藝康 (ECL) 2012 Q4 法說會逐字稿

Welcome to the Ecolab fourth 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 any objections, you may disconnect at this time. Now I would like to turn the call over to Mr. Michael Monahan, Senior Vice President, External Relations. Sir, you may begin.

Thank you. Hello, everyone, and welcome to Ecolab's fourth quarter conference call. With me today is Doug Baker, Ecolab's Chairman 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, saying 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 discussed in the section of our most recent Form 10-Q, under item 1-A, Risk Factors, in our fourth quarter earnings release, and on slide 2. We also refer you to the supplemental diluted earnings per share information in the release. In addition, as mentioned on slide 2 of this conference call, does not constitute an offer to sell or the solicitation of an offer to buy any securities.

Also, please note that in order to provide a meaningful comparison of our operating performance, where applicable, actual results for the fourth quarter of 2012 are compared against pro forma results for the fourth quarter of 2011. The pro forma results are based on historical consolidated financial statements of Ecolab and Nalco, and were prepared to illustrate the effects of our merger with Nalco. These pro forma statements are available on our website, at Ecolab.com/investor, as well as our Form 8-K filed April 27, 2012, and selected portions are contained in our slides and press release.

Starting with an overview in slide 3, we delivered strong results in the fourth quarter, despite continuing economic headwinds and higher delivered product costs. We leveraged improved sales volume, pricing, our synergy and cost efficiency work, to produce our tenth year of double-digit adjusted EPS growth out of the last 11. Looking ahead, we expect to continue to outperform our markets and show double-digit earnings gains in the first quarter and the full year, as solid sales growth, appropriate pricing, innovation, synergies and margin leverage more than offset increased delivered product costs.

Moving to some highlights from the fourth quarter, and as discussed in our press release, reported fourth quarter earnings per share were $0.77. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, fourth quarter 2012 earnings per share increased 27%, to $0.89. 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 strong gains in Global Energy, Latin America, and our worldwide Kay operations.

We continue to be aggressive, focusing on top line growth. We are emphasizing our innovative product and service strengths to help customers get better results at lower cost, and through these drive new account acquisition across all of our customer segments. We also continue to implement appropriate price increases to help offset higher delivered product costs and investments in our business. We remain focused on expanding our margins, emphasizing productivity and efficiency improvements to help increase profitability, as well as drive merger synergies. We also continue to make investments in key growth businesses to sustain our technology and sales and service leadership positions.

Our work to integrate Nalco and Ecolab have gone very well. One year into the merger, we are delivering on or ahead of plan on our cost and growth synergy targets. Our agreement to acquire Champion Technologies, announced October 12, continues under review by the Department of Justice. We remain in active discussions with them and believe we are nearing a resolution; and still expect to close in the first quarter, but have nothing further to report at this time.

While economic trends present ongoing challenges, we continue to look for the first quarter to show further sales gains and margin improvement. First quarter adjusted EPS is expected to increase 12% to 20%, to the $0.56 to $0.60 range, and compare against adjusted EPS of $0.50, as business growth and the increasing benefits from synergies and cost reductions more than offset soft economies, the higher delivered product and pension costs, the sale of Vehicle Care, and comparison against a strong quarter last year. We continue to expect full year 2013 adjusted earnings per share, excluding expected Champion accretion, in the range of $3.38 to $3.48, representing 13% to 17% base growth, with Champion accretion improving on that. In summary, we expect the first quarter to show another solid double-digit earnings growth performance by Ecolab, as we also make the key investments to drive superior results this year, as well as in the years ahead.

Slide 4 shows our fourth 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 fourth quarter increased 65%. When compared with fourth quarter 2011, adjusted pro forma sales, which include the impact of Nalco in both years, Ecolab's fixed currency sales rose 7%. Looking at the pro forma of growth components, volume and mix increased 5%, pricing rose 2%, acquisitions and divestitures did not have a significant impact, and currency decreased sales by 1%. Rounding accounts for the remaining difference. Reported sales for the US Cleaning and Sanitizing operations rose 2%. Adjusted for the transfer of water treatment-related businesses to the Global Water segment, US Cleaning and Sanitizing sales increased 5%.

Institutional sales grew 5% in the fourth quarter. Sales initiatives targeting new accounts and effective product and service programs continued to lead our results, outperforming mixed end markets. Lodging room demand continues to show modest growth, while food service foot traffic remains soft. To drive our growth and improve on our industry leadership, we remain focused on new products that deliver increased value and reduce labor, water and energy costs for our customers in our warewashing, laundry and housekeeping markets. Programs we launched in 2012, like our next generation warewashing platform, called APEX 2, have gained traction and have been well received in the marketplace. In the fourth quarter, we launched a new hard surface cleaning system for facilities managers. We also continued to increase our customer focus and service intimacy through salesforce investments, simplified structures, national and local marketing initiatives, and continued investment in field technology to help drive efficiency and service, as well as better align sales efforts. Though institutional will face a tough comparison against a strong sales period in first quarter 2012, we expect our new sales initiatives and product innovation will enable institutional to show steady sales improvement in the first quarter and better gains throughout the year, as it once again significantly outperforms its markets in 2013.

Kay's fourth quarter sales increased 12%. Quick service sales enjoyed strong growth in the quarter from both large and small customers. The food retail business grew at strong double-digit rates, benefiting from several new customer additions. We look for continued good sales growth in the first quarter and another solid performance for Kay in 2013.

Healthcare sales increased 4%, as good gains in our patient temperature management business led results, benefiting in part as guidelines for patient management during surgical procedures gained greater acceptance. Healthcare's growth also benefited from our environmental hygiene and surgical barrier solutions for hospitals that help prevent the transmission of hospital-acquired infections. These more than offset continued softness in the overall US healthcare market. Looking ahead, first quarter sales are expected to show better growth, as account gains, along with new products to be launched this year, will help drive sales and offset the challenging healthcare environment.

Food and Beverage sales grew 2%. Good gains in the dairy and food offset beverage -- or lower beverage and protein sales. Our market focus on improved customer penetration, along with our drive to provide total plan assurance offering comprehensive plant-wide cleaning and sanitizing, water treatment, waste water and pest elimination solutions, has enabled us to win new business and focus -- and offset slow conditions in the beverage and protein markets. When combined with our innovative products and our focus on lowering customer energy and water usage, we expect to see similar sales trends in the first quarter, with better trends developing in the second half.

Sales for US Other Services rose 3% in the fourth quarter. Pest elimination sales continued to show good trends, rising 3%. Growth was led by stronger gains in food processing and healthcare, improved results in food service segments, and a 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. Programs launched in 2012, like the expanded large fly program, and the new hotel protect program with bed bug assurance offering, have shown good results. We expect our new products and programs, along with aggressive selling and improved service levels, to yield continued good sales gains in 2013.

Sales for GCS increased 5% in the quarter. Meal count wins helped to drive strong growth in service revenues, which were partially offset by soft parts sales resulting from a system change which is now complete. We continue to see good results from chain account relationships, as we drive sales through their regional and franchise organizations. We expect GCS to continue to show improved results in the first quarter, as we expect continued good service trends and improved parts sales to benefit results.

Measured in fixed currencies, 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 3% in the fourth quarter. Europe's institutional fourth quarter sales declined versus last year. New business gains among regional and local customers leveraged new products, but were more than offset by soft market trends and continuing weak demand in the south. First quarter sales will also be lower than last year, as the timing of distributor shipments and one-time sales last year, combined with soft end markets, impact the first quarter comparison.

Food and Beverage sales rose modestly over last year, reflecting market share gains, a focus on corporate accounts, and the cost savings benefits of our innovative products. These worked to offset lower customer volumes.

Textile care sales rose modestly in the fourth quarter. New account wins, new products and technology, like lower temperature washing, more than offset soft market trends. These should also benefit 2013, along with a focus on improved account profitability, that includes additional pricing and culling unprofitable accounts.

Healthcare sales showed solid organic growth in Europe, led by new account gains and new products. Pest Europe sales showed good growth, due to a continued focus on corporate accounts, new programs and operational improvements. Our work to improve operational efficiency in our Europe business continues to show good progress. We are further leveraging our shared services facility, transferring more work to Eastern Europe and offshoring. We also continue to consolidate facilities and improve procurement savings.

We delivered more than 200 basis points of structural margin improvement in 2012, though the weak economy and raw material increases in Europe offset about half of those gains in operating income. As a result, EMEA's operating income margins increased by 110 basis points in 2012. We continue to expect EMEA's operating margins to improve to the low teens over the coming years, rising at around 100 basis points per year, as the current economic challenges faced by Europe slow the pace of our progress. For 2013, we expect further substantial gains, with margins expected to rise around 100 basis points as a result of our actions. Looking ahead, we expect Europe's first quarter to show flat fixed currency sales, with strong profit improvement, as it outperforms the continuing weak European business environment.

Asia-Pacific sales grew 6% in fixed currencies. Better trends in China, along with strong growth in other emerging markets, served to offset slower growth in mature countries. Institutional sales showed solid sales growth, led by good account gains in fast growing markets and by new product sales. Pest Elimination sales benefited from increased product penetration and account gains. Looking ahead, Asia-Pacific expects continued solid sales growth in the first quarter of 2013.

Fourth quarter sales for Ecolab's Canadian operations increased 5% at fixed currency rates. Growth in the core businesses drove the solid results. Latin America reported continued strong double-digit fixed currency sales gains, up 19%. 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, despite some slowing in Latin America markets.

Fixed currency global water sales increased 3% in the fourth quarter compared with 2011's pro forma results. Good growth in Food and Beverage, primary metals, power and manufacturing were offset by lower sales in mining. Regionally, we saw moderate growth in Asia, Latin America, and North America. Europe grew modestly, reflecting the continued challenging economic conditions in that region. We continue to drive market penetration with innovative solutions to optimize water usage, through technologies including 3D TRASAR for cooling towers, new commercial solutions for water recycling and reuse, and applications for waste water. We expect global water sales to be flat in the first quarter, as gains in the Americas are offset by difficult markets and operating conditions in mining and Asia.

Fourth quarter 2012 fixed currency global sales for paper increased 1%. Strong growth in Latin America and moderate growth in Asia and Europe was led by the use of innovative technology, and was partially offset by the strategic reduction in low margin business and lower customer plant utilization rates in North America. We expect first quarter paper sales will decline modestly, as the paper market shows continued weakness, primarily in North America.

Measured in fixed currencies, pro forma energy sales grew 18%. The quarter reflected strong volume growth in upstream and market share gains in downstream. Strong double-digit growth in our upstream business was a result of healthy market conditions, share gains, and a continued focus on higher growth energy sources. We saw very strong growth in deep water and shale accounts, continuing momentum in oil sands, as well as strong activity in the Middle East, Africa and Latin America. Downstream business growth reflected share gains in Asia and Latin America.

We expect 2013 base energy segment growth, excluding the impact of Champion, to run above our long-term expected trend of 10% to 12% sales growth, driven by shale, continued strength in the deep water and oil sands business, and steady growth in downstream. But the pace will moderate from 2012's fast pace to closer to their long-term trend. We look for first quarter 2013 sales to reflect this moderation, as well as reflect the comparison to a very strong quarter last year, when sales rose 29%. Net, we expect first quarter energy sales to rise in the upper single digits, excluding the impact from Champion, with much stronger organic sales growth in the following quarters.

Slide 6 of our presentation shows selected income statements, comparing reported 2012 with pro forma 2011 information to allow more meaningful comparisons. Fourth quarter gross margins were 46%. Adjusted for special charges, fourth quarter gross margins were 46.4%. When compared with fourth quarter 2011 adjusted pro forma results, 2012 gross margins continued to expand, increasing 80 basis points. The adjusted gross margin improvement primarily reflected the benefits of the volume and pricing gains, as well as merger synergies and cost efficiencies, which more than offset higher delivered product costs and the business mix impact of higher energy sales.

Reported SG&A expenses represented 31.9% of fourth quarter sales. When compared with 2011 adjusted pro forma results, the 2012 SG&A expense ratio also continued to improve and declined 210 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 17%. Adjusted for the transfer of water treatment to the Global Water segment, operating income increased 15%, with margins up 190 basis points when compared with fourth quarter 2011 pro forma operating income. Volume and pricing gains and cost synergy efficiencies led the increase.

Operating income for US Other Services declined 7%, as good results from pests were offset by field investments, including EcoSure, and the completion in GCS of the parts distribution change.

International fixed currency operating income increased 32% versus last year. Adjusted for the transfer of water treatment business to the Global Water segment, operating income increased 35%, with EMEA operating income up 48%. International margins improved 300 basis points, as pricing and volume gains and our Europe margin transformation efforts more than offset higher delivered product costs.

Global Water operating income grew 37% in fixed currencies compared to pro forma results. Margins expanded 310 basis points as pricing, volume gains and cost synergies led the increase versus a soft period last year, before pricing actions began to benefit results.

Global Paper operating income increased 72% in fixed currencies, which compared against depressed results and an unusually large bad debt last year. Excluding bad debt, operating income rose 57%. Pricing, synergies and the elimination of low margin business drove the increase. Similar to Water, these results compared with a weak period last year before pricing actions began to benefit results.

Global Energy operating income grew 49% in fixed currencies. Margins expanded 350 basis points, led by the strong volume gain, operating leverage, pricing and synergies, which more than offset delivered product costs, investments in the business and comparison to last year, which included a sharp run-up in raw material costs. We expect Energy's first quarter operating income will be similar to the prior year, reflecting the first quarter's lower volume growth, significant field investments, and the business mix. We expect double-digit growth in the remainder of the year.

The corporate segment and tax rate are discussed in the press release. Reflecting the pending Champion transaction, we did not repurchase any shares during the fourth quarter. The net of this performance is that Ecolab reported fourth quarter diluted earnings per share of $0.77, compared with $0.34 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 27%, to $0.89, when compared with $0.70 earned a year ago.

Turning to slide 7, Ecolab's balance sheet reflected the impact of the Nalco merger. Total debt to total capital is 52% at December 31, compared with 57% reported a year ago. Our net debt to total capital was 47%. The large cash portion -- position reflects cash related to the pending Champion purchase.

Looking ahead, 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 among major accounts, leveraging our leadership positions in key growth markets in food, water, energy and healthcare, as we work to offset continued generally soft global conditions. We expect to show margin expansion again in the first quarter, driven by sales growth, innovation, pricing, merger synergies and better operating efficiencies. 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 first quarter results to show moderate pro forma sales gains, as underlying growth remains good, but as our Energy business compares against strong prior year results. We expect that Energy will return to double-digit growth in the second quarter. However, we expect this first quarter comparison will result in approximately a $0.03 negative impact on first quarter EPS, along with the previously mentioned impact from lower interest rates on our pension plan and the absence of Vehicle Care that will together cost an additional $0.03 per share in the first quarter of 2013.

Despite these very substantial headwinds, many of which have an outsized impact on our seasonally smallest quarter, we still expect adjusted first quarter 2013 diluted earnings per share to increase 12% to 20%, to the $0.56 to $0.60 range, compared with the adjusted earnings per share of $0.50 earned last year. We look for continued double-digit growth over the balance of the year and expect full year 2013 adjusted earnings per share, excluding the expected Champion accretion, in the range of $3.38 to $3.48, representing a 13% to 17% base growth, with Champion accretion improving upon that.

As an update regarding our pending Champion acquisition, we've received clearances from all required countries, except the US. As mentioned earlier, we remain engaged and active in ongoing discussions with the US Department of Justice regarding its review. We believe that we're nearing resolution of their issues and expect to close within the first quarter. We hope to have more information soon. We continue to expect the Champion acquisitions will be $0.50 accretive to 2016 and help us to build a stronger Energy business and a stronger Ecolab, with better growth opportunities to achieve continued consistent, predictable, above average growth.

We also want to let you know that, consistent with our change to a global business management structure, we'll begin reporting segment sales and operating income on a global basis for the Cleaning and Sanitizing businesses, including Institutional, Food and Beverage, Kay, Healthcare and Pest Elimination, as outlined in slide 9, beginning in the first quarter 2013. This will be on the same basis as Water, Paper and Energy are currently reported, and we will present all of our businesses on the same global basis. This will not affect Ecolab's previously reported consolidated operating income or EPS, and we will issue annual and quarterly restated information prior to the first quarter release, so you can see how this change will look in prior years.

In summary, we once again delivered on our forecast in the fourth quarter, while offsetting higher delivered product costs and the weaker economy, while still investing in our future. We look for sales and profit growth to continue to show double-digit growth in 2013's first quarter and full year, as we drive to produce yet another strong year and build for our future. And now, here's Doug Baker with a few comments on the quarter.

Hello, everyone. Just a couple of thoughts. First of all, Q4, I guess you would have to describe as a very good end to a very good year. First, we successfully drove integration all year, delivered $75 million in synergies as forecast. We had a lot of the heavy lifting behind us, reorganizations, relocations, comp and benefit changes. And we feel good about that, because while doing that we continue to do a very good job driving the underlying business. So last year, our underlying business continued to perform very well. We had record new net corporate account business gains. We had very good customer retention metrics. Sales grew and margins expanded in virtually every business. Europe was a huge net plus, particularly in the fourth quarter, up a reported 310 basis points. But if we adjust for what we consider one-time, it's still over 250 basis point improvement year-on-year. And Energy, as we all know, had an amazing year.

So we exit in good shape and we expect another very good year in 2013. The formula is going to be quite familiar, i.e., new business, plus new innovation, plus synergies are all designed to overcome what we consider still continued lousy markets. We expect 13% to 17% EPS growth next year. That's adjusted EPS growth. And again, strong Energy performance, in the lower to mid-teen growth, both top and bottom line for the year. It's going to be one of the key drivers. But also solid performance from all of our businesses, which is exactly what we realized last year. Here, more in the single digit growth, but expanding margins to drive great leverage.

Now, all of the above continues to exclude the impact of Champion. We do expect Champion to close in the first quarter; and after it closes, we will then come back with our expected accretion impact from Champion for the year. But we'll wait until we close.

So those are my opening thoughts. I'm going to pass it over to Mike to start Q&A.

Operator, would you please begin the Q&A process?

Certainly.

(Operator Instructions)

David Begleiter, Deutsche Bank.

Thank you. Good morning -- or afternoon, Doug.

Energy -- can you give a little more color on the Q1 headwinds impacting earnings and how they will reverse or be less in the back half of the year?

Yes, the simple answer is, we had 29% growth in Q1 of last year. So it's really mostly a story of the base and a comparison with the base. And really, our expectation is -- so we even talked about that 29% as abnormal last year and not to expect that to continue in the second, third, and fourth quarter of 2012. And we said expect high teens, which is exactly what we ended up delivering.

This year, it is more low to mid-teens expectation. But the first quarter, because of the comparison, is just going to be lower. However, if you start doing two-year growth rates and everything else, it's going to be continued very good news and we expect good things. That business is in very good shape.

And Doug, just on Europe -- is this Q4 result a real turn in the business that you've been looking, waiting for?

Yes, I think we always knew -- we did a little over 100 basis points last year, improvement year-on-year in margin. That follows a 65 basis points in '11. So cumulative, we're up about 175 basis points for the two years. That's below the projection we made when we announced the Renaissance restructure January of '11.

However, we also didn't predict the Europe crisis and all the rest. So yes, I think it is a clear sign that the programs we've implemented are making headway; that in spite of the sluggish economies, we're reporting sales growth -- i.e., modest, a couple points -- but that couple points generated very sizable OI returns and growth as a result of the Renaissance work that we did. And so, as Mike talked in his earlier comments, we expect another 100 basis point improvement this year. And we still see, in total, 1,000 basis points over the life of this program. It's just going to take more years to get as a result of the Europe crisis than it would have if we had a , "more normal" European economic situation. But we feel great about it.

Thank you.

Nate Brochmann, William Blair and Company.

Hello, everyone.

Nate.

Wanted to talk a little bit on the pricing on the raw material front, Doug. Obviously, you got a little bit of relief heading into the end of the year relative to the big pressures that you saw at the beginning of the year. Obviously, still getting a little pressure in the first quarter. What gives you the confidence, looking out through the year, that again you catch back up and that those raw material prices abate?

Well, look, you never -- I would say, here's how we're treating it. Our best estimate is that it abates in the second half of the year. That's what we think is going to happen. Our plans assume that it won't happen.

So we are out aggressively going after pricing and doing all the things that we know we need to do to make sure that we continue to manage this situation until it shows itself to be as benign as we forecast. So you have what you're going to do and you have what you forecast. We try not to let the forecast influence us unduly.

My guess is it abates. If I'm wrong, we're still going to have it covered. If I'm right, I think we'll be even happier.

Okay. Just a follow-up -- back on the Europe front. You talked about your customer retention being pretty strong last year, which is obviously evident in the decent, good performance there. How are you seeing the customer retention in Europe, particularly the pressures that everyone is facing? And given that you're still considered a premium type product? Thanks.

Yes. Well, we've done well in Europe -- frankly, all over the world, in terms of retention this year -- across our major businesses. I would say, while our products are priced premium, we generally prove to be lowest end-use cost because of the savings that we deliver in Water, Energy, and the rest. And the longer people are with us, the more they understand the economic benefits of our programs. So we have historically been good at retaining customers. And I would say that's continuing, and we're having good success continuing to generate new customers.

And you have to, in this environment. Because underneath the covers, if you will, we all know that there's real softness in the economy, and so our version of same-store sales aren't going to be enough to drive the type of growth that we expect from ourselves.

Thanks.

Gary Bisbee, Barclays Capital.

Hello, guys. Good afternoon.

Following up on that last point, Diversity was out recently, mentioning a large North American hospitality customer win that they implied was from you. I wondered if you'd comment on that? Or if not on that, more broadly how do you see, with them better capitalized and we hear hiring salespeople in the marketplace again -- how do you see them as a competitor? Has it changed much? Thank you.

Yes, I guess, Gary, to answer it, we have always had a great deal of respect for Diversity. The best way for us to show the respect is to likewise be a very aggressive competitor. We don't plan to change that. I would say, in all cases, we track wins and losses against every major competitor that we have in all the businesses that we're in. To a competitor, we had substantially more gains than losses last year. That would include Diversity. That includes the victory that they're touting.

We tend not to get into an account by account. I think we've learned over the years that, if you're going to talk about your wins, you probably should talk about all your losses, too. And there's a million accounts that we handle over a year. I think at the end, we're going to work to drive performance. We feel good about how we're doing that, and we feel good about the momentum we have.

Okay. Great.

And then the follow-up -- can you give us an update on how you're feeling about potential revenue synergies from Nalco? I know you weren't expecting a whole lot this past year, but is that on track? Any wins or any commentary you can give on how that's looking? Thank you.

Externally, we had a very low target, called zero. Internally, we had a little more ambitious target. And I would say we are handily ahead of our internal target. We've had more early success than I think we forecast, and like the prospects going forward. So when we announced the merger, we talked about $0.5 billion by 2016 in growth synergies. And we still believe that's very achievable.

Thank you.

Jeff Zekauskas, JPMC.

Hello. Good afternoon.

Could you talk about the conditions in the Global Water business in Asia -- whether your business is growing or contracting, and what are the factors at work?

Yes, it's growing. Didn't grow every quarter all year, but improved steadily throughout the year. And I guess that's how we view it -- that some of the pressures on the Water business, particularly in Paper, occurred in Asia first. And we see Asia coming out of it, in many cases, led by China. So I guess we view that as a positive story as we move forward.

But of course, varies by end market. You've got more pressure where you might expect, mining and some of the others, which we addressed in the upfront comments. But the Water business, we expect to continue to grow next year and to continue to have very good OI performance.

So when that business was part of Nalco, it used to rack up years where it would grow 20%. What are the factors that have slowed that rate of growth down? And what do you see as a more normal growth rate for the Asian Water business?

Yes, well, it grew quite quickly in 2011, as well. I mean, I don't -- if we're talking Asia, Jeff, in particular --

Yes.

-- because that's where the Water business was growing quite quickly. It wasn't growing 20% globally.

Right, in Asia.

We expect that the Asian business has capability to do that again. I don't think it's news that China, in particular, which was the major fuel for that growth, hit -- let's call it a major speed bump in its industrial production in 2012. So certainly, that had a real impact and China is moving out. I think we talked about China improving in the second half, as early as the second quarter, and we've seen steady improvement there. And so we expect Asia to continue to be a very strong part of what's going to drive Water growth long-term.

Okay. Thank you very much.

Dmitry Silversteyn, Longbow Research.

Good afternoon, guys. Just a couple of questions, if I may.

First of all, the higher delivered costs that you keep talking about and you expect to see in 2013 -- is that raw materials-related on the product side? Is it packaging? Is it more people, feet on the street? Is it higher gasoline costs? Is it all of the above? Can you talk about what some of the drivers of your higher costs are?

Yes. It's part, propylene's gone up. I think we've talked through the years about what our raw material areas are. And it's not dramatically different than first quarter of last year. It's just moved up from fourth quarter of this year. But we have other pressures.

However, I would say, my expectation -- since '04, we have seen fairly consistent raw material pressures in our business. We've expanded margin during that period of time. And all we're saying is, we all know there's a little bit of lag when we see the pressure from raw materials; it typically has upfront a little bit of a compression impact on our margins, and then through pricing and other actions we have shown that we've been able to overcome these pressures with time.

All we're trying to do is say we see a little pressure in the early part of the year. We're not saying that it's going to impact the year. We're forecasting 13% to 17% EPS growth.

Fair enough.

Switching gears to the profitability of the Other division, in general, and GCS, specifically -- can you let us know what the profitability gain or loss for GCS was in the fourth quarter and what your expectations are for 2013?

And just an overall comment/observation/question -- your Other division's profitability has declined for the last couple of years on a year-over-year basis. I understand the Pest Elimination business had probably something to do with that. You're now talking about more staffing costs in that business. What's the outlook for 2013? Or perhaps the inflection point is going to happen later than that in that business?

Yes, I would say a couple things. So there's three businesses, really, in there. One's a part of Pest. And that's where the staffing increases occurred. It's in our audit side of the business. Pest has been improving steadily. We had a top line problem we said we had to address in 2012. The team did a very good job. They got top line momentum. They're now firmly in the mid single digits and working on improving from there. That gives you enough room to start driving Pest profitability, because we can get leverage on that type of growth.

EcoSure -- we've had to make investments throughout 2012. We'll start lapping them in the second half, but we expect EcoSure profits to improve next year. And then GCS, we had a loss in the fourth quarter, but it was fairly small. And the GCS business has continued to improve year-on-year. I would expect that to continue. So for that segment, I would say that we expect it to be accretive -- i.e., to drive OI increase in '13 versus '12, and not be down.

Okay. Thank you very much, Doug.

John McNulty, Credit Suisse.

Yes, thanks. This is actually Alina Khaykin, sitting in for John.

Quick question on the Champion acquisition. Can you talk about what's holding up the DoJ and where their real sticking point is?

No, I can't. What I guess I can say is, we continue to expect to be able to close in the first quarter and we continue to expect this to be a very, very good deal for us.

Okay. And then also, when just thinking about headcount for 2013 versus 2012 globally, how are you thinking about maybe adding sales force on a global basis?

Yes. This year organically we were up just north of 1%. But part of that is because we had opportunities when we were merging the Water businesses, et cetera. Next year, we would probably be a little north of that in terms of expanding sales force -- a couple percent is what I would expect.

Okay. That's helpful. Thank you.

David Ridley-Lane, Bank of America.

Thanks.

US Cleaning and Sanitizing, which it didn't have a Project Renaissance, saw operating margin expand by 180 basis points for the full year. What are the -- if there are any things that you would like to call out that are helping drive that, other than just revenue leverage in that segment?

Well, first of all, the way synergies were applied to the businesses, they impacted all segments to one degree or another, because basically a lot of the synergy effort was on shared G&A and corporate costs, as we discussed earlier. That was the first year's pressure, as well as purchasing. And purchasing -- again, you had shared raw materials suppliers. It's going to affect all businesses.

So we were up in total for the business about 160 basis points, not just -- I'm talking about for the corporation. Year on year, if you do pro forma, margin increase at OI level. And about 60 of that would be from synergies and 100 would be from what I would call just normal efforts. So these normal efforts apply to many businesses, but they apply in particular to the US Cleaning and Sanitizing.

US Cleaning and Sanitizing has been doing a great job in innovation. They've been driving new platforms in both warewashing, now in laundry. These command substantially more price per pound or kilo, than the products that they're replacing; but they deliver 3 to 4X, if you will, in the premium, in terms of value to customers and energy and water reduction.

So those are great margin enhancers as we continue to drive them. They've continued to be on pricing, because we continue to see raw material pressure. So that needs to be a constant push. And then, of course, they work on fuel productivity. And we've rolled out technology over the years that we've discussed in the field, which enables our field to spend less time on paperwork, more time selling, which means they can handle a few more accounts than they could pre-technology.

Got it.

And then just curious -- because I know you plan on finishing off the share repurchase authority -- I think it's about $280 million or so. Are you waiting to do that until after the Champion acquisition closes? And would that be something that happened relatively quickly? Or would you measure that out over the course of the year?

Yes, we would and need to wait until after the Champion business closes. Part of the Champion deal includes stock. And I can't commit to an exact timetable, but once the Champion deals close, we have the ability to restart share repurchases.

Okay. Thank you very much.

Laurence Alexander, Jefferies.

Hello. Good afternoon. This is Rob Walker on for Laurence.

I guess, first, on international -- given the strong Q4 margins, what are your expectations for 2013 for that segment margins?

Well, we already discussed Europe, where we expect Europe margins to increase by another 100 basis points. That's by far and away the biggest part of the segment. Latin American and Asia-Pacific margins will also improve, as we improve, if you will, scale there. Sales volume will translate into margin improvement, because it's over pretty much a fixed and existing infrastructure base. So we would expect those margins to continue to improve, mainly driven by Europe.

Okay. Thanks.

And in terms of cash flow, what are your expectations for 2013 in terms of CapEx, working capital, pension funding? And should we assume cash restructuring charges of around $100 million or so?

Hello, Rob. This is Mike.

We're looking for free cash flow to about equal net income again in 2013. We haven't given a formal CapEx forecast. We were around $600 million in 2012. We'll probably be at the same ratio to sales going forward. Maybe a little -- around the same ratio to sales.

All right. Thank you.

Mike Harrison, First Analysis.

Hello, guys. Couple questions for you.

First, on Food and Beverage, you've had a couple of weak revenue quarters there. Is that mostly market weakness, or are you seeing some competitive pressures there? And maybe if you could talk about how you're responding to that weakness in an area that we've come to expect above market growth rates.

Yes, no, we feel very good about our prospects with our Food and Beverage business. A couple things. There's been some softness in the protein segment, which has been widely reported. But at the end of the day, it's really just timing of when new businesses come on, both in the base and coming on in the current year. We expect that business to be mid single-digit performer going forward and continuing to drive very good OI leverage.

And while you're speaking about timing, Doug, I know the Kay business can be somewhat lumpy. Just looking at the strength in Q4, was that more of a normal period? Or did we see an up-lump that might be unusually strong?

And was also hoping you could talk about what you're seeing on the food retail side. It sounded like that was not significantly stronger than what you were seeing in QSR.

Yes, the Kay business is, I'd say, performing very well. I think it has since we acquired it. And it's driven by new business, no doubt about it. We've had new business on both the QSR side and the food retail side. Food retail side has had outsized new business gains; prospects there look good. But it will always be lumpy in the sense of lumpy growth rate. But it just grows faster in some periods than others.

I don't want to start characterizing this as cyclical at all, because it's never shrunk, that I know of, in any quarter. It just keeps building on its past success, and we see plenty of runway for that business to continue to do that.

Okay. And then the last one's just on the Global Paper business. Can you talk in a little greater detail about the strength you're seeing in the margins there -- how sustainable that might be? And specifically around this elimination of low-margin business, what was -- can you quantify the sales drag associated with that? What kind of customers are they, and how much further you have to go in those low-margin elimination efforts?

Yes, I would say we're mostly through the paring low- margin customers. And it wasn't in a single part of the paper industry. We really -- we do this regularly. We look at the top 10 worst contracts that we have. We determine how we're going to fix them, what do we need to do. In some cases, you have to exit them, particularly -- and we really judge a contract based on its gross profit, not necessarily on its operating income. And simply, if you have a lousy gross profit, it's unfixable, even with volume or growth of the customer over time.

And so we've done some of that work. I think the Paper team has managed, in a difficult environment, very well. They had a very strong year in terms of profit. The drag, I guess I would simply say, has certainly impacted the business, but it's not like we would have chest pounding results on the top line if we hadn't undergone this. That business has been impacted by the economy. We will expect it to improve through 2013. But in either case, we expect it to have another strong year in terms of OI.

All right. Thanks very much.

Mike Ritzenthaler, Piper Jaffray.

Great.

My first question's around the Global Energy segment. And you'd called out a couple of pockets of particular strength -- Latin America, Middle East, Asia. We've heard that from a couple of others that participate in this space. Is there an aspect of Nalco that is a beneficiary of exposure in those regions, and is there any sort of competitive response that you need to make to ensure that, that continues in '13?

Well, I would say, one, several years ago, that business made a strategic move to go after, if you will, the new oil and the new finds. And much of those during that period were in emerging markets, or Africa, Latin America, et cetera, Russia. And that move proved to be very wise.

So we have a good position there, and it's a position that's been building, not shrinking. We have very, very high retention rates in that business. And to sustain the business over the long term, we've got to continue to do what's gotten that business to where it is -- be the innovation leader, continue to be aggressive in terms of going after new business as it comes on, and continue to hold on to it. I would say the business lends itself to high retention, if you continue to do a good job, because there's high risk in changing midstream. So once you're on a platform, or you're on the oil field, you tend to keep that business as long as you perform.

So there's nothing about this business we really don't like. We're going to continue to invest in it. Obviously, our move in Champion indicates that it's an area we like quite a bit, mostly because it's a very similar model, much more so than, I think, we imagined the first day we started looking at this merger possibility. And we came to appreciate it through due diligence and have appreciated it more as we've owned it.

Okay. That's helpful.

And then on Latin America, I guess more broadly, should we be thinking about Latin America as kind of a high-single, low double-digit volume growth region, as you look at the various businesses that are exposed there and as you continue share gains? And how much runway do you feel is left there? It seems like it's a multi-year platform. But I think any other additional color you could give there would be helpful.

Yes, no, I think the Latin America market has a lot of runway. So we consider that a double-digit growth opportunity for the foreseeable future. We have great opportunities in virtually every business we're in. I think we've got a very strong team in Latin America running that business. It's a team that's been enhanced recently with additional manpower in both management and now in corporate accounts.

So we like the Latin America business. I don't care if it's Energy, Water, Institutional, F&B, Kay, Healthcare, even. So we've got plenty of opportunities.

All right. Thanks.

P.J. Juvekar, Citi.

Good afternoon. This is Eric Petri standing in for P.J.

Just first, on Healthcare -- is that growing slower than your expectations? And are you looking into any bolt-ons to bolster growth?

Well, I would say the Healthcare business last year, as we annualized against some big acquisitions, it was double-digit globally, single digits in the US. I think it was, what, 4% or 5% in the US? And we expect that business to continue to progress. I guess we expect more in the high-single digit-type growth rate on a global basis. It's going to flip back and forth year on year between Europe, which is our other big platform for that business. So, no, I would say we feel very good about the Healthcare business and its prospects, and we expect it to continue to be a major contributor.

Okay. And then how long do you expect the Nalco-related deal charges to continue? I know you called out $0.35 next year.

We're going to still have charges through 2014.

Any color on how to divide that $0.35 between Champion, Nalco?

The $0.35 did not include -- well, it was all Champion. Did not include the Champion numbers. We'll give -- it will include the deal costs that we've swallowed to date on Champion, but none of the costs related to synergies, et cetera, in Champion.

Okay. Thanks.

Robert Koort, Goldman Sachs.

Hello. This is Angel Castillo on for Bob. He's actually set up at our ad conference.

Most of my questions have been answered, but I just wanted to expand a little bit more on Latin America. You mentioned you've been pretty bullish on it. And today you mentioned you've been seeing some slowing in certain Latin American markets. I was wondering if you could expand a little bit more on that.

I think the reference really wasn't to our business, per se. It was really to the underlying economic conditions in -- Brazil, would probably be the prime example, that there's been some slowing in Brazil. To date, we've been overcoming the slowdown, if you will, by very big successes with new accounts.

Okay. And then just to expand on that as well, you said -- how much of that would be market share versus pricing in Latin America, and the growth and success you've had there?

Yes, our pricing depends by country, but obviously we've got some very high inflation countries, like Argentina, et cetera. In total, around that region, it's in the 3% to 4% range.

Perfect. That's all I had. Thank you.

Shlomo Rosenbaum, Stifel Nicolaus.

Thanks for squeezing me in, in the end over here. Most of my questions have been answered.

I just want to probe a little bit more in Europe. You guys are doing, I would say, a pretty good job in terms of moving the margins up there. I was wondering -- all things considered, are you seeing any stability in the end markets? In other words, have you seen the decline abating over there? Can you just give us a little bit more color?

Well, I would say steady would be a hard word to use in a sentence with Europe. So I would describe Europe as -- you know, it's a very mixed story. But you've got -- I guess my expectation on Europe -- it's going to be much more of the same this year as last year. We do not see significant degradation, but you still see real softness in countries I think you would expect, and particularly Italy, Greece, Spain, and some of the other countries; and we expect to see that continue through this year. We think we will offset it, hence our forecast of growth.

Now, we did it last year. I think our plan is right. We expect to have nominal growth again in 2013. But Europe -- I don't think it would be fair to call it steady state right now.

Okay. And the synergies with Nalco are primarily going to come through the Global Water unit; is that correct? In terms of the sales synergies, I'm talking.

What was that, Shlomo? We didn't catch that.

The sales synergies that you're expecting with Nalco, is that going to be shown primarily in the Global Water unit?

Yes.

And --

(inaudible) I think the new business activity with, call it, new customers selling this program and an existing customer, principally going to hit Water. We are seeing some F&B dragged into historic Water accounts, which we would also expect. They've got some food business that F&B had not yet penetrated the plant. In Technology -- I think you're going to see the Technology plays, and Energy and Institutional, and in Water and F&B. More spread.

Okay. Great. Thank you.

Rosemarie Morbelli, Gabelli and Company.

Thank you for taking my question.

Doug, when we talked about the Paper in Asia, you mentioned it was rather weak, but yet there is quite a lot of growth in that particular industry in Asia, with paper mills expanding or new ones coming on-stream. Isn't Nalco participating in those?

We participate in a number of them, but I would say a number of the greenfield openings were delayed two to three quarters. And those that were planned to open in the first half of '12 are now going to open in the first half of '13. So there were significant plant take-downs, greenfield delay openings, and the rest in the paper industry throughout Asia.

Okay. And if I could ask about Healthcare -- what is the size of that business currently? And it seems to me as though it is not growing as you anticipated. Any help from insurance companies forcing hospitals to operate in a more sanitizing fashion?

Well, the Healthcare business globally is $600 million. And it grew a little over 10% last year, 8% organic. So, I guess as a -- look, we have high expectations.

Would I like more out of that business? Sure. And if I told you it grew at 15% and 12%, I'd still say the same thing. But the business is performing quite well, had expanded margins, had very significant OI improvement as well during that period. So we like the Healthcare business quite a bit, still believe it's going to be and continue to be a major contributor to the corporation's growth.

Okay. Great. Thank you.

Okay, everyone. Well, thank you very much. That completes our call. So if you have any further questions, please give Lisa or I a call. Otherwise, have a great day. Thank you.

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