importantly, we believe it's accelerating, and we expect to do better than that moving into Q1.

Great. Thank you.

Our next question is from Andrew Whitman of Baird. Your line is open.

Good afternoon, guys. I want to follow-up a little bit on that last question, digging into institutional a little bit more. You mentioned the unfavorable business mix. Can you just give a little bit more detail about exactly what that was and your expectation for that here heading into 2011? If that trend could continue if those pricing environments are the same now as they were a few months ago?

Yes, the business mix conversation was about total US cleaning and sanitizing. With that said, a big portion of that did happen to occur in institutional. And if it's an actual outcome of distributer inventory reductions because often what we have in distributors is principally food service goods and food service solids at L are high margins. So, when you have a reduction of those sales, you have some natural reduction of GP for that period. I guess what I would focus on on institutional is and broadly, is our US cleaning and sanitizing operating income margin improved for the year. And we expect it to improve again next year, and so we don't think we have anything fundamental here. We did have some oddities in the quarter.

That makes sense. Kind of a similar question on K. That business had been growing mid to high single digits sequentially. A bit of a step back here this quarter, flattish. Just wondering what you attribute that to. Is that slowdown maybe internationally, same customers using less, any color there would be appreciated.

Yes, the number you're looking at is a US number. And as I've described K before, K is an elephant hunting business. And so it doesn't move on steady lines. And so what you're doing is annualizing, if you will, to get some very large lens a year ago. And as they continue to succeed with no change, you will see that business start moving up. Their international business is accelerating, right, and is double digit plus and honestly, I think we've got significant upside there, that we haven't quite capitalized on yet either.

Very, very helpful. I wanted to just do one final question, if I might here, just on the M&A. I think I caught there quickly that you said there was some element of M&A already included in 2011 guidance. I was wondering if that's quantifiable to see how much of the guidance number is attributable to that.

Yes, from a sales standpoint, we expect to see roughly two points of sales growth that's going to be attributable to M&A already discussed and announced to the market.

Great. Thank you.

Roughly, we estimate that's going to deliver about $0.03 positive from an EPS standpoint.

Perfect. Thank you very much.

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

Thank you. Good afternoon. Just circling back on this change in distributer inventory, what's creating the volatility there? And the last time you faced this issue was due to your own actions in terms of incentives. But what lead to some of this sales volatility this time around?

I would just say I think it's as simple as you're going into a year-end for distributors too, and they are quite sensitive to their inventory positions. It's an important part of their financial metrics. They manage it. They clearly have been managing the inventories much more tightly over the last three years than they did prior to that. So, we've seen, if you will, significant step down in inventories and distributors over the last three years. I'd say until you see substantial market improvement in sales momentum, we don't expect to see a big change in that. But ultimately, distributer inventories are a reflection of how lean they can operate given their systems' effectiveness and what underlying demand is. Demand is starting to pick up, but unfortunately, it has been offset somewhat by their ability to manage the systems upgrades.

And Bill, I think I might have asked you this in a prior call as well, but outside of healthcare, I didn't really think that you had much inventory at the distributors, or maybe customer inventory, and maybe that's a separate issue. Is that still the case? And do you still expect your distributors to try to run leaner, and will there be any further impacts from their efforts to reduce working capital?

Yes, even -- this wouldn't be a conversation for total 2010. It's a conversation because we're focusing on a 13 week period. I don't expect there to be material changes in inventory moving forward. They've brought it down substantially over the last three years. We don't believe there is a lot of room for that to move further. Regarding the first part of your question, there is not much inventory in customers, but there is inventory in the distributer channels. And even in institutional, a sizeable number of our accounts are shipped via distributors, even though in all cases, we have the direct service relationship. So, what we're talking about is the distributer inventories, not the end use customer inventories.

And thank you for that. Just a final question, did I detect a change in tone regarding your pricing strategy? Because your answer to the question on raw materials and the impact that -- most of that $0.10 impact in the first quarter, and you'd mentioned you expect pricing to catch up. I think in prior calls, you said that Ecolab will never really price towards linking pricing with raw materials. Given the extraordinary environment we're seeing for raw materials, are you softening that stance somewhat?

No, there's been no change in our pricing policy. We like pricing when we can get it, but we try to manage it in a way that works for our customers and our markets and as a result, we don't tend to pass on immediate large spikes to our customers. We take a more measured approach and as a result, when we see spikes in raw materials like we've just seen, it takes us a while to catch up because of the way we do approach pricing, which is a more measured approach. Its been quite effective in the past, and we believe that's exactly the right strategy to deploy again.

Okay, perfect. Thank you.

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

Yes, good afternoon. Just a few quick questions. It certainly sounds like you're expecting the growth to start accelerating in 2011 on the top line. And I guess I'm wondering what's giving you the confidence that you're going to actually see that, because it doesn't seem like your end markets are showing kind of any hockey stick-type improvements.

Yes, John, while I agree that we do not see any hockey stick-type improvements in our end market, what we've seen is probably in 2010 in some markets a steady improvement and others a bottoming, if you will, from that standpoint. And we see further improvement in 2011 but by no means rapid improvement or hockey stick type effects.

What gives us confidence in the sales is one, we believe we've got a very good handle on our underlying, if you will, consumption patterns in customers. We understand clearly what inventory situations are, and we also know what we accomplished last year in terms of innovation or new product pipelines which have been launched and are out. What we accomplished in terms of new business successes, particularly in the corporate account arena, And so when we start putting that equation together and also watching business trends, we feel fairly confident that our business, from a top line standpoint, will perform better in 2011 than it did in 2010. Not just year on year record, i.e. $1 more, but in fact, accelerating trends.

Okay, fair enough. Just a question on the longer term. It looks like if we kind of assume that you get back to your normal historical growth rates, call it 6%, 7%, 8% on the top line and you get this 200 basis points of margin improvement in Europe. All else being equal, nothing else getting better in terms of margins, you do 15% or better depending on if it's 6% or 7% or 8% top line in terms of earnings growth. So, how should we think about the growth kind of over the longer term for Ecolab? Because it seems like it may be coming in, or if you're successful on the European side, it may come in better than what you've done historically.

Yes, I guess I would say two things. Even if you look at the last period, the last five years, we were in the 16% EPS delivery for the first couple years of that period until we ran into 2008, which was still double digit, right? '09 was 7%, and we're back in double digits again and we believe accelerating. So, I guess we open this thing, we expect this five year period to be more successful than the last five year. I can give you all the forward-looking caveats. I'm not predicting another financial crisis equal to last one, right? And we're not expecting monster raw increases like 140 oil here in the next three months or anything like that, but I don't think anybody else is. So, our -- what we always aim for is to outperform our objectives, and our objective is 15% EPS. And we continue to try to work to lay the ground and make sure we have the initiatives in place to achieve that. What we can never predict fully is what the world is going to throw at us, but our hope is, yes, that we do over achieve 15%, but we're not in the forecasting mode beyond 2011.

Okay, fair enough. And one last quick housekeeping question. I believe you're targeting like $0.01 of essentially a charge tied into Europe in your first quarter number or the guidance that you gave. What are you targeting for the full year? What's in that $2.47 to $2.53 target?

John, this is Mike. We show on the table that there's about $0.01 of transformation costs in the first quarter. And then for the year net, we think that it will be a net $0.02 positive. So, that's netting the benefits against the transformation activity cost.

Okay, fair enough. Understood, thanks.

Our next question is from David Ridley-Lane of Banc of America Merrill Lynch. Your line is open.

Sure, thank you. Since EMEA is around two-thirds of international, can we translate your comments that EMEA margins will be up about 100 basis -- up 100 points in 2011 to roughly that the international segment will be up say 60 or 70 basis points?

Yes.

Yes, that's fair. And then do you have the GCS contribution in the quarter? And maybe you could talk about expectations for that division profitability in 2011?

(inaudible) For the year, David, it's basically cut its loss in half again. And for the quarter, GCS loss was just a little over $1 million.

And are you -- do you think that 2011 could be a year of profitability for GCS?

Look, I think I have a good track record of forecasting broadly. I'm not sure it's extended yet to GCS, so what I would say is this. Where we are down to is we've said our GCS is a one front war, sales. And GTS sales, as you've seen in our recent reporting, has improved and was 6% in Q4.

If we are successful in continuing that trend, which we plan to be, we are going to ultimately start crossing the threshold and making money in that business. And of course, our hope is sooner versus later. I will say this. It will be accretive again in 2011, of that we're quite confident. Our hope is that we get it over the profit line, but I am going to stop short of predicting it.

All right, thank you very much.

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

Good afternoon. This is Rob Walker on for Lawrence.

Hi, Rob.

Just a question or two. If you can help quantify the impacts of the receivable write-off in the quarter. And then on the raws, you mentioned the $0.10 hit in raws that will be in 2011, largely in Q1. Did you mention the hit in Q4? And can the $0.10 hit in 2011 potentially reverse by the back half of the year? And not to squeeze another one in there, but with the higher raw materials, is it becoming more urgent to try to restructure and shorten your supply chain and if you could talk about your ability to do that.

Well, the receivable was roughly $5 million yet in Q4, one-time hit, so that's that. Regarding direct product costs, fourth quarter they were flat around the world, flattish. But they show up differently in different businesses in different regions of the world. But they were probably net positive in Asia Pacific and some of the others, US, they were unfavorable, all right? So, if you look at US cleaning and sanitizing, there was an impact, probably in the neighborhood of $4 million or $5 million for raw materials, okay? Offset by other regions.

The second thing, in terms of raw materials next year, we expect them to be $0.10 negative. We are forecasting markets that are pretty dynamic. We are out moving on pricing and others and typically, our product supply system moves. We don't try to react to market moves. We try to react to what's the best way to set up the supply chain for long-term optimal performance from customer service and cost standpoint. And it's very hard, you have 60 plus plants and 100 plus warehouses. You don't go rearrange that because polyethylene is moving up.

Okay, fair enough. And can that $0.10 potentially reverse in the back half of the year of 2012?

Well potentially, anything's -- sure. But I guess we're -- my guess long-term and our assumption and broadly this helps us, but not only when we buy raw material. Look, I think water is going to be a more important commodity for our customers and for anybody operating in the world, including humans who drink it. And energy costs are going to be under pressure and going up, not down, and energy is a big component in many of the rods we buy. So, I guess we suspect there's going to be ongoing inflation in our raw material buy moving forward. It can move around year to year, but that's our assumption, and we would be delighted to be proven wrong on the raw material inflation part of that scenario for us.

Okay, thanks. And then just a question or two if I can on cash and pension. On pension, the $100 million contribution you mentioned, do you expect the benefits of that to be largely offset by lower discount rates? And if you expect a tailwind, how much do you expect? And what are your expectations for pension funding in 2011? And I'm not sure if I caught your expectations for CapEx in 2011, and if you could roughly break that out kind of roughly by region, thanks.

Yes, in terms of pension, some. It's going to be a $10 million benefit this year in terms of stuff we've done, and part of it clearly is $100 million contribution as we go in. CapEx, I'm not sure what the question was on CapEx.

Did you mention what your CapEx expectations are for 2011 and if we can roughly get a sense for --

(inaudible) for CapEx.

From a model standpoint, we basically said use kind of a consistent standard. You're going to be safe.

Okay, thank you very much.

Our next question is from David Begleiter of Deutsche Bank. Your line is open.

Doug, just in Europe, can you comment a little bit on the Q1 sales expectation being flat? And longer term, given the transformation, what is potential for Europe top line sales, and do you need to make any more changes in the sales force in terms of structure to drive that top line growth?

Yes, I would say throughout 2010, we saw nominal improvement in our European sales volume as we went throughout the year. And we expect to have growth in Europe next year, but I won't quibble with (inaudible) because these are small single digit numbers and ultimately, we need to get Europe up into the mid single digit numbers. And so certainly, continuing to add, if you will, resources on the corporate account side, which we've done aggressively the last few years, it has benefited us significantly as underlying markets there improve. And we get much more connectivity between management and the field, we believe we'll be able to operate there as effectively as we do in the other regions. So certainly, that is a key part of the plan, meaning you will see benefits from the restructure announcement we had almost regardless of what the sales are. However, it is much more leveraged with sales growth than without, so sales are the key component of the plan.

And when would you expect to gain share in Europe, Doug, over what period of time?

Well, I would say, I'm pretty confident we have been gaining share in Europe over the last few years. It's hard to describe. The underlying markets, particularly in food service, both in Europe and US, have been really lousy. And we have been holding our own and outperforming all of our publicly reported competitors in those markets, so we're pretty confident that we are gaining share.

Thank you.

Our next question is from Bob Koort of Goldman Sachs. Your line is open.

Hello guys, it's Brian McGuire on for Bob today. Just a couple questions on the European restructuring. Just wanted to clarify, does the $120 million of cost savings include any wind down of ERP spending or implementation costs?

No. That would not be included in this, so that is, if you will, an additional benefit. I mean certainly there was impact, when you go through one of these ERP implementations you have extra costs. That's a piece of the 100 basis points this year. As I would say, the real benefits from the restructure activity we're talking about are certainly much more in the 2012 and 2013. We've laid out what they are this year, but they are pretty minimal this year. A lot of work this year, but the benefits accrue in 2012 and 2013.

And on that note, do you kind of have an idea of what the run rate for savings will be at the end of 2011 and in 2012? And will it be 2013 when we hit the $120 million mark?

We haven't exactly said, but I think if you do the math of our publicly announced 100, 200 plus, 200 plus, you start getting that the expectations, we're going to be very close to there by that time period.

Okay, and then one last thing on Europe. Are you worried about any drop in service levels as a result of the restructuring? And what gives you confidence that you can maintain the high standards you guys have set for yourselves?

I would say one, it's always a concern, and it's on the front of our planning objective, is to make sure it doesn't happen. I would say this part of the Europe transformation effort has less impact than the EBS implementation or the ERP implementation, simply because there you're ripping apart, if you will, your whole central nervous system of the business, and we worked hard to mitigate service problems there. We had some. They've been corrected. They are behind us, and we don't anticipate having nearly the same service impact as a result of this part of the transformation that we did with the last part.

And do you anticipate the restructuring in Europe to have any impact on your timing of acquisitions or the acquisition pipeline over there? Is there anything inherent about it that will keep you from doing a deal until you guys in the back office align what you would like it to be?

I would say in fairness, there would be certainly some deals that we may pass on if we don't feel they are going to have huge strategic advantage for us long-term, that we would not want to hinder our ability to execute here for what I would call kind of a tactical nominal acquisition play. If something fundamental and very important came along that we felt was key to long term success, we would move ahead.

Okay, thanks a lot.

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

Good afternoon, guys. A couple of questions to kind of follow-up on a lot of the discussions already took place. The -- if I'm correct, there was a discussion of European margin improvement projections, when you were going through the ERP installation was that once the ERP went live, which I think took place in April of 2010, it's going to take you a couple of quarters to get rid of the redundant systems, and I think it was about 400 people or so there, and margins there are going to improve about three points as a result of that. Has that taken place or any of that is still part of your margin improvements guidance with this new restructuring program?

Yes, Dmitry, I guess what we've said fairly consistently all along is that the ERP implementation was key to enabling us to get at many of the fundamental things that we needed to do because you had to be able to do the accounting, do the back office work, et cetera. And the old structure was going to prevent us from doing some of the things we needed to do to manage a business. By itself, the ERP system brings zero savings, right? So, it's all the work that you do after the system to leverage it and the other opportunities around Europe unrelated to that system, which are also plentiful.

We talked during that time that the expectation, whole system implementation would be 100 basis points a year. We said that you would start seeing some of the benefit in fourth quarter 2010, which we did, roughly 60 basis points. What we're saying now is that the pace of change, the target's still the same, roughly 1,000 basis points. But the pace of change is going to be significantly accelerated as a result of this restructure and instead of 100 basis points a year, you will see 2X that plus beginning in 2012 and certainly for 2013 and probably for 2014, depending on how much we get done in 2012 & 2013, okay? So, that's the best way I can describe it. I'd say it's quite consistent. If you go back with the conversations we've had about this, if anything, we do believe this is a benefit because we are bringing forward the financial benefits of these initiatives.

Okay, so would it be fair to say that this restructuring program and the reason that it wasn't done previously, is it was basically empowered by the ERP system and the visibility that it gave you into your own operations and allowed you -- gave you the confidence to restructure and reduce your scale or footprint in the region as much as you have with this restructuring program?

Yes, I would l -- yes. I wouldn't pin it all on it, but absolutely. What I would say is we needed a new ERP system to give us the flexibility we needed to design the business around the customer needs and without the ERP changes, right, it would have been I guess possible, but very problematic and difficult.

Okay, and then just a couple of follow-up questions. When you talked about the distributer inventory draw down impact of $5 million in an answer to the previous question, was that a revenue impact or was that a profit impact?

Revenue.

Revenue, okay. And then second question, also a follow-up in an answer, I think, I forgot who asked the question. But when you talked about improving European margins by a point and then you said it -- would roughly where you agreed with the statement it roughly translates into 60 basis point improvement for the division overall, the international division, shouldn't you also see improvements in the -- in your Canadian and Latin America and Asian businesses where it's just a matter of volume leverage and you would expect from your comments volume to continue to be pretty strong in 2011?

Yes, yes. We would expect to continue to see margin improvement in Latin America and Asia Pacific also. I registered the heart of that question, can you take the 100 since it's two-thirds and transfer it over the whole international thing? Yes, and then you're adding even a little better than that. That would be our goal.

Okay, so actually, if you kind of factor all of it in, your international margins in 2011 should do better than a point improvement, maybe even closer to a point and a half?

I think we're in danger of getting over our skis now. I would say it's going to be better than the 70 basis points.

Got you. Okay, thank you very much, Doug. I appreciate it.

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

Hi. You're letting go 900 people in Europe. What's the timing of the departure of those people, and what do they do?

Yes, one, we haven't finalized those plans because we need to work with the works councils to do that, which we are in process now, initiating that piece of it. So, we do not have exact specifics around who or when. What I can tell you is what's foreseen but still needs to be developed in partnership with the works council is that this is principally going to be, if you will, back office, shared service support, right, heavily in those arenas which is areas that we believe we have a clear path towards. And so what we're working to do, if you will, is maximize sales to customer support and minimize the cost of all of the necessary back office support.

Okay, and then just lastly, just to follow-up on a previous questioner, the K revenues in the United States or the K sales were flat in the fourth quarter and in the previous three quarters in the US. They were pretty -- they were either high single digit or low double digit. Is the new trend of the US K business flat growth in 2011 or low single digits, or how do you see that?

Yes, I think -- we discussed this briefly before, but not in detail. That K business runs into its basic types. It succeeds by making outside sales when you compare it to its base. We describe it as elephant hunting versus farming and so as a result, as they bring on new customers, you will start seeing that business moving forward. We are not predicting the K is somehow plateaued or is out of growth. It's far from the case, but we've been through this before on K, and as we bring on new business, you will start seeing an acceleration of growth again. But K has always been somewhat lumpy.

Okay, thanks very much.

Jeff, if you look back in the quarter, you'll see K having very robust quarters, leaner quarters, but for the year, it's usually pretty consistent from the upper single digit growth area.

Okay, thanks very much.

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

Hi, good afternoon.

Hi, Mike.

Wanted to ask about pricing and if you could just comment kind of broadly about what you're seeing in the pricing environment in the US and in Europe? And you had talked a little bit in previous calls about looking longer term at maybe a 1%-ish percent price increase per year. Have you changed that view given where raw materials are? And can the market at this point bear price increases of the 3% to 4%-ish range that we saw when raw materials were causing problems previously?

We're going to get into a rounding discussion. I would say we've had to up our pricing plans as a result of the raw material moves. They're significant, they're well publicized. They are well understood. We do not anticipate anywhere near the 3% to 4% that we were going after. One, it's not required, two, I don't think it would be smart for the business in terms of what we would do with customer relationships. So, we are in a much lower place, it probably still rounds to 1%, let's say it's rounding down now versus rounding up.

Understood, thanks very much.

Our last question is from PJ Juvekar of Citi. Your line is open.

Hi, this is John Helfst standing in for PJ.

Hello, John.

Hi. In the past, you've provided us with your growth expectations for your key end markets like healthcare and food service. Can you give us a little bit more granularity on what your growth outlook is on your larger end markets for 2011?

Yes, food service we would still see as relatively flat as we go forward. Lodging this year recovered quite substantially, and we think lodging year on year is going to be in the 3% range. Healthcare is probably low single digits. As we move forward, food and beverage in its historic norm of low single digits, those would be our big key markets.

Okay, and can you tell us how much you plan on growing your sales force this year?

Probably in the 2% range.

Okay, great. Thank you very much.

Thanks, everyone. There was one issue we wanted to circle back on, and that was regarding the transformation, Europe transformation expense as shown in the EPS bridge. That is not the restructuring costs. The restructuring costs, as we mentioned, will be in the special charges. The transformation costs in the first quarter represents some of the activities that we're doing to run these projects. We'll have those costs through the rest of the year that will be offset by some of the benefits that we get later in the year, so that's why you see it going from $0.01 negative in the quarter to a positive -- the remaining quarters to a $0.02 positive for the full year. So, with that, that wraps up our fourth quarter conference call. This call and the associated slides will be available for replay on our website. Thanks for your time and participation, and best wishes for the rest of the day.

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