藝康 (ECL) 2012 Q2 法說會逐字稿

Welcome to the Ecolab second-quarter 2012 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 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 second-quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO. A copy of our earnings release and the accompanying slides referenced in this teleconference are available on Ecolab's website at www.Ecolab.com/investor. Please take a moment to read the cautionary statements on slide 2, stating that 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 second-quarter earnings release, and on slide 2.

We also refer you to the supplemental diluted earnings per share information that we released. Also please note that in order to provide a meaningful comparison of our results of operations where applicable, actual results for the second quarter of 2012 are compared against pro forma results for the second quarter of 2011. The pro forma results are based on the historical consolidated financial statements of Ecolab and Nalco and were prepared to illustrate the benefits or the effects of our merger with Nalco. These pro forma statements are available on our website at www.Ecolab.com/investor as well as our Form 8-K filed April 27, 2012, and selected portions are contained in our slide press release.

Starting with an overview on slide 3, we delivered strong results at the top end of our earnings forecast in the second quarter, despite currency and economic headwinds. We leveraged our sales and volume growth, pricing, as well as our synergy, and cost efficiency work to offset significantly higher delivered product costs, and produced yet another strong double-digit increase in our adjusted earnings per share. Looking ahead we expect to continue to outperform our markets and show good earnings gains in the third quarter and for the full year as a solid sales growth, appropriate pricing, innovation, synergies, and margin leverage more than offset expected moderating increases in delivered product costs, as well as offset the impact of higher depreciation and amortization charges from the merger. Further, we expect 2012 will be our 10th year of double-digit adjusted EPS growth in the last 11, and we will do so while setting up strong growth for the years ahead.

Moving to some highlights from the quarter, and as discussed in our press release, reported second-quarter earnings per share was $0.62. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, second-quarter 2012 earnings per share increased 13% to $0.72. The adjusted earnings per share growth was driven by volume and pricing gains, new products, and new accounts, which along with synergies and cost savings actions more than offset higher delivered product costs.

We enjoyed very strong sales growth in our global energy and Latin American operations, as well as solid growth from Kay and healthcare. We continue to be aggressive, focusing on topline growth. We're emphasizing our innovative product and service strengths to help customers get better results at lower cost and through these, drive increased market share in our core businesses, as well as new account acquisition across all of our customer segments. We also continue to implement appropriate price increases to help offset higher delivered product costs. We remained focused on expanding our margins, emphasizing productivity and efficiency improvements to help increase profitability as well as drive merger synergies.

We also continued to make investments in key growth businesses as well as bolt-on acquisitions to build future growth. Our work to integrate Ecolab and Nalco is going very well, and we're delivering on our cost and growth synergies. We continue to be focused on growing our business, and excited by the opportunities the combined Company offers our customers, as well as our position as the leader in additional high-growth markets that leverage our mutual core strengths in product technology and sales and service execution.

While economic trends and currencies present increasing challenges, we continue to look for the second half to show solid sales growth and further margin improvement. This strong business performance will continue to be impacted by the much higher depreciation and amortization expense from our merger. Third-quarter adjusted EPS is expected to increase 11% to 16%, to the $0.83 to $0.87 range, and compare with adjusted EPS of $0.75 earned by legacy Ecolab in the third quarter 2011. As business growth, the increasing benefits from synergies and cost reductions and seasonally higher revenues more than offset the higher fixed depreciation and amortization interest expense from the merger.

We narrowed our forecast range for 2012, recognizing exchange has cost us $0.05 per share since the last forecast while our efforts to gain share and improve efficiency will be used to offset weakening economies. We expect full-year 2012 earnings per share to rise 16% to 19%, to $2.95 to $3.02 range. In summary we expect 2012 to reflect another strong performance by Ecolab, as we show accelerating quarterly earnings gains to once again deliver a very attractive growth and shareholder returns this year, and set the stage for improved results in the years ahead.

Slide 4 shows our second-quarter results both as reported and pro forma, with adjustments for special gains and charges, while slide 5 shows our sales growth detail. Ecolab's reported consolidated sales for the second quarter increased 74%. When compared with second quarter 2011 pro forma sales, which include the impact of Nalco in both years, fixed currency sales rose a strong 6%. Looking at the pro forma fixed-currency growth components, volume and mix increased 3%, pricing rose 2%, acquisitions and divestitures did not have a significant impact, and currency decreased sales by 3%, rounding accounts for the difference in the total.

Reported sales for the US Cleaning and Sanitizing operations rose 1%. Adjusted for the transfer of the water treatment-related businesses to the global water segment, US Cleaning and Sanitizing sales increased 5%. Institutional sales grew 3% in the second quarter. Sales initiatives targeting new accounts in effective products and service programs, continue to lead our results and outperform mixed-end markets. As expected, and mentioned in our May teleconference, second-quarter sales growth moderated from the first quarter rate, reflecting the impact of an inventory build by distributors in the first quarter, as well as by comparison to the rollout of new products and programs in the year-ago second-quarter period. Total shipments, meaning direct plus distributor shipments, to our end-use customers, which we closely track showed a consistent trend as in the first quarter growing around 5%.

Looking at our end markets, lodging room demand continues to show steady gains, while food-service foot traffic remains soft. To drive our growth and improve on our industry leadership, we are introducing more new products that deliver increased value and reduce labor, water, and energy costs for our customers in our warewashing, laundry, and housekeeping markets. We launched our next-generation warewashing platform called Apex2 and showcased a number of other innovations at the National Restaurant Show in May. We also continue to increase our customer focus and service intimacy through sales force investments, simplified structures, marketing initiatives, and improved field technology.

Institutional continues to show very good fundamental trends and share gains. We expect Institutional to continue to deliver solid growth over the balance of the year and once again outperform its markets in 2012. Kay's second-quarter sales increased 10%. Quick service sales enjoyed strong growth in the quarter from both large and small customers. The food retail business grew double digits, benefiting from several new customer additions. We look for continued good sales growth in the third quarter and another strong performance for Kay in 2012.

Healthcare sales increased 7% as good growth from hand hygiene, environmental hygiene, and surgical drapes were offset by continuing soft US healthcare industry market trends. We continue to see steady new account gains from our product innovation and investments in new sales productivity tools. Looking ahead, third-quarter sales are expected to show solid growth.

Food and Beverage sales grew 6%. Sales increased in all segments led by corporate account wins, pricing, and product penetration. Food and Beverage will continue to focus on new account acquisition, pricing, and new product sales, though we expect third-quarter sales growth to moderate due to slower industry trends and the annualization of recent customer wins.

Sales for US other services rose 4% in the second quarter. Pest Elimination sales continue to show good trends, rising 4%. Growth was led by stronger gains in food processing and hospitality, improved results in food-service segments, and robust growth in add-on service sales. We continue to drive new product and program solutions to better meet our customer needs and differentiate our offerings. Recent new program launches like the expanded Large Fly program, and a new hotel protect program with bedbug assurance offering, are showing good initial results. We expect our new products and programs, along with aggressive selling and improved service levels, to yield continued sales gains in 2012.

Sales for GCS increased 4% in the quarter and profitability improved once again against the year-ago period. New account wins and appropriate pricing helped to drive strong growth in service revenues, which were partially offset by soft part sales. We're seeing good results from chain account relationships as we drive sales through their regional and franchise organizations. We expect GCS to show stronger sales growth and continued profit improvement in the third quarter.

Measured in fixed currency, sales for international cleaning, sanitizing, and other services increased 3%. Adjusted for the transfer of water treatment to the global water segment, fixed currency sales increased 5%. Europe, Middle East, and Africa fixed currency sales rose 2% in the second quarter. Europe's Institutional second-quarter sales were flat versus last year. New business gains among regional and local customers leveraged new products, but were offset by weak demand primarily in the Mediterranean and Ireland. Food and Beverage sales rose modestly over last year, reflecting market share gains, a focus on corporate accounts, and an emphasis on the cost savings benefits of our innovative products, which work to offset slower customer volumes.

Textile Care sales declined in the second quarter, reflecting very weak end markets. We're using new products and technology like lower temperature washing to offset these market trends. Reported healthcare sales in Europe were strong, reflecting the [ESA form] acquisition. Excluding the acquisition, healthcare sales showed good organic gains.

Pest Europe sales showed good progress, reflecting a continued focus on corporate accounts, new programs, and continued operational improvements. Our work to improve operating efficiency in our Europe business continues to show good progress. We're on track to deliver more than 200 basis points of structural margin improvement in 2012, though the weak economic environment, and raw material increases in Europe will offset about 50% of those gains at operating income. We continue to expect to improve margins to the lower teens in Europe over the coming years, though the current turmoil there is slowing the pace of our progress. Looking ahead, we expect Europe's third quarter to show continued modest fixed currency sales growth with good profit improvement, as it outperforms the weak European business environment.

Asia-Pacific sales grew 5% in fixed currencies on a pro forma basis. A sales recovery in Japan helped to offset moderate growth in China. Institutional sales showed good growth. New programs and a focus on restaurant and lodging expansion in the emerging Asian markets, along with a recovery in Japan from last year's devastating tsunami benefited sales. Food and Beverage sales also performed well, new account gains and recovering sales in mature markets led the increase. Looking ahead, Asia-Pacific expects continued good growth in the third quarter.

Second-quarter sales for Ecolab's Canadian operations increased 6% at fixed currency rates. Strong growth in core businesses drove the solid results. Latin America reported continued strong fixed currency sales gains, up 20%. Adjusted for the Brazil pest and Institutional acquisitions, Latin America grew 14% in fixed currencies, as Institutional, Food and Beverage, and Pest Elimination continued to grow at double-digit rates. Institutional growth was driven by continued success of global and regional customers and new growth opportunities in Brazil. Food and Beverage sales reflect continued strong demand in the beverage and brewing markets, as well as the benefits of new accounts and investments in key sales areas. Pest Elimination continued to deliver double-digit gains. Looking ahead, Latin America expects continued double-digit growth in the third quarter.

Fixed currency water sales increased 1% in the second quarter compared with 2011 pro forma results. Both periods includes certain water treatment related sales transferred from the US and international segments. In addition, 2012 compared with the year-ago period when sales grew a very strong 12%. Second quarter 2012 saw good growth in Food and Beverage, power, manufacturing, and mining. These were offset by lower sales in wastewater, where we compared against a large one-time sale last year, and in heavy industry including primary metals, where destocking especially in Asia hurt results. Regionally we saw strong growth in Latin America and a modest increase in North America and Asia. These were partially offset by lower sales in Europe, reflecting the weak economic conditions in that region.

We expect sales growth to improve in the third quarter, led by North America and Latin America as new account wins resulting from our differentiated technologies and appropriate pricing more than offset lower volume gains, lower volume trends, at existing customers. Global paper also compared against a strong period last year. Second quarter 2012 fixed currency global sales for paper declined 2%, compared with a very strong 11% increase in the year-ago period. Growth in Latin America and EMEA was more than offset by sales declines in North America and Asia Pacific. Lower customer plant utilization rates, especially in Asia-Pacific packaging, and a strategic elimination of certain low-margin business in North America more than offset the use of innovative technology to drive sales. Excluding the elimination of that low-margin business, paper sales would have grown slightly. We expect third-quarter paper sales to be flat as the paper market stabilizes.

Measuring fixed currencies, pro forma global energy sales grew an outstanding 19%, reflecting continued strong volume growth in upstream, and market share gains in downstream. Very strong double-digit growth in our upstream business was a result of robust markets, share gains, and continued focus on higher growth energy sources. We saw strong growth with deepwater accounts as well as continued strong sales to oil sands, the Middle East, and Africa. High-single digit growth in our downstream business reflected share gains in the Middle East and Asia. We expect the energy segment's growth to remain very strong in the third quarter as continued strength in the conventional offshore businesses and upper single-digit growth in downstream largely offsets the temporary impact of unconventional drilling shifting its focus and drilling assets to oil and away from natural gas.

Slide 6 of our presentation shows selected income statement items comparing reported 2012 with pro forma 2011 information to allow more meaningful comparisons. Reported second-quarter gross margins were 45.6%. Adjusted for the impact of special charges, 2012 adjusted gross margins were 45.7%. When compared with second-quarter 2011 adjusted pro forma results, 2012 gross margins decreased 20 basis points. The decrease in the adjusted gross margin primarily reflected the impact of the business mix impact of higher energy sales and exchange, which more than offset volume and pricing gains from a gross margin perspective. In absolute dollar terms, pricing once again exceeded the higher delivered product costs in the second quarter and we expect third-quarter gross margins to exceed prior-year levels.

Reported SG&A expenses represented 33.2% of sales. When compared with 2011 pro forma results, 2012 SG&A expenses declined 140 basis points. Leverage from the sales gains and cost savings efforts, including merger synergies, and Europe restructuring savings led the improvement. Reported operating income for Ecolab's US Cleaning and Sanitizing segment rose 19%. Adjusted for the transfer of water treatment to the global water segment, operating income increased 17%, compared with second-quarter 2011 pro forma operating income. Volume and pricing gains in cost innovation more than offset higher delivered product costs in the quarter.

Operating income for US other services increased 16%, benefiting from sales leverage and improved efficiency. International fixed currency operating income increased 19% versus last year. Adjusted for the transfer of water treatment to the global water segment, operating income increased 21%, with EMEA operating income up 33%. Margins improved as volume and pricing gains, our European transfer margin transformation efforts, and improved cost efficiencies more than offset higher delivered product costs.

Global water operating income grew 5% in fixed currencies, compared to pro forma results. Pricing more than offset higher delivered product costs, excluding a large project sale in last year's second-quarter, profits would have risen 8%. Global paper operating income declined 9% in fixed currencies as pricing was more than offset by a lower volume and the higher delivered product and other costs. Global energy operating income grew 18% in fixed currency, led by the strong volume gain, operating leverage, and pricing, which offset higher delivered product costs, investments in the business, and product mix. The corporate segment and tax rate are discussed in the press release.

We repurchased 1.3 million shares during the second quarter. The net of this performance is that Ecolab's reported second-quarter diluted earnings per share of $0.62, compared with $0.53 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 13% to $0.72 when compared with $0.64 earned a year ago.

Turning to slide 7, Ecolab's balance sheet reflected the impact of the Nalco merger. Total debt to total capital was 53% at June 30 compared with 32% reported a year ago. Our net debt was 51%.

Looking ahead and as outlined in slide 8, we continue to take aggressive actions to drive both our top and bottom lines, expanding our market share and customer penetration as one Company among major accounts, leveraging our leadership positions in key growth markets in food, water, energy, and healthcare. We are using innovation and pricing to benefit margins and expect to more than offset delivered product costs through 2012. Our merger synergies along with Europe's transformation work continues to go well and beat or exceed expectations. And we expect to deliver on these aggressive goals while building growth for the future.

As also described in our press release, we look for third-quarter results to show mid-single digit sales gains led by global energy, and our Latin America operations. This solid business performance will again be impacted by the much higher depreciation and amortization and interest expense, as well as increased share count from our merger. Adjusted third-quarter diluted earnings per share are forecast to increased 11% to 16% to the $0.83 to $0.87 range, compared with the adjusted earnings per share of $0.75 earned last year. We expect the benefits of growth from the underlying business, seasonally higher revenues, and moderating impact from delivered product costs, and increasing synergies and cost reductions to more than offset the weakening global economies, unfavorable currency, and higher fixed depreciation and amortization and interest expense and shares from the merger. As a result we continue to look for 2012 full-year adjusted EPS to increase 16% to 19% to the $2.95 to $3.02 range.

In summary we once again delivered on our forecast in the second quarter, while offsetting higher than expected delivered product costs and in the weakened economy while still investing in our future. We look for sales and profit growth to accelerate through 2012 second half, to produce another strong year, and make it our 10th year of adjusted double-digit EPS growth out of the last 11 years. And now here's Doug Baker with his comments.

Thank you Mike. Good afternoon. I just want to offer two thoughts and also talk a little bit about the pattern in the second half. So overall I feel very good about the progress we've made as a Company and the position that we're in. The integration work that we've undertaken has gone quite well. Our cost synergies are tracking above plan. We're already seeing effective transfer of technology from business to business. And it's already making an impact in our ability to serve customers. Growth synergies are ahead of target. And our people are on board.

The integration also, while it's going quite well, is not getting in the way of growth. So our underlying business continues to move ahead. Our second-quarter new business results in corporate accounts were again ahead of last year by double-digit. So the first-half corporate account new business gains are up over 25% versus last year. That is a huge metric for us and very important.

New product launches, one of the key drivers for gross margin recovery and expansion, are also on target this year. And our Europe Renaissance project, the restructuring project is delivering improved margins as Mike outlined, so the legacy Ecolab EMEA sales are up 2.5%, OI was up 34%, 120 basis point improvement versus second quarter last year. So we are on track for 100 plus basis point improvement for the full year. As a result, we remain on our path to deliver very, very good EPS growth for the year, forecast indicates 16% to 19% growth for the year, and importantly we will exit the year with real momentum.

The last point I'd like to touch on is a pattern of our EPS growth in the second half, which is different than our pre-merger pattern. Specifically, Q3 was typically a larger absolute EPS quarter than the fourth, and this year, post merger, we're forecasting a $0.06 to $0.07 higher Q4 than Q3. So what drives this is the following. First, our seasonality as a combined entity has changed, particularly between Q3 and Q4. So while it used to be lower in Q4, now Q3 and Q4 in a typical year are going to generate roughly equivalent absolute EPS earnings. So the basis changed when you look at the quarters sequentially.

Number two, we anticipate a significant and continue to ramp up in quarter-to-quarter synergy savings, and Renaissance restructure savings in Europe. In total, these will be $0.05 or even better, higher if you will in Q4 versus Q3. And finally, we also get roughly a $0.01 boost in tax in Q4 versus Q3 this year due to the US R&D tax credit, which since it hasn't passed, all falls in Q4 versus in typical years when we smooth it out over four quarters.

So importantly our expectations are on our sales, pricing, and raws are very consistent with current trends, meaning there is no expected hockey stick ramp-up in either markets or underlying performance trends in our business. Net, we think we have a very good handle on the forecast and on the business. Our expectations this year is for a very good performance for the full year 16% to 19%. Importantly it's accelerating double-digit EPS growth every quarter, all driven by excellent integration work, outside synergies, and continued excellent underlying business performance, driven by great new business gains.

Most importantly, not only did this set up for a very good year in '12, but means we are building momentum leaving the year, which bodes well for 2013 as well. So with that as an opening, let me now open it up for questions. And so I turn it back to the operator.

(Operator Instructions)

David Begleiter, Deutsche Bank.

Doug, thanks for the back second half description. Just on the same track, energy, how do you expect the back half of the year to look versus the first half of the year on an EBIT basis?

For energy specifically?

Yes.

I think our call is pretty much as it was at the end of Q1, which is our expected rest of the year performance at that time and this is high teens sales growth. And I would say improved EBIT margin. If you look at Q1, Q2 EBIT margins in energy, they look like they're different. If you really understand some one timers between the two of them, they're very smooth, and around 15% for those two quarters. We expect that they will be greater than 15% in the back half.

Excellent. And on the $0.05 increase in synergies, Q4 versus Q3, can you provide some more detail on what's driving that $0.05?

It's a whole host of initiatives, David. But getting down to fundamentals around indirect procurement savings, a number of which are contracts, which we've been renegotiating are just going in to place mid third quarter, so they haven't delivered any savings year to date. We'll get four quarter savings for these in Q4. We have continued reduction in G&A, and in headcount around the world, particularly in corporate, and G&A overlap positions. So those are more fully realized in Q4 than they are. We're closing offices around the world, which are taking place mid to late Q3, so you're going to see full impact of those in Q4. And I can go on another list of initiatives.

Then you get into the restructure programs in Europe. There have been a number of things that have been in the works for 18 months, which are coming on board in Q4. We'll start delivering savings there as well. So a lot of this is just natural timing. I think quite consistent with what we said at the beginning of the year that we wanted the majority of this work done the first year, which really means that it's going to be back half weighted.

And lastly, what do you expect the price versus materials gap to increase in the back half of the year as rolloffs come off?

Yes. I think always, we had anticipated first of all, the base gets easier in a sense because last year the raws really increased, ramped up in the second half and we had consistently I think pretty good performance on pricing. So as we just mentioned in Q2, pricing overtook raws; in Q3 and Q4 we're going to have a greater gap as we move on.

Thank you very much.

Nate Brochmann, William Blair.

Doug, just to follow-up on that last question a little bit, obviously we've all seen the decrease in fuel and I know that the raws don't necessarily always 100% follow that, but can you talk to us about the direction there in terms of whether you are seeing some sequential relief? And as you said, then as you put forth that pricing we should see as you mentioned an even greater gap there?

Yes. I think we have said -- no doubt that we are going to have improved gross profit year on year in the second half. It's going to be much greater than we saw in the first half. We were behind in Q1. We're about even in Q2. Q2, the gross profit issue was really a mix issue. And we will have improved -- you'll see daylight in three and four.

Certainly some of that is continued pricing. And then also raws have abated so our forecast for raws has come down from Q1 where we looked at the year to be quite over our plan to more in line with our plan quite frankly. But it has lowered over the course of the year.

Okay. And then a follow-up to that, Doug, whether it's correctly perceived or not, I know that during the road shows and in terms of the acquisition with Nalco, that you did the chart where the earnings with Ecolab and Nalco were actually pretty close in terms of volatility so it might be a little bit of a misperception. But I was wondering in terms of the raw material impact and volatility, do you feel that you have your hands around that now a little bit better on the Nalco side than maybe they did before?

I don't know. I guess we are comfortable -- we have good visibility and understand what's driving the ultimate business performance. And certainly, our understanding of the energy and WPS business is expanding as time goes on. But I think we're comfortable that we've got a handle on how raws impact that business. It's not dramatically different how we see raws impact our business. Either in size of impact, timing of impact, how long it takes any of these businesses to recover big raw moves in terms of pricing activity.

I think the story we told historically is year one, we recover absolute dollar impact. Year two, we recover margin. And I think that formula works quite nicely as you start thinking about WPS and ES as well. And I think that's what's played out. They have executed in both energy and water and paper quite well in terms of pricing to recover the raws.

And so you've got some abatement on the raw material on that side. I think we've got a handle on what that means and how it impacts the business. Certainly that's going to bode well and that's in our forecast for Q3 and Q4, but we had some $60 million of negative raw year on year in the first half and it's going to be modestly positive. You will pay less for raws in the second half than we did a year ago. So that's in the forecast. And I think we've got a good handle on it.

And one last quick one on the sale side, just in terms of what you're seeing in Europe, obviously you have a pretty high recurring revenue stream and I know the majority of the mix is to countries that are still doing okay. But can you talk a little bit in terms of what you're seeing there in terms of just trends and any significant deceleration?

Yes. Actually, we had modest, I guess, Q2 hung in there quite well. Our anticipation is we are going to hang in there in Q3 and Q4. I think we've got good reason to believe that. I think the pain is where you would expect it, that you go down to Italy, Greece, and Spain, and we have negative year-on-year sales growth in those markets. And it is fully offset by growth, albeit modest growth, in the balance of Europe.

I think we're somewhat favorably disposed given that our big weight is in Germany, France, and some other countries which aren't in great shape, but they're not nearly as adversely impacted by the crisis as, say, Greece, Italy or Spain where we have relatively smaller shares.

Great. Thanks for all the color.

John McNulty, Credit Suisse.

Just two quick questions. First of all on the business that was transferred out of Institutional into the Nalco businesses, the water piece, was that about $35 million? And on that can you walk us through what the margin impact would have been to either help or hurt Institutional and the water businesses?

Yes. The business came out -- it was our water business. It was in US Cleaning and Sanitizing and some of it was in our AP reporting to a business in Australia. It wouldn't have impacted Institutional at all. It was moving out of -- it didn't have any impact there.

I would say in total, as we look at it, it had a modestly negative impact on Nalco in Q2 because there's a big one-time sale in Q2 last year in that business. So the WPS business results would have been modestly better without it if you exclude it like a point higher in sales and 2 points in NOI.

Okay. Great. And then on the -- with regard to some of your business whether it's F&B or some of the Nalco businesses, is the drought having any impact on those businesses either positively or negatively at this point that you can tell?

Yes. It wouldn't -- not yet. We've been through many of these cycles in the past. This clearly is going to increase feedstock and ultimately increase protein prices. And we will have the typical switching among protein sources. We're fairly well represented across protein segments, so I don't think this is going to make our future conference calls -- I don't think it's going to be worthy of a mention. We'll just probably move through the cycle. Bigger impact on other people.

Okay. And just one last question. With regard to Europe and the margin improvement, it sound like it's going to be coming in maybe a little bit lighter, which I guess is a little bit surprising given that you're still seeing growth there. I guess, what are some of the things that are really holding back the potential for margin improvement there this year?

Yes. I'd say, John, what I would say is what we signaled, or I worked hard to signal into the first quarter was that we would not see 200 basis points this year of margin improvement. Mostly because the underlying market isn't as healthy as we anticipated. But with that said, we expected 100 plus basis point improvement. I would say we still believe that's the right forecast, one more quarter into the year. And I think the fact that we had a very strong performance in Q2 indicates that that forecast is pretty good.

The real change if you will from 18 months ago when we first gave it is obviously we anticipated modestly better underlying economic conditions in Europe, and we're seeing now I think we are performing quite well, given the European conditions. I mean, NOI is going to improve dramatically this year. We're going to make more money in Europe in spite of the economic prices. We're offsetting this, they're doing a good job on new business gains, getting pricing. Doing a bunch of stuff that I think bodes well for not only this year but for next.

Great, thanks for the color.

Ed Yang, Oppenheimer.

Doug, just following up on the European Renaissance again, you're looking for 2% margin expansion this year. Now 1% with the economy. How confident are you that the 1% will hold? Or with growth -- how much would growth have to slow further or deteriorate to see that change?

And the outlook for 2013 I believe you were looking for long-term, another 100 basis points full year going out. Does slower growth this year entail that you have to trim those outer year expectations as well?

Yes. So look, I'm confident we're going to do 100 plus basis points this year. I think we're on track. Certainly it's sensitive to sales. So if sales fell off or occurred differently than we are forecasting, but we're not expecting a big ramp-up of by any stretch, then that would be negatively impacted. I think, though, we've got a good handle on sales expectations, so we feel good about the forecast for the year.

In terms of outlook for '13 and ' 14, we would expect to continue to increase margin performance. We expect to have our highest margin in Q4 this year, which gives us very good momentum going into next year, leaving the year. So at least 100 plus again next year would be our expectation. And I think that's probably what we'll be forecasting when we get down to it.

Okay. And on the energy side of the business, you spoke about the margin comparisons between the first and second quarter and sounded like there were someone offs as well, but did you see any -- I expected somewhat of a bigger boost from raw material relief or propylene relief in the second quarter. Did that help? Was that helpful at all in the second quarter for energy?

Yes. It doesn't flow through immediately, right? Usually you've got inventory and other stuff you got to get through. Of course that convention is different by different geographies. Certainly, it was welcomed news. I think the best thing to hang your hat on is we feel good about the margin progression. And if we look at any more normalized time period, the second half could be better margin than the first half. I would call it very good growth, high teens growth in the third and fourth quarter. So that business we feel is quite healthy.

Okay. Maybe a question for Mike -- how much revenue was eliminated in the paper business?

About $5 million.

Okay. And are there any other businesses as you've gone through with the integration that makes sense to take another look at as well?

Yes. I'd say we're kind of constantly purging. One of the things we like our businesses to look at is, we won't use the word we use, their worst 10 contracts and maybe their worst performing parts of their business. And just make sure we have a handle on things change when we do these contracts and we want to stay up on them. There are is still contracts out there that we don't love, that we are on and after. Not only in I'd say the paper business or the water business, but some of the businesses, the legacy Ecolab businesses too.

Okay. Thank you for your time.

Gary Bisbee, Barclays Capital.

You've talked a lot about the risks to Europe and how you're doing there but can you just give a comment on the legacy Nalco businesses in Europe? I know those fell off quite substantially in 2009. Are you seeing pressure there? Are they doing about what you would expected? How should we think they'll trend in the back half?

We're trying to get a sheet to pull up because we've got a break out by even specific region. All in all, the WPS business for total Europe is performing, I would say it's in the 3% range, and the energy is up by 30% range. Total, if you combine all of our businesses, Europe growth would step up to the 4% range. So they're growing at a faster rate and have better margin than the legacy Ecolab business. One of the reasons we have the whole Renaissance restructure was that we were not satisfied with the legacy Ecolab business margin performance. And wanted to move that into the double-digit range, which is why all of the conversation around it.

I would basically say in terms of how we view Europe, it certainly isn't going to be a bright spot in terms of sales performance for us. We believe it will continue to grow. We do believe it's going to be a fairly bright spot in terms of operating income performance as we continue to drive margin in spite of all the bad news coming out of Europe. So the fact that we started this restructure18 months ago is, frankly, quite good news for us because it's enabling us to manage through a tough situation in a pretty effective way.

Okay. And then I wondered, are you still planning to do the $1 billion of buybacks that you mentioned that you announced the Nalco deal or shortly thereafter? I think you did $0.5 billion in Q4 but it seems like first half of this year you're well below the pace to do that second $0.5 billion.

Yes. We're actually almost 75% of the way through the buyback. If anything, we feel like we've made very good progress there. We did put it on what I'll call a hiatus as a result of the European crisis noise, just to make sure we understand how the financial system is or isn't impacted as we go through that, because we've made such significant progress in a pretty short order.

Okay. And then I guess the last one, what about the growth outlook in Asia? I know China is still fairly small but things seem to be decelerating there, and in some other places. Are you still confident that that business is positioned to get solid growth in the back half of the year? Thank you.

Yes. I would say in total in Asia, yes. We think we would the building momentum as we exit the year going this year. And China is probably one of the major stories there. In our China business, not surprising like everybody else's, has slowed as the year's gone on, or slowed down, and we do expect to start seeing sequential improvement in Q3 and Q4 as we exit the year in China, which has a fairly significant impact on the overall Asia business.

Great. Thank you.

Dmitry Silversteyn, Longbow Research.

Two of my questions have been answered, but I still want to get back and talk about the European business. You've talked about the Europe process, I think you made a comment were up north of 30% year-over-year, operating income. But the overall international operations were only up about 16%. So was this a currency headwind that we're seeing here? Or did profitability of some other operations in Europe decline to offset the international piece?

-- around the international reporting segment for Ecolab?

Right. All right. My question is, your overall International Cleaning and Sanitizing operating income was up about 16% if my calcs are correct, and I think you mentioned in your comments that European profits in dollars, you're operating income was up north of 30%. So since this is the biggest part of international I'm just wondering where the offset is, is it foreign exchange? Or did profitability deteriorate them in some other geographies?

Yes. We're talking typically when we're giving, say, the European 34% number, that's in fixed currency. And so you've got it right. In fixed currency we had very good performance across our international operating segments. And that report out is legacy Ecolab international operations. And it's then currency is the major negative as you go through this on a reported basis.

So currency was negative 2% for international operations for Ecolab legacy?

What that, Dmitry? You didn't come through.

Was currency a negative 2% contributor to topline in international operations for the legacy Ecolab business?

3% total for consolidated Ecolab. And so international was about 50% of that. Yes. So it would be bigger impact on international.

Okay. I'll have to get back to you on that, offline, then.

We'll get you the numbers from the public to the fixed because as you know we always report and manage to a fixed currency, so I'll have to check on what the public dollar was.

Right. No problem. Can you talk a little bit about the GCS business progression in terms of probability? I know you lost it a little bit of money in the first quarter of this year. Was that business slightly profitable or still losing money in the second quarter?

Second-quarter we lost about $0.5 million, in the second quarter. Anticipate that we will more than recover Q1, Q2 losses. And make money for the year Q3, Q4.

Okay. Very good. And then was there an acquisition component in your health care reported results? Or of 7% or is that -- are all the acquisitions in healthcare anniversaried by now?

Yes. They've anniversaried in second quarter in the US. There was an acquisition in the European healthcare, which we called out which was ESA form. But not in the US number.

And what was the contribution of that in the quarter? If you just look at the European business?

It was a few million bucks, Dmitry. I can get you the number after the call.

About 1% or so. Nothing super major. Final question just to get back on the European margin growth story, you talked about 200 basis points plus and in conversations that we've had, the issue of growth in Europe was supposed to be impactful of the magnitude of the plus, but not necessarily the 200 basis points initially, which were just cost removals, if I remember correctly. Now you're talking about offsets because of slower economy and yet you're growing in Europe, your business is not seeing volume declines. Can you reconcile your progression and your thinking about profit improvement in Europe, 12 months ago versus today?

Dmitry, I think consistent with the conversation we had at the end of the first quarter, or even when we announced the restructure program in Europe, we basically said, look, it's predicated on modest growth, not a huge ramp up in growth, but modest growth. And the other underlying assumption was probably a fairly stable raw material environment. What we've -- and so with that underlying assumption, we basically said we would expect to see 200, 200, and then 100, 100. And ultimately get to double-digit margins in Europe.

What's changed probably since we initially went out in January of 2011 is the fact that one, we had significant ramp up in raws, which we are now catching up to with pricing. The pricing catch-up is probably a little slower than our normal one-year, one-year formula I articulated earlier because the economic conditions there are so dire. And growth is a little worse than we anticipated when we announced it. Not terribly worse, but it's a combination of those two. And basically, has gotten us to say, we still expect to get to double-digit margins, but it's probably going to take a year or two longer than we initially forecast. Simply because the ramp-up's going to be a little slower.

We aren't coming off the fact that we think this business ought to be a 12%, 13% type margin business. And we still believe we see a clear road to get there. It's just a little longer road than we anticipated in January of 2011. So the forecast this year of 100 plus is certainly lighter than the 200 we went out initially, but I think given the environment, I feel the team's doing a very good job offsetting the raws and maintaining some sales momentum in a very difficult environment. So we think we will end up the year much improved in Europe and most importantly, I think with good momentum going into '13, so we can see continued margin improvement as we go into '13 and '14.

Just to be clear, Dmitry the work that we're doing in the cost take out, that is coming along as expected. And we are well ahead on that, simply the other costs are the issue.

Right. Understand. So it sounds like you're being maybe a little bit less proactive -- on pricing given the soft economic environment, perhaps it's costing you a little bit more to get incremental sales than you thought it would? And then plus the raw materials which at least for the first half of the year are comping negatively even though in the second half of the year, we'll keep our fingers crossed, that you're going to get a little bit of a relief.

Yes. Our pricing has been improving in Europe, but there's no doubt that pricing is a negotiation with a customer. And we've got to make some trade-off decisions based on where people are economically. It is always much more difficult to get pricing in a very difficult economic situation. Certainly I would consider Europe right now a difficult economic situation. With that said, pricing has been accelerating there for us, but not at the pace that the raws would have dictated in what I will call normal economic times.

Fair enough. Thank you for that color.

David Ridley-Lane, Merrill Lynch.

On a constant currency basis, did SG&A decline from the first quarter of '12? And then in your guidance, do you forecast a similar constant currency decline in the third quarter?

We're taking a look.

Certainly the part that we've got to go look at is there's a variable component to our SG&A, which is commission and some bonus which are based on growth. I would say certainly I can state confidently that the G&A component is coming down sequentially quarter by quarter by quarter as we go through this. There's no variability there. So we're doing a little math on the S part as we go through this.

Okay.

Give us a second and come back.

And then any numbers you can put on the Nalco synergy savings in the second quarter as you're progressing towards your run rate target of $250 million a year?

Yes. We had $21.5 million of synergy savings in Q2.

Perfect. And then just a final question, how did the Nalco revenue trend as you went through the quarter?

Well, I don't have day by day -- here's what I would say. We believe if you want to go -- what's our expected business trend? So we basically already said energy. We expect continued high-teen sales growth consistent with what we saw in Q2. We expect the water side of the business to show sequential improvement from two to three and three to four. And we expect the same on the paper business.

All right. Thank you very much.

Strengthened through the year, not weakened.

Laurence Alexander, Jefferies.

First, with the acceleration and the synergies, should we be thinking about -- are you pulling forward synergies from 2013, or should we be thinking of a widening gap over the quarters versus your prior trajectory?

Yes. Most of -- there are a lot of one-time synergies. I will say we are getting to maximum synergies on a faster path than we originally forecasted when we announced the deal last July. But with that said, I think there's going to still be, as the path unfolds, sizable synergy increase ' 13 to '12. We raised the number, but we're also working hard to move along this path quickly.

Okay. And secondly, can you talk a little bit about what's going on in the free cash flow -- Nalco was usually a fairly robust free cash flow generator. And can you just walk through a little bit what's happening there?

Yes. I'd say the free cash flow is in line with what our expectations are. So it refers nicely to the last question you asked. Part is we certainly are spending more. And at a similar rate on our restructure efforts. Which is one of the reasons that we're forecasting higher numbers than originally stated when we announced the merger, and at a faster pace. So that takes more restructure money early. So you've got that coming out. We made a fairly large pension contribution.

And then you naturally have working capital expansion. Working capital if you compare to Ecolab numbers by a year ago, simply because we've got a bigger business, the pro forma working capital that we're operating with now is quite consistent with what the business was utilizing last year, if you will, on a pro forma basis. But those are the big moves. We've got share buybacks, and some of the other things that we've talked about. But mostly it's going to be pension, and the restructure.

And I realize this would be in the Q but do you have a rough sense for how much is restructuring just so we can back out what normalized free cash flow is looking like?

Laurence, I'll have to get back to you with that number.

Thanks.

Shlomo Rosenbaum, Stifel Nicholas.

I thought I heard -- Doug, I thought I heard you talk about some outperformance in the growth synergies. And I was wondering if you can talk about that a little bit more, where you're seeing that and what specifically are you pointing to?

I'll take a shot at it myself since we had this, very ambitious goal of zero for the year. It wasn't hard to have outperformance but with that said I would say we feel very good about the uptake and the real focus initially has been on marrying the water technology and the Food and Beverage opportunity. And so there's work along two fronts. One obviously selling the existing water technology and also developing if you will, enhanced capabilities as a result of leveraging the 3D TRASAR technology and applying it in some traditional F&B arenas in the F&B space.

And both of those efforts are going quite well. The one I'm most excited about is the latter. The technology marriage, because of what it means long-term for the business and our ability to meet customer needs. So we've had very good progress in the quarters. We've already -- we're in the $20 million plus. We expect to be much greater than that. We've got a lot of prospects, and think we'll make very good progress here.

Great. Then the top end of the EPS guidance came down by $0.03. Is that all currency or is there anything else that's in there? Is there some macro in there? Can you give us a breakdown?

I guess the simplest math would be we mentioned earlier that currency since last quarter impacted us a negative $0.05 and we took the top down by $0.03. So currency, mostly. There's a lot of moving parts in the business, but currency would have been the outsizing impact.

Okay, That's what I was looking for. And then from a high level, when do you expect to be finished with a lot of acquisition noise so that this business can really exhibit the free cash flow potential that it has? In other words are we looking at mid-2013, 2014? When should I think about that?

I would say I think by and large it will be behind us by the end of '13.

So 2014 should be where we start to see breakout?

Yes. From a cash flow standpoint. I think we'll have very good EPS results through this integration period, but obviously cash flow's going to be negatively impacted with restructure expense. And that's really '12 and '13 impact.

Okay. Great. Thank you.

Andrew Wittmann, Robert W Baird.

Just want to get a little bit more clarity on the guidance as well. Looks like the assumption underpinning the share count changed from last quarter from this quarter. Looks like it actually went up a bit. By my calculation that's about $0.03 more that were impacted there. If we've got $0.05 of a change in the FX, maybe $0.03 in the share count, I guess operationally, what are you looking at? What are you seeing in the business which is helping you get back there? What segments in particular do you think are going to help you get there? Sounds like energy is one of them, a little bit more optimistic there, but is there anything else operation that's helping you get these offsets?

Yes. I would say one, the share impact is not $0.02. It would be $0.01. Just given timing of shares and the work that we've already done there. So it's not as dramatic as it might look, otherwise. I would say the pluses, certainly, we've talked -- I mentioned raws abated from first quarter in terms of what we forecast for the year to some degree. But then we've got continued improvement in synergies, other cost savings, and the underlying business is hanging in there and doing quite well. So I'd say it's a combination of those things that allow us to have confidence in what we're forecasting, which is a very good year.

And just in volumes, looks like there's a sequential downtick a little bit on the volume side. Can you just talk about -- you mentioned tough comps in some of the business, but how much of that is tough comps versus macro? If you could just help us get a little bit of color in terms of how the volumes have been trending here?

Yes. I guess the way -- looking at it over the last -- I've been looking at these numbers for a while, the simple thing if you're talking about 9% in Q1 to 6% in Q2, it really breaks down into probably three distinct pieces. One certainly is energy growing at 19% versus 29%. That's about 1 point of growth. That was expected. And we expect energy to continue in the high teens. So that point, if you will, should be built into how we think about the business going forward.

The second piece was -- I'll characterize it as somewhat inventory. It was year on year comparisons on inventory. Just basically as the industrial businesses slowed down, there's always an inventory take our first, so they get hit pretty hard and then have a little bit of a recovery. Call that a point.

And then there's just I think economic slowdown, which is probably worth another point. So two of those points are going to be with us. So while we went 9% to 6% I think as we look at the second half, we think we are 6% plus going through. So better than second quarter. Not at first quarter run rate. If that helps.

It does. Thank you.

Mike Harrison, First Analysis.

You guys have talked in the past about -- you talk a little bit about southern Europe being weaker. In the past, Q3 has been very important in terms of the vacation season. Do you have any early read on how that season is shaping up in southern Europe?

It's not great. But we don't think it's going to be a material driver in Q3. So I think we've got a good handle on what the expectations are, particularly in Italy as we go through it. It's not a monster piece of our European business. So I think we're in good shape even with a lousy holiday period in Italy.

And then within the energy business, you mentioned that mix was something that hurt I think both the quarter-on-quarter and year-on-year margin comparison. What's hurting you in mix? And maybe as we look forward, do you see anything that reverses the mix or changes the mix? I'm thinking maybe deepwater Gulf of Mexico, any thoughts on that?

I would basically say the first half performance of energy in terms of margin, we think is a very good indicator of how the business performed. I would probably say there is some favorable stuff in the first quarter, worth maybe 50 basis point and some unfavorable in the second. And we think 15 is probably the best proxy for how that business performed in the first half, which was the first half cumulative number.

So it wasn't huge swings in either one. It just happens on these 13-week periods. Right? Energy's got some big shipments and big deliveries that occur. And so you're going to have some impacts on 13-week periods. But all in all we think that business is fine and moving in the right direction.

And then last question is on the paper business, can you talk a little bit about the dynamics that you're seeing such that North America was soft and Europe is showing growth, and then maybe just quickly on Asia, is that mostly packaging that you're seeing contribute to softness there?

Packaging, where we had the softness, Europe somewhat was -- it went into the swamp earlier. And we've been fighting through in Europe a little longer. So I would just say it had -- it hit the low point earlier and is starting to move back. Right? North America I think you saw the slowdown in this quarter from an industrial output standpoint. And China is fairly clear too.

All right. Thanks very much.

Rosemarie Morbelli, Gabelli and Company.

Just following up on the paper business a little bit, I am surprised at your expectations of growth in the second half. As both in North America and in Europe, you actually have paper mills shutting down. What are you doing that is not affected by that particular factor?

Rosemarie, some of it was the business was I'd say impacted by destocking, which is somewhat behind us now in these other places. I guess I'd underscore the word modest expectations in terms of growth. So we're using the most liberal definition. We don't expect big bounce back in paper in Q3, but we expect it to improve, and so be positive in Q3, but quite modestly. Flattish to positive. And then better than that in Q4.

Okay. And then looking at the share buyback, usually you actually buy enough to offset the dilution. Based on the number you are giving us, there will be dilution in the third quarter. So have you stopped the buyback program altogether until next year when you have a better picture of the global economy and what you're doing?

Yes. No. We don't want to signal that. I think what we have said is once I think the Europe crisis showed its full head, and the fact that we had made such significant progress in a fairly short period of time, we thought discretion called for what I call a hiatus period. We haven't put a set timetable when that would end, but certainly we would like to understand what, if any, financial impact on the financial system we may see as we come through this.

As we also went and talked about the remaining shares have a somewhat a negative impact if they are not executed this year, but we think it's a manageable impact as we go through. So we think the plan that we have in place is a smart plan for shareholders and for the business.

By a negative impact, are you only talking about the higher number of shares translating into maybe a lower EPS? Or is it another negative impact that you are referring to and I am missing?

No. It's that impact.

Okay.

A little higher share count. Has a little negative impact on EPS. But we think the smart play right now is make sure we understand the situation before we continue to move forward.

Okay. So not because there would be some kind of a penalty if you don't go through the full program?

No. There's no penalty.

Okay. And lastly if I may, were you disappointed or happily or unhappily surprised by some of the Nalco results? And of course this addresses the predictability of the Nalco business which everyone was worried about at the onset?

Yes. I think the only way we're going to ever answer the predictability question is, are we able to continue to forecast successfully and continue to drive earnings growth? I would say we feel like we are positioned to demonstrate that as we move forward. I think that's going to be the ultimate answer to this question. I think it's the only fair answer to the question.

As we look at the business in total, I would say like the businesses that we've been managing for a long period of time, there are always pluses and minuses in all these businesses. I don't think that we've been quote-unquote surprised by the Nalco businesses. If there have been surprises they've been as many positives as anything else. Certainly energy has been a business we liked very much moving into this, and performed quite well. We knew that paper was more cyclical than the other businesses.

We knew Nalco in total was slightly more cyclical than Ecolab, but we always said that was a very high markets we are very un-cyclical. And we think this is manageable as we go through. When you take the total weight of the business, we think we would still characterize the total business as certainly manageable in terms of any cyclical nature, and still quite predictable.

Which is I think really what the hallmark of our business was is we work hard to deliver against the forecast we give so that there can be confidence in what we see going forward. We think that's important.

And lastly, thank you, Doug -- lastly if I may, can you remind me of the total synergy dollar amount that you're expecting for 2012?

In our original forecast for cost synergies, and so these would exclude tax. For cost synergies, our original forecast was $150 million at the time of announcement, July 20, 2011. We, in January, upped that to $250 million on cost synergies. Again, that excludes tax.

Jeff Zekauskas, JPMorgan.

Doug, when I look at your returns, if you add up all the Nalco operating profit, I think it was up $10 million year over year, roughly in the quarter. And your synergies were $21 million that you captured? So there's a question there, it seems that in the quarter all the returns or 80% of the returns came out of the Ecolab business. And that the incremental margins in your US Cleaning and Sanitizing were close to 70%. And in your international business, maybe they were close to 40%. So did the synergies in fact come out of the Ecolab side? Did Ecolab capture it? Or why is there such disproportionate operating profit growth on the Ecolab side, and so little on the Nalco side given the synergy total?

I would say two things. One, allocations and how we allocate dollars, the synergies are going to show up not only the energy and WPS businesses, but also the institutional, F&B, Kay, et cetera businesses. The way that we allocate. So that they're not going to flow specifically or only to WPS and to energy as we go through that. So I don't think you can look at it that way and expect that they are only going to be there.

With that said, if you look at the energy and WPS businesses together, their first-half performance was quite strong. I would say our business was quite strong. And so year to date, they're up 16% NOI, if you exclude the business that we transferred to them. So the underlying business performance has been very solid there. The synergies will build considerably quarter by quarter. So you take the $20 million run rate at 80%, it's nowhere near the $250 million that we're forecasting.

So we know that's going to get better over time. And you'd also have to look at tax over time where we've had sizable cash impact as well as we've already brought down the combined rate to equal that historic rate of around 30%. They were running at about I think 34%. And so we've already brought that down considerably. So I think you'll see sizable cash benefits as this story unfolds as well.

If you took your $20 million in synergies or $21.5 million in synergies, how would you allocate them across the divisions in the quarter?

I don't have the specific allocation here. We're talking 20 businesses in a bunch of countries.

Okay. Thanks very much.

But that's not how we set up the P&L.

Sure.

There are no other questions at this time. I'll turn it over now for closing comments.

That's it for us. Thanks, everyone, for your time. If there's any questions, please give me a call to follow up. Have a great day.

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