藝康 (ECL) 2011 Q3 法說會逐字稿

Welcome to the Ecolab third-quarter 2011 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 third-quarter conference call. With me today are Doug Baker, Ecolab's Chairman, President, and CEO, and Steve Fritze, Ecolab's Chief Financial Officer. A copy of our earnings release and accompanying slides referenced in this teleconference are available on Ecolab's website at Ecolab.com/Investor.

Please take a moment to read the cautionary statements on slides 2 and 3, 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 our recent amended registration statement on S-4 for the Nalco merger announcement and on slide 2. We also refer you to slide 3, which describes additional merger information and where to find it, as well as participants in this merger. This conference call does not constitute an offer to sell or solicitation of an offer to buy any securities. We also refer you to the supplemental diluted earnings per share information in the release.

Starting with slides 4 and 5, we delivered strong results once again, in the third quarter. We leveraged sales volume and pricing growth, along with excellent acquisition performances, to offset significantly-higher delivered raw material costs and leveraged our cost efficiency work especially in Europe, to produce another double-digit increase in our adjusted earnings per share. Looking ahead, we expect to continue outperforming our markets, and show continued strong earnings gains in the fourth quarter and the full year, as better sales growth, pricing, innovation, and margin leverage more than offset easing delivered product costs, and work to deliver double-digit adjusted EPS growth once again in 2011. Further, we believe our continued strong growth prospects, along with the additional growth opportunities from the Nalco merger will lead to better EPS growth for Ecolab in the years ahead.

Moving on to some highlights from the quarter, and as discussed in our press release, reported third-quarter earnings per share declined 12% to $0.65. On an adjusted basis, excluding special gains and charges, and discrete tax items from both years, third-quarter 2011 earnings per share increased 14% to $0.75, which was at the top end of our forecasted range. The adjusted earnings per share growth was driven by volume and pricing gains, new products, and new accounts, which along with strong performance from acquisitions and cost savings actions, more than offset higher delivered product costs. We enjoyed strong sales growth in our food and beverage business in nearly all regions. Geographically, our Latin America, Canada and Asia-Pacific operations also saw robust gains, and our acquisitions performed very well in the quarter.

Our US cleaning and sanitizing sales continued to show steady growth, but were impacted by a prior period product and customer roll-outs. We expect stronger reported results in the fourth quarter. 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 new account acquisition across all of our customer segments. We're also continuing to implement appropriate price increases to help offset higher delivered product costs. We remain focused on expanding our margins, emphasizing productivity and efficiency improvements, to help increase profitability.

We're also achieving excellent progress in our actions to improve profitability in our Europe business. We have seen the benefits of these actions in our results, although as we outlined in our last call, Europe's third quarter also reflected the impact of significantly higher raw material costs. We continue to expect strong margin improvement in the fourth quarter, and for the full year of 2011, with much more significant contributions over the next several years, and we continue to make significant investments in key growth businesses and acquisitions to build further growth. This includes our pending merger with Nalco, which we believe will significantly bolster our opportunity set for our customers, and position us as the leader in additional high-growth markets that leverage our mutual core strengths in product technology, and sales and service execution.

We look for the fourth quarter to show a strong sales performance as organic sales growth accelerates. Adjusted EPS is expected to increase 15% to 18% to the $0.69 to $0.71 range, compared with adjusted EPS of $0.60 in the fourth quarter of 2010. For the full year of 2011, we look for adjusted EPS to be in the range of $2.53 to $2.55 per share, showing a 13% to 14% gain over last year. That full year EPS gain would represent the ninth year in the last 10 of adjusted double-digit EPS growth. Note that these forecasts exclude the prospective impact from Nalco, which is expected to close before year-end. In summary, we expect 2011 to reflect a strengthening performance by Ecolab, as we show strong earnings gains to once again deliver attractive growth and shareholder returns and set the stage for improved results in the years ahead.

Slide 6 shows our income statement and slide 7 shows our sales growth detail. Ecolab's reported consolidated sales for the third quarter increased 11%. Fixed currency sales rose 6%. Looking at the fixed currency components, volume and mix increased 2%, pricing rose 1%, and acquisitions were 2%. Sales for the US cleaning and sanitizing operations rose 6%. Adjusted for acquisitions, sales increased 3%. Institutional sales grew 3% in the quarter. Sales initiatives targeting new accounts and effective product and service programs continue to lead our results, and outperform mixed end markets, and cautious customers.

We compared against some inventory pipeline building in last year's third quarter, which negatively affected our growth this quarter by about 1 percentage point. Total shipments, meaning direct plus distributor shipments, to our end-use customers, which we closely track, showed steady growth consistent with the second quarter and outperformed mixed market trends. Lodging and room demand continued to show good growth against tougher comparables, while food service foot traffic remained soft. To drive our growth and improve on our industry leadership, we're introducing more new products that deliver increased value with reduced labor, water, and energy costs for our customers, in our wear washing, laundry and housekeeping markets.

We have fully rolled out Solid Power XL, our new concentrated ware washing product that provides 50% more cleaning power per capsule, as well as the Cleaning Caddy, which won an Industry Innovation Award and provides customers with the ability to more frequently clean their restrooms with less down time, thereby saving money and improving guest and employee satisfaction. In addition, we are developing new programs with distributors to target regional independent chains, and drive better penetration and new account growth, and we are continuing to make additional investments in our sales and marketing force and leveraging additional marketing initiatives to drive sales growth. We expect these growth initiatives, as well as additional pricing, to deliver solid institutional sales gains in the fourth quarter, and benefit from comparison to last year's softer fourth quarter.

Kay's third-quarter sales were up 2%. The fundamental business remains in good shape, and we expect a stronger fourth quarter and solid full year. Third-quarter sales to quick service restaurants rose modestly, reflecting lumpiness in the timing of Kay's quick service customer rollouts and the slow market growth. The food retail business had a tough comparison versus 2010's strong third quarter, due to several new customer roll-outs that took place in the second half of last year. However, new account shipments will begin in the fourth quarter, and drive better food retail growth in that quarter in 2012. We expect continued good new account gains in food retail, along with better quick service sales to drive better growth in Kay's fourth quarter and another year of growth in the upper single digits.

Reported sales for textile care increased 40%, adjusted for new acquisitions, sales were up a very strong 8%. Good customer gains, momentum from new product launches, new program launches, and additional sales within existing customers more than offset soft but improving industry conditions. We expect fourth-quarter reported sales will be off slightly, as they compare against a strong period last year, which included some discontinued sales from the Dover acquisition.

Healthcare sales increased 32%. Excluding the acquisition of OR Solutions, sales increased 4%, as good growth in hand hygiene, instrument processing, and environmental hygiene were partially offset by slow growth in surgical drapes, which reflected weak US healthcare market trends. We continue to see new account gains from our OptiPro instrument reprocessing line, for central sterile, and further progress in our Encompass and Environmental Hygiene line for patient room hygiene. Further, OR Solutions continues to show strong growth. Looking ahead, fourth-quarter sales are expected to show steady organic and strong reported sales gains.

Food and beverage sales grew 5%. Core F&B, cleaning and sanitizing sales increased, led by corporate account wins, pricing and product penetration. Water management also showed strong growth, though sequential gains were less, due to 1-time project sale in the second quarter. Food and beverage will continue to focus on new account acquisition, pricing, and new product sales to deliver growth in the fourth quarter.

Vehicle care sales were flat year over year. Growth in the in bay and auto dealership segments offset tunnel wash declines. The division continues focusing on new and improved products and dispensing platforms. We look for vehicle care to show improved year over year sales growth in the fourth quarter.

Sales for US other services rose 2% in the third quarter. Pest elimination sales rose slightly, as gains in food processing, healthcare, hospitality, and food retail were mostly offset by slow and cautious conditions in other major market end markets, as well as reduced add-on service sales. We are working to develop new product and program solutions to better meet our customer needs and differentiate our offerings. With recent new product launches like Guardian Plus for full-service restaurants and bedbug treatments in non-hospitality markets such as long-term care, retail and restaurants, are showing good results. We expect our new products and programs, along with aggressive selling, to help offset the softer markets and yield sales improvement in the fourth quarter.

GCS sales increased 6% in the quarter, and in the long awaited development and consistent with our comments last quarter, GCS turned a profit in the third quarter with $400,000. New account wins and appropriate pricing helped to drive the quarter's sales gain in profit. We remain focused on developing chain account relationships, and driving sales through their regional and franchise organizations. We expect GCS to again show strong sales growth and continued profitability in the fourth quarter.

Measured in fixed currencies, international sales increased 6%. Adjusted for acquisitions, sales increased 4%. Europe, Middle East and Africa sales rose 1% in the third quarter, at fixed currency rates, as we continue to offset soft end markets in the region. Europe's institutional third quarter sales increased modestly. New business gains among regional and local customers leveraged new products, that offer customers superior results, and strong cost savings, including reduced consumption of water and energy.

Food and beverage sales rose modestly, reflecting market share gains. Food and beverage continues to focus on new accounts and cost savings benefits in our innovative products. Textile care sales declined in the third quarter, reflecting soft work wear markets. We are using new products and technology to offset these market trends and improve textile care results. Europe healthcare sales showed a strong increase. New products and programs in pharmaceutical and infection prevention led the growth.

Pest Europe reported a moderate sales decline. As mentioned in our last call, seasonal revenue shifts, that benefited the second quarter, reversed in the third quarter. A continued focus on corporate accounts and new programs are expected to yield a modest gain in the fourth quarter. In addition, we made a small pest acquisition in Spain during the fourth quarter as part of our expansion of pest elimination in Europe.

Our work to improve operating efficiency in our Europe operations continues to make excellent progress. We are starting to realize broad procurement and manufacturing savings from our consolidated system transparency. Most recently, we've been centralizing finance and HR support, completed the pilot of our front office simplification model, and continue to move non-critical functions to outsource providers. We have a series of other projects underway with more actions to be taken as we work to realize substantial margin improvement potential that exists within our Europe business. Looking ahead, we expect Europe's fourth quarter to show continued modest fixed currency sales growth, but to also achieve strong profit improvement, due to our transformation projects and better raw material comparisons.

Asia-Pacific sales grew 15% in fixed currencies. Adjusted for acquisitions, sales grew 5%. We estimate the effects of the earthquake in Japan reduced that third quarter sales gain by about 1 percentage point. Institutional sales, adjusted for the Cleantec acquisition, showed good growth. New programs and a focus on restaurant and lodging expansion in the emerging Asian markets helped offset the impact of Japanese and New Zealand earthquakes earlier this year. Food and beverage sales also enjoyed strong organic growth. New account gains and improved product penetration led the increase. Looking ahead, Asia-Pacific expects continued good sales growth in the fourth quarter.

Third quarter sales for Ecolab's Canadian operations increased 7% at fixed currency rates, as strong growth in the core business drove results. Latin America reported a strong sales gain, rising 16% in fixed currencies, as all divisions in that region grew double digits. Institutional growth was driven by new accounts, increased product penetration, and continued success with the global and regional accounts. Food and beverage sales reflected strong demand in the beverage and brewing markets, as well as the benefits of new accounts, and pest elimination sales showed a double-digit gain. Overall we expect attractive growth trends to continue in Latin America and yield another double-digit gain in the fourth quarter.

Turning to margins and the income statement and slide 8 of our presentation, third-quarter gross margins decreased 170 basis points to 49.4%. The decrease primarily reflected the impact of higher delivered product costs, and restructuring charges, related to our European supply chain, which more than offset the impact of volume and pricing gains. Raw materials increased in the third quarter, but it looks like that was the peak in terms of year on year impact, and that pricing and cost reduction actions we are taking will drive gross margin expansion into future quarters.

SG&A expenses represent 34.3% of sales, 150 basis points below last year. Leverage from the sales gains and acquisitions, as well as cost savings efforts led the improvement. Operating income for Ecolab's US cleaning and sanitizing segment rose 6%. Adjusted for acquisitions, US cleaning and sanitizing operating income was flat, as higher delivered product costs offset pricing and volume gains in the quarter. Operating income for US other services increased 6%. Margins expanded 70 basis points, reflecting pricing and cost savings actions.

International fixed currency operating income increased 9% versus last year. Adjusted for acquisitions and divestitures, international operating income increased 8%. Margins expanded 30 basis points, as volume and pricing gains, favorable customer rebate adjustments, and improved efficiencies more than offset higher delivered product costs. Corporate segment and tax rate are discussed in the press release.

The net of this performance is that Ecolab's reported third-quarter diluted earnings per share of $0.65, compared with $0.74 reported a year ago. When adjusted for special gains and charges, and discrete tax items in both years, adjusted earnings increased 14% to $0.75, when compared with $0.66 earned a year ago. Turning to slide 9, Ecolab's balance sheet and cash flow remains strong. Total debt to total capital was 30% at September 30, compared with 34% reported a year ago. Our net debt was 24%.

As detailed in slide 10, we continue to take aggressive actions to drive both our top and bottom lines, expanding our market share and customer penetration, using differentiated new products and leveraging our investments in our key growth markets. We are using pricing and innovation to benefit margins, and along with favorable currency trends, we expect to more than offset delivered product costs in the fourth quarter. Europe's work to transform itself into a higher growth and more profitable operation continues to go very well. Europe will show strong margin expansion in 2011, even though raw material costs will offset some of our transformation progress this year. We expect results from our actions to show strong profit growth in Europe in the fourth quarter, and continue to increase significantly over the next several years.

Looking at Ecolab's fourth quarter 2011, we expect organic sales growth to accelerate. We look for adjusted diluted earnings per share, excluding the impact of our anticipated Nalco merger, to increase 15% to 18% to the $0.69 to $0.71 range, compared with the adjusted earnings per share of $0.60 earned last year. We expect the fourth quarter gains to be driven by improving sales volume, higher pricing, cost savings, acquisitions, and the actions we are taking to improve our Europe profits. Fourth-quarter special gains and charges and discrete tax items will consist primarily of costs related to the Nalco merger. We continue to look for 2011 full-year adjusted EPS to increase 13% to 14%, to the $2.53 to $2.55 range, excluding the impact of our pending merger with Nalco.

Slide 11 shows the status of the merger process at this point. We have received US antitrust clearance, as well as clearance from certain other countries, as mentioned in the press release. Respecting the procedures of the various antitrust agencies, we will not specifically comment, here or in the Q&A, beyond the disclosures contained in our preliminary proxy statement on the status of certain other countries, other than to say we expect to receive the required clearances in a timely manner to enable a close within the fourth quarter. We have the necessary credit facilities in place to finance the merger, and we have very strong integration teams from both sides working aggressively to plan the post business merger structure and opportunities.

We remain highly confident we will receive a successful vote and close our merger before year-end. We continue to believe that Nalco's position in large and high growth markets, its technology, and sales and service leadership offer substantial and compelling benefits for our combined customers, and provides significant additional growth drivers for our business. Together, we believe we are a stronger Company with better growth opportunities, providing central services in the critical global needs of food, water and energy and will provide superior performances through all kinds of economic scenarios.

In summary, as noted on slide 12, we delivered the top end of our forecast range in the third quarter while offsetting higher than expected delivered product costs and while still investing in our future. We look for sales and profit results to accelerate in the fourth quarter, and make 2011 our ninth year of adjusted double-digit EPS growth out of the last 10 years. And we expect the fourth-quarter momentum, the outstanding benefits from the Nalco merger, and the additional investments and actions we are now taking will yield better sales and EPS growth in 2012 and 2013.

That wraps up our third-quarter conference call prepared remarks. Operator, would you please instruct people on how to make questions?

(Operator Instructions). The first question does come from Nate Brochmann, William Blair & Company. Your line is open.

Good afternoon, everyone.

Hey, Nate.

Wanted to talk a little about, Mike, in your prepared remarks, you talked about some of the -- your customers being a little bit cautious on inventory and some of the distributor channel issues in the third quarter. What gives you confidence in terms of going into the fourth quarter that some of those issues rebound and per in the press release, continue some of that momentum into 2012?

Yes, Nate, I would say a couple of things. Most of the inventory issues we related to, or related to last year, where we had what I would say is probably an artificial bump on inventories, temporarily in Q3. So it was mostly a comparison issue. I think we've got a good handle on how inventories are trending this year, and have that built into our forecast for Q4.

Okay. And then maybe just an update a little bit on the Nalco merger. As you get some of the integration teams in place, is they anything that you learned or identified thus far that you would be willing to share in terms of maybe some of the positive surprises that you're starting to uncover?

I guess I'll probably not go into a lot of detail right now. I will say early when we came out and we gave the synergy number, we always said that it was at the low end of our range, and we acknowledged that. I would say all we've learned confirms that, that we would anticipate that there's upside on the synergies, which we also said was going to be important, because we know since going out that other things, FX, pension costs and other things are negatives and synergies was one of the natural ways that we were going to offset what the world throws at us. I would say we have confirmed that in fact synergies will be an upside.

Great, thank you very much. I'll turn it over.

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

Hi, guys. Good afternoon. I guess a question, I know you've talked about from the beginning of 2011 having worked in a weak macro backdrop into your numbers, but it seemed like things slowed over the summer in Europe and the US, whether you're looking at business and consumer confidence or just a lot of the different economic indicators. Are you seeing anything in your business to indicate that's having an impact and if we do have like an incredibly weak environment in Europe for several years, do you remain confident in being able to achieve those margin gain targets for 2012 and 2013, that you've provided us in past quarters? Thanks.

Yes, Gary, Doug. I would say, yes, from the beginning, we always said that we expected to be in Europe and US in particular, kind of a long slog, so very nominal GDP growth at best. I would say, unfortunately, that looks to be the case. I guess it's fortunate, if you have double dip instead, which we do not buy into.

I guess my point would be this. The environment is sufficient for us to continue to drive sales growth, and to continue to accelerate. If the economy was better, it would be easier, no doubt about it. But we aren't, I don't think, viewing the economy as in our way from delivering the type of EPS performance that we expect of ourselves, and that I think our investors expect also.

Europe, Europe continued to grow. We continue to see growth in Europe. It is a lousy environment, with that said. Even in spite of a lot of the efficient activity we have there, we continue to sell new business successfully. We continue to drive not great top line performance, but positive top line performance, and the type of performance that we need to get the type of OI margin improvement that we have committed to and we expect to be able to continue to do that in the type of environment we foresee.

Okay. Just 1 quick follow-up. You've also put out that the Company plans to begin a share repurchase program after closing the Nalco transaction. Is there any -- first of all, I just want to confirm that was not included in the $3 number, and number 2, is there any time line on when you would likely do that, or is that just a new authorization that you'll then use, how the stock trades to determine timing? Thank you.

That was not in our original $3 number. The time periods we gave were it starts after close and we expect to complete it by the end of 2012.

Okay. Thanks a lot.

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

Good morning, and congrats on the solid quarter in a tough environment. Couple of questions, if I may. Can you provide a little bit more detail on the run-up in raw material costs? Was it a resetting of some contracts? Was it transportation costs? Kind of what gave you the sequential delta that you weren't expecting?

I would say it was -- break it down into 2 components. Caustic increased when we didn't expect it to, and frankly, other declines came on much slower than we anticipated. We're seeing them, but they just haven't come as rapidly, was a little stickier than we thought, and that was really -- it's those 2 factors that led to, frankly, higher raw material costs in the quarter than we had forecasted, when we had our Q2 call. I'd say in spite of that, the business performed well, and we overcame it. So I think it's just one of the facts in the business. It didn't turn out to be a material fact in the sense of determining performance.

Right. Right. I mean, it was certainly gratifying to see you guys being able to overcome a gross margin squeeze that was somewhat unexpected. Your anticipation of a quick recovery or quicker recovery of these costs, is that from a new pricing initiatives you put in place? Is it from accelerating declines in some of the raw materials that were not cooperating in the third quarter? Kind of, what's behind your optimism that we've probably seen the peak here? Caustic pricing will probably come up again as chlorine demand comes down seasonally in the fourth quarter.

We've taken our caustic price up for the year, per that comment. Yes, no, we're seeing some price decline and abatement in certain areas, and so, it's happened, and so it's easier to forecast now because we've actually realized it. So certainly in total, raw materials will cost us less in Q4 than they did in Q3. But I would say the bigger part of the story is pricing traction, which we watched build throughout the quarter, and so we have quite a bit of momentum leading into Q4, and so as a result, we expect that gross profit, gross margins will be ahead of last year in Q4.

Got it. That's helpful, Doug. Thank you. And then a quick question on Europe. Obviously, tough economic environment, but you're making good progress and taking costs out of the business. Can you update us where you stand at the end of the third quarter versus your 100 basis point improvement that you were seeking on a year-over-year basis, and if there's any offsets we should be thinking about that, to add that number?

Yes, Europe -- I would say in our range of estimates, we forecast 100 this year at the beginning of the year, delivering 100 basis point improvement this year, then 200-plus next year, 200-plus in 2013. I would say working backwards, we are very confident, probably even more confident in the 500-plus over 3 years. I would say in the range of reasonableness, the 100 is in the possibility this year. I don't know if it's likely, because we've had much higher raws. With that said, I would just call that a timing issue, because pricing there is catching raws also, whether it catches it in time to get the 100 this year, or if it happens in the first quarter is really the debate. But it's going to be a significant improvement this year in Europe OI margin year-on-year.

Okay. And then final question, on GCS now that it's gotten profitable, was this a blip or was this a data point that we can extrapolate going forward? Are there any investments rolling in that would prevent you maintaining this slow level of profitability, or should we see these hundreds of thousands of dollars perhaps growing to low single digit millions of dollars in 2012?

We alerted Treasury that $400,000 is coming your way. We don't think it's a blip. You could see the improvement building for the last, really 6 to 7 quarters. And so I guess our expectation is, it will be profitable again in fourth quarter. It will be profitable for whole year, we anticipate in 2012. I guess if there's going to be a blip it's going to be first quarter and that's really related to volume, low volume. But we anticipate it will make money in total for 2012.

That's helpful. Thank you very much.

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

Hi, good afternoon.

Mike.

Just with respect to Europe, was hoping that maybe you could walk through some of the major divisions or end markets in a little more detail, and talk about what you're seeing in terms of demand trends, particularly as we come off this kind of seasonal peak period during Q3. What were you seeing specifically in lodging, food service, and F&B?

Yes. I'd say a few things. Lodging in Europe is up year-on-year. Restaurants are flat to down a point, as you go through, and F&B is modestly up for the year, underlying markets. I would say it's more a geographic split than it is by market split. And if you see some dramatic, I guess, deltas, it would be where you would expect it. So central Europe for us is doing quite well.

And then the ring, particularly Italy, Spain and Greece, as you might imagine, aren't doing particularly well. But that's like every newspaper article you read. In total, when we add it up, we have positive growth there, and frankly some trends which are positive. Not overwhelmingly positive, but positive.

And in terms of healthcare, I know you commented that the surgical drape business is down, presumably there's a number of factors driving that, but can you talk about the outlook for healthcare, and how presumably, if we continue on this lower number of surgeries, how that might be affecting your attempts to win new business, and kind of break into new areas with healthcare facilities?

Yes, I think healthcare, Mike, the best way to think about it is, there's been a concerted push to drive what we consider the most value-added, which also happened to be the best margin products in our line, and those areas are performing quite well. The areas where we don't have as much value-add, we haven't had nearly the emphasis. So as a result, our total sales is modest, when you exclude acquisitions. But I would say the profitability in that business is up tremendously. And for the year, it's going to be a near double of profitability.

So I think they got more or less the equation right. I mean, it was important for us to move that up and it has moved up dramatically and so that's how we're viewing that business right now. So it's a $0.5 billion. It's got scale. We're starting to leverage the scale effectively. That's really what I would consider the story on healthcare.

And then last question I had was on the F&B business in the US. You talked about pricing being a component of the growth you saw in Q3, and hopefully going forward. But historically, that pricing has been a little bit more closely linked to what's going on with your raw materials. So how long do you think it is until we see a little bit of pushback, given that you expect some of your raws to be moderating into 2012?

Yes, I would say if anything, because of our -- look, raws, if there's been a surprise in the year, it could have been only in our camp, we had forecasted raws to be up very modestly this year, and they're up anything but modestly. And so raws have been a big negative surprise for us in the year. In spite of that, we're going to deliver a very solid year. But as a result, we are a little behind our pricing pace.

We are going to lap and cross raws handily in the fourth quarter, i.e. pricing, money coming in from pricing is going to more than offset money going out the door for incremental raw costs in Q4. But with that said, I think in a normal year if we had probably forecasted this more accurately, we're not the only guys who got it wrong, by the way, we would have probably been a quarter ahead. So they're going to pace it. Historically, when raws have abated, we have not lost pricing.

Thanks very much, Doug.

The next question comes from David Ridley-Lane with Merrill Lynch. Your line is open.

Yes, I just had a question. What was the increase in sales force headcount during the quarter, and what are the segments that you're adding headcount disproportionately?

Yes, we're up 2% for the year, and Q3 pace is consistent with the earlier quarters.

Is there -- what are sort of the top 2 or 3 segments where you're really making those headcount additions?

Well, we're making it in healthcare. But I would say the most significant would be a geographic split, and obviously we're putting the bodies in AP and LA disproportionately, because that's where the growth is.

Okay. And then maybe a fourth quarter comment, but also if you could look out a little bit longer than that on Asia-Pacific, I know everybody's focused on Europe, but could that business start to see reacceleration, a pretty significant reacceleration, given the absence of natural disasters then?

Yes, well, that would be an interesting year, wouldn't it? I think we've had almost every natural disaster that's on the list in this year in Asia-Pacific. Our Asia-Pacific business, even in spite of that, is continuing to perform quite well. Obviously, in some markets during some periods, you got relatively easy bases to go against. So I would expect if you have zero natural disasters next year, I don't know if that's ever happened in Asia-Pacific, you would expect to get a pop.

Thank you very much.

The next question comes from David Begleiter with Deutsche Bank. Your line is open.

Thank you. Doug, in the US, have your new account gains this year been above or below your expectations?

Why don't I give you 2 points of view. I would say nothing's ever above our expectations, because our expectations are very high. But, in terms of corporate account activity globally and wins and losses, net gains, we were up 18% to the favorable versus last year, and last year was a great year. So we are having a lot of success again this year in driving new account productivity, even when you move from corporate accounts down to regional, and down to lower areas.

We have had an improvement in terms of lost account numbers, which I think you would expect, but we're starting to get to more normalized non-economically pressured type numbers, and so that obviously helps your net gain figure as well. And so that's occurring on the street and regional account level also.

And Doug, how is the competitive intensity for the smaller accounts in the US right now?

I would say I think there is -- I really don't know that it's --it's looked quite intense to go after that business. I would say it's more because those accounts are under pressure than it is because there's a different level of activity competitively when you get down to it. And it's always been intense. That is where you have all the regional competitors playing and competing and vying for the business. And so I would say it remains intense. And I would chalk up as much of it to frankly the environment they're competing in. It's difficult for them. They've got food inflation. They've got traffic count declines, right, they're watching every penny.

And Doug, last thing on Nalco, you commented on the cost synergies. What about the sales synergies 2 months into your integration process?

I would say if anything, and as we went out, I think we said the $0.5 billion which is what we said year 5 run rate would be in terms of gross synergies was more middle of the range as opposed to being on the conservative side of the range, which our cost synergies certainly were. I would say we feel very good about the ability to go get $0.5 billion.

Thank you very much.

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

Good afternoon.

Hey, Lawrence.

First question's just on customer order behavior, I guess US and Europe. Are you seeing any shift in the tendency toward menu shrink? Are the cross selling initiatives beginning to gain a little more traction?

Yes, no, we really haven't seen dramatic changes there in either case. I mean, you always get under pressure, but that pressure is more early in the cycle, which is when we saw it when they start, say, substituting pot and pan for floor pan, because it's cheaper to use it. Those things are usually early cycle. We saw them, and the trends there have been pretty consistent.

And separately, if you're looking towards a longer slog going forward, are you -- have you shifted your sales force incentives at all?

We haven't right now, no. I would say our incentive programs work fairly well in both robust economic growth times and times like this and so they have stood the test of time. What we do is, we have different emphasis in terms of types of products that we're bringing to the market, what features that we are highlighting. We've been on a total impact, total cost conversation with our customers for a while, and the programs that we're introducing offer a great trade in terms of better chemistry, to help reduce electricity and water usage, and in total, they reduce their costs. And that story, which we've applied very successfully in ware washing, now in laundry, in F&B, in lubricants, now increasingly in the CIP space has resonated quite well with all of our customers. If there's going to be a shift, I'd say that's the shift, and we think that shift has long, long legs.

Thank you.

The next question comes from Mark Gulley, Ticonderoga, your line is open.

Hey, guys I've got 2 questions, one on demand and one on pricing. First of often on demand, Doug you earlier noted that you're seeing good results with respect to new account wins and national account activity. That sort of suggests that your base business is even softer than we're seeing. Is that the case, that the base business really isn't performing all that well?

No, I'd say we're growing, Mark, I would go and point back -- I mean, the institutional business, if we look at our consumption figures this quarter, was up mid -- like 4.5%. Which is roughly the same number we had in Q2, nearly identical. And that consumption pattern, we do know that traffic remains soft in the food service market. The corporate account numbers I talked about were global numbers, but we are seeing improvements in every region and across all businesses.

Right? So it's fairly uniform. It's not the same percentage in every region, in every business, but it's positive. And so I would say we know that the market isn't great and the way you grow in these markets is you gain share, and I think we're doing a great job doing that. And as a result, we expect to continue to accelerate. In fourth quarter, our projection is, we will have a stronger quarter in terms of reported and underlying sales than we did in Q3.

Okay. And on the pricing side, if I can, what kind of price increase might we expect, maybe fourth quarter and perhaps into next year? And even though the lines are crossing, raws versus price, on a cumulative basis, have you kind of made up what you surrendered and how long will it take to get back to even on a kind of cumulative basis.

It will take a few more quarters to get back everything. But in Q4, we would expect pricing to be 2%, up from about 1.5% in Q3. That's the kind of acceleration that we expect to see and that gives us obviously pretty positive pricing momentum moving into next year.

Thanks, Doug.

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

Good afternoon, guys.

Hello.

It's been a couple weeks since the Diversey transaction closed over at Sealed Air. Did they come out of the gate with any new programs, new pricing? Have there been any employment changes that you know of?

We don't have a lot of news there. And so, not apparent to us.

Anything that you're doing now that deal is closed to sort of defend your business better?

I would say this has always been a focus here, and remains a focus. I would say go back to the earlier comment, that our corporate account new business activity net is up fairly dramatically. I would say that's going to be an ongoing emphasis here and so 2 things. 1, we really don't like to lose business at all. And we think when we do lose business, it is fundamentally a mistake that we made somewhere along the process, and we don't like making those mistakes. And we are working hard to secure all competitors' business, because we think they'll be better off with us, and we'll continue to do that. So we're not going to become an easy competitor for anybody.

Thank you.

Next question comes from Andy Wittmann with Baird. Your line is open.

Good afternoon, guys. First, just want to start with a technical question. On the guidance, was there any change in the underlying foreign currency exchange assumptions, or was that flat versus last quarter's guidance?

I think we reflected a -- what I call a current view of FX, so in our guidance, FX, degraded if you will, since last quarter. We thought we were going to get more out of Q4 in July than we think we're going to get out of it now.

Okay. Great. And then Doug, I was just wondering if you could comment on some numbers that were in the proxy, that basically, apparently the numbers that Nalco's Board looked at versus Ecolab's Board looked at, it was basically a 5 year plan for each other's companies, those growth rates that were in the proxy suggested somewhere around 7% CAGR for Ecolab, a little bit better than that for Nalco. I think since that time, the economy's gotten a little bit, maybe, more uncertain. Can you comment a little bit about how realistic the numbers are that the Boards exchanged during the review?

Well, those are numbers put together by both the respective management teams and then shared with the Board as part of their ongoing strategic update process. I can certainly speak for our numbers. They were what we considered a realistic view of our business at that time. I would say, as all things, there's like 6 or 7 key inputs into those numbers, and they all change monthly. I would say broadly, if you want to get to the heart of it, we feel -- we like the position our business is in. Is everything perfect? No. But we think we're in good position.

We're building sales momentum. We've got pricing momentum going. We know raws a big going forward. FX, who the heck knows, hard to predict. But I think our ability to go kick out as a standalone Company, strong double-digit EPS is in good shape, particularly when you think about all the leverage activities that we have going on in Europe and the rest. And so that remains our view.

Is it 6% CAGR versus 7% CAGR on this year's economic view? I don't know if that's the heart of the story. I think in total, we have enough levers where we felt we could, 1, not only drive sales faster but also translate that into very strong EPS growth. On the Nalco side, I think we went through -- we looked at those numbers. We came up with our own view. Some of it is natural conservatism, where you're going to be shelling out a lot of money, that you want to make sure it works even in the absence of all good news, and so we worked hard to try to understand sensitivities. So, by and large is a basis. I think we feel quite good about the work that was done from both sides.

Great. Thank you. I'll leave it there.

The next question comes from Rosemarie Morbelli with Gabelli & Company.

Good afternoon. Thanks for taking my question. Doug, have you seen any change in the attitude at your customers on the water side, since you announced your acquisition of Nalco, and then related to that, any change or any discussions with Nalco since Diversey announced they would be the sole distributor for GE, which we know is a business which used to compete directly with Nalco in the past.

Yes, I would say too, by and large the feedback from our customers, particularly those who are going to be I guess in our minds positively impacted by the merger, the feedback's been quite positive from the customers. They understand why this makes sense, and why it works, and all the rest. Has there been any change? Certainly there -- in very rare instances we had customers contemplating a switch, and obviously they're just going to wait. Okay? So but I would say this is really very small stuff.

In terms of the GE Diversey announcement, I guess I would have 2 thoughts. Yes, you're right, Betts is their historic competitor and Diversey's ours. It's in a sense a nice gift from a locker room standpoint that we're working to bring the companies together, and we now have a common person, right? To go after and both is with our historic competitor. I would say it's a little bit an acknowledgement that what we're doing here makes strategic sense. I don't know what else to say. Otherwise, why would you work to go do that?

At the end of the day, I think our partnership, it's number 1, number 1 in our structure is preferable. I would rather have it run as a company, it's very hard to do alliances. Not impossible. GE and Diversey are both very formidable competitors. We'll take it serious, but I would rather have our structure.

Okay. That is helpful. And then if I may, on the acquisition side obviously your plate is kind of full with Nalco, but you were talking in your prepared remarks about healthcare and getting to a certain size to benefit from scale and so on. Have you put aside any thought of bolt-on acquisitions on the healthcare side or any other category for that matter while you are dealing with the Nalco acquisition?

No, Rosemarie, what we've said is even in our plans, in our forecasts, we continue to anticipate that we will have some bolt-on activity as we go forward. So we would expect to continue to have some small add-ons, in terms of acquisitions. We just I guess -- there's going to be that type of work going forward. I would say the bar's going to be a little different for a period of time, no doubt about it. But we know that there are a number of properties out there that we're very interested in and remain interested in, even in spite of the Nalco merger.

Thank you.

The next question comes from Jeff Zekauskas with JPMC. Your line is open.

Hi, good afternoon. If you look at your sequential sales, you went from about $1.7 billion to $1.74 billion. But your SG&A costs went from $610 million to $595 million, or down $15 million sequentially in spite of sales going up $40 million. How did you do that?

Well, Jeff, we've been working on a couple of pieces. But certainly, one has been, a lot of restructure activity going on in Europe, which is a big spend area for us. So certainly, we know that's gaining traction, so that had some of the story as we go through. If you're looking at reported numbers, right, as well, you're likely going to have FX and some other impacts too.

So I guess the counterpart of that is sequentially your international sales were up about $16 million, and your international operating profits were up $17 million. So does that reflect some absolute reduction in costs in Europe, or in your offshore area or how do you analyze that change?

Yes, look, again, you're going to have -- this is going to be year on year, so you're going to have --

Sequential.

This is sequential?

Yes.

Okay.

In other words, sales are up $17 million or $16 million, profits are up $17 million.

Yes. It's a big base. If you have gross profit expansion, right, significant, you've got a reduction in SG&A because of leverage, you'll end up being able to do numbers like that, not forever, mind you, but certainly that's the formula and we have said routinely that we expect to see increased leverage in our international businesses, right, in AP and LA, it's principally going to come from volume, and have you a fixed asset base and in Europe, it is principally from the restructuring or the efficiency activity, i.e., what we call Renaissance paying off.

Did your sequential prices change in the quarter?

Yes, they went up.

A percent?

No, didn't go up that much. I'd say -- it went up like half a point, 50 basis points.

Okay. Thank you very much.

The next question comes from Bob Koort with Goldman Sachs. Your line is open.

Thanks very much. Was wondering if you could talk a little about any disparity or what the variation in pricing is across your business units.

Pricing variation. You know, a lot of -- let me -- I'm going to go look for a chart for 1 second. Sorry, Bob. You want a detailed answer, you're going to get one now.

Excellent.

So, look, the pricing activity is greatest in institution North America. It's where we're seeing the raw material increases, principally, where we have the inflationary pressure. F&B, globally. Not as much in services. Healthcare, it's fairly modest. Regionally, North America, Europe were later cycle in AP and LA.

Can I follow-up on the institutional business, obviously it's the biggest one, we suspect one of the more profitable businesses, do you reach t at some point a scale disadvantage where you've just gotten so big that you can't grow at sort of those corporate-wide 7% to 8% rates that you project overall, or is there reasons to think there could be ebbs and flows in that particular business?

I guess theoretically you do get there. We aren't there yet. I think the thing to remember about our institutional business is, you've got to go take it back down to the customer level. The way we grow this business is by growing our business within customers, and if we sell more customers and sell them more stuff, we will grow, and the only reason I bring that up is if you look at even the change within institutional, where we've had the longest history, and have, frankly, the highest penetration from an institutional standpoint. You've still got significant upside in selling them GCS, pest, EcoSure, water filtration, et cetera.

They still remain a very good, if you will, growth avenue for this Company, and it's also a very profitable growth avenue for this Company, because we've got the whole infrastructure built up over time. That's how we think about that. When you look at institutional alone, I would say look, they've accelerated sales this year. Their second-half sales are going to be dramatically better from a growth rate than their first-half sales. They are working to offset, and will more than offset in the fourth quarter the raw materials that they've had to take on this year.

They continue to invest in that business. They've got the best product portfolio that I think they've ever had. They've got a bunch of stuff coming on-stream. They're putting technology out in the field. That business is a great business, and I really think that team's done a very good job driving the type of activities we know we need to drive to continue to grow share there, which is exactly what they're doing.

Very good. Appreciate it.

There are no further questions at this time. I'd now like to go ahead and turn it back to Mr. Monahan for closing remarks.

Well, thanks everyone for your participation today. If you have any questions, please give us a call. Otherwise, have a terrific day. Thank you.

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.