藝康 (ECL) 2013 Q3 法說會逐字稿

Welcome to the Ecolab third-quarter 2013 earnings release conference call.

(Operator Instructions)

This call is being recorded. If you have any objections you may disconnect at this time. Now, I would like to turn the call over to Mr. Michael Monahan, Senior Vice President, External Relations. Sir, you may begin.

Thank you. Hello, everyone, and welcome to Ecolab's third-quarter conference call. With me today 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 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 the item 1-A Risk Factors, in our third-quarter earnings release and on slide 2. We also refer you to the supplemental diluted earnings per share information in the release.

Starting with an overview in slide 3, we delivered strong results in the third quarter despite continuing global economic headwinds. We leveraged solid sales volume growth, pricing and our synergy and efficiency work substantially improved operating margins and produced a very strong adjusted earnings per share increase.

Looking ahead, we expect to continue to outperform our markets and show further double-digit earnings gains in the fourth quarter and the full year. As good sales growth, appropriate pricing, innovation, synergies and margin leverage, as well as acquisitions more than offset slow markets and investments in the Business.

Moving to some highlights from the third quarter, and as discussed in our press release, reported third-quarter earnings per share were $1.00. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, third-quarter 2013 earnings per share increased an outstanding 20% to $1.04.

The adjusted earnings per share growth was driven by volume and pricing gains, new products and new accounts, synergies, cost savings actions and the Champion acquisition. We enjoyed double-digit growth in our global specialty business along with solid acquisition-adjusted gains in global energy.

Latin America led the regional growth once again and was bolstered by good gains in North America and Asia-Pacific. These and other increases were leveraged by good margin expansion. We continue to be aggressive, focusing on top-line growth.

We are emphasizing our innovative products and service strengths, as well as our range of solutions to help customers get better results and lower costs. 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 costs, and investments in our business. We remain focused on expanding our margins, emphasizing productivity and efficiency improvements to help increase profitability, as well is drive merger synergies.

We also continue to make investments in key growth businesses to sustain our technology in sales and service leadership. We remain on or ahead of plan for our Nalco and Champion synergy targets. Europe margins remain on track for strong growth.

Looking ahead, while economic trends present ongoing challenges, we continue to look for the fourth quarter to show further attractive sales gains and margin improvement. Fourth-quarter adjusted EPS is expected to increase 13% to 18% to the $1.01 to $1.05 range, and compare with adjusted EPS of $0.89 as business growth and the benefits from synergies and cost reductions more than offset soft economies, business investments and comparisons against a near-30% adjusted EPS gain in last year's fourth quarter.

We narrowed our full-year forecast for 2013 and look for strong, 18% to 19% increase to the $3.51 to $3.55 range. In summary, we expect the fourth quarter to show another attractive double-digit earnings growth performance by Ecolab, as we also make key investments to drive superior results this year as well as for the years ahead.

Slide 4 shows our third-quarter results, both as reported and with adjustments for special gains and charges. While slide 5 shows our sales growth detail. Ecolab's consolidated fixed currency sales for the third quarter increased 16%. Acquisition-adjusted fixed currency sales rose 5%.

Looking at the growth components, volume in mix increased 4%, pricing rose 1%, acquisitions and divestitures were 11% and currency was a negative 1%. Reported fixed currency sales for the global industrial segment rose 3%. Adjusted for acquisitions, global industrial sales also increased 3%.

Third-quarter reported fixed currency global food and beverage sales increased 7%. Acquisition-adjusted third-quarter fixed currency sales grew 4%. Growth was led by beverage and brewing, dairy, and ag rate, which more than offset modestly lower sales in the weak protein market. Regionally, we enjoyed strong results in Latin America, with moderate growth led by share gains in other regions that were partially offset by soft Europe results.

Global food and beverage continues to benefit from its total planned assurance approach to customers, in which we combine our industry-leading cleaning and sanitizing, water treatment and pest elimination capabilities, to deliver improved food safety results, lower operating costs and better product quality assurance for customers. This has enabled us to win key global customers and offset sluggish conditions in several of our regional markets.

Looking ahead, we expect accelerated sales growth in the fourth quarter, as we see further benefits from our innovation pipeline, better customer penetration and new business capture. Fixed currency global water sales increased 1% versus last year. Excluding the impact of mining and the deemphasized businesses, global water sales to the heavy and light industry markets were up 4%. Gains were led by growth in Latin America and Asia-Pacific, with North America and EMEA slowing slight gains, primarily reflecting soft mining markets.

We continue to drive market penetration with innovative solutions to optimize water usage, using 3D TRASAR platform technologies, new commercial solutions for water recycling and reuse and applications for wastewater. We are focused on corporate account enterprise sales, growth synergies and product innovation to build growth, along with the ongoing work to improve the profitability of our account base.

We expect global water to show a better sales increase in the fourth quarter, as continued growth in our core heavy light markets is bolstered by favorable mining results. And these more than offset the ongoing deemphasis of non-strategic business.

Fixed currency global sales for paper increased 3%. We saw double-digit growth in Latin America, strong gains in Asia Pacific, and a modest increase in North America, as sales benefited from increased technology penetration and a return to more normal inventory levels. This growth was partially offset by declines in EMEA, resulting from continued low plant utilization. We expect fourth-quarter global paper sales to show similar growth led by Latin America and Asia-Pacific, reflecting new business and technology penetration.

Fixed currency sales for the global institutional segment rose 5%. Fixed currency sales for the global institutional business grew 3% in the third quarter. Institutional's end markets remain soft with modest growth in global, lodging room demand and still challenging food service foot traffic across North America and Europe.

Looking at regional sales trends, Latin America continued to post strong sales growth, North America enjoyed a good gain, Asia-Pacific sales were up slightly and Europe was modestly lower. Sales initiatives targeting new accounts and effective product and service programs continue to lead our results.

To drive future growth and improve on our industry leadership position, we remain focused on executing global sales initiatives, globalizing core competencies and introducing product innovation that delivers increased value with solutions that sustain water and energy and reduce labor costs while also enhancing our customer focus around service intimacy. We are also making further investments in field technology to help drive our service efficiency and have better aligned our local sales team efforts.

Longer-term, our new, global institutional structure is helping to accelerate global deployment of our innovation in technology, which we expect will help improve growth by driving better market penetration and new account gains. We look for fourth-quarter global institutional business sales to show continued good growth, as progress in our global sales initiatives and continued aggressive sales efforts help us out-perform challenging markets.

Third-quarter sales for global specialty grew a very strong 14% in fixed currencies, benefiting from good, fundamental demand and new customer roll-outs. Global quick service sales increased double-digits as we enjoyed steady growth from both large and small customers.

New accounts, along with increased service coverage and additional solutions for customers to drive operational efficiency and food safety, leveraged generally modest industry trends. Regionally, Asia-Pacific sales were led by a good quick service foot traffic growth, while North and Latin America recorded solid gains and Europe saw modest growth.

The food retail business showed double-digit sales growth in the quarter, driven by customer additions, new products and increased penetration. We look for fourth-quarter global specialty sales growth to be in line with its more normal trend, rising in the mid to upper single-digit range as it delivers another solid performance in 2013.

Fixed currency global healthcare sales increased 4%, as growth from account gains and new product introductions were slowed by continued soft US and European healthcare markets. Third-quarter sales were led by strong growth from patient and equipment rates, contamination control and improving growth in hand hygiene, which were partially offset by soft instrument reprocessing sales.

To grow sales in this challenging environment, we have increased our focus on corporate accounts, built on our sales and service approach and continue to strategically broaden our product lines, leveraging Ecolab's antimicrobial and pathogen expertise. For example, we recently introduced OxyCide, a disinfectant that kills C. diff in a record 3 minutes. We expect global health sales to increase moderately in the fourth quarter, as account gains and new product launches in both North America and Europe more than offset the weak healthcare market in comparison to a stronger quarter last year.

Reported fixed currency energy segment sales grew 68%. Acquisition-adjusted global energy fixed currency sales rose 9% as energy compared to a strong quarter that included the impact of non-annuity disbursement sales mentioned last year. Adjusted for those one-off sales, third-quarter 2013 sales would have risen 12%.

Our upstream business saw further double-digit growth in the third quarter, resulting from share gains and our continued focus on higher-growth energy production sources, including deepwater, shale and oil sands. Downstream business sales grew nicely, resulting from a pickup in North America refining and strong market share gains.

The integration of the energy and Champion businesses is going very well. We are on or ahead of plan for our integration targets.

Looking ahead we expect acquisition-adjusted energy segment sales to continue showing good growth, driven by a continued production strength in the deepwater and oil sands businesses and steady growth in the downstream which should more than offset moderated growth in North America shale and turmoil in the North Africa. We expect fourth-quarter acquisition-adjusted sales growth will be in the upper single to load double-digit range, as energy goes up against the strong quarter last year, when acquisition-adjusted sales grew a robust 20%.

Sales for other segments declined 3%. When adjusted for a vehicle carried divestiture, sales rose 6% in the third quarter. Fixed currency global pest sales increased 5% in the third quarter. We enjoyed good growth in food and beverage, healthcare, and restaurants.

Regionally, we saw good growth in North America and double-digit growth in Asia-Pacific. Europe grew modestly, reflecting the ongoing challenging conditions in that region.

We continue to drive market penetration with innovative service offerings and technologies, including the global protect programs, Bed Bug Assurance, STEALTH Fly Station, STEALTH Fusion and an expanding solution offering. We expect global pest sales to show further good growth in the fourth quarter led by gains in the Americas and Asia.

Sales for equipment care showed improve growth in the third quarter, rising 9%. New account sales, better penetration and improved technician productivity drove strong growth in service revenues, while part sales also showed strong gains.

We continue to see good results from chain account relationships as we drive sales through their regional and franchise organizations. We expect equipment care to show further good gains in the fourth quarter as continued good service trends, improved parts sales and streamlined operations benefit results.

Slide 6 of our presentation shows selected income statement items. Third-quarter gross margins were 46.0%. Adjusted for acquisitions and special charges, third-quarter 2013 gross margins were 46.2%, up 20 basis points versus a year ago. Volume and pricing gains, as well as merger synergies and cost efficiencies, offset the business mix impact of higher energy sales.

SG&A expenses represented 31.5% of third-quarter sales. Adjusted for acquisitions, the SG&A ratio improved 120 basis points versus last year. The favorable mix of energy and Champion as well as sales gains and cost savings efforts, including merger synergies, led the improvement.

Fixed currency operating income for global industrial increased 10%, with margins up 100 basis points. Pricing, volume gains and cost synergies and efficiencies led the gain. Margins also improved as we focused on more profitable areas of the Business.

Fixed currency operating income for global institutional increased 14% with margins up 170 basis points. Pricing, volume gains and cost efficiencies drove the increase.

As noted in the press release we moved the intangible asset amortization specific to the Champion acquisition. This change was made retroactively resulting in $14 million of amortization expense moving to the energy segment from the corporate segment for the second quarter of 2013.

A table showing the restated second quarter segment operating profits is shown in the appendix to the teleconference slides. Including this change, reported global energy fixed currency operating income increased 42%.

Acquisition-adjusted global energy operating income increased 20% in fixed currencies, led by the volume gain, synergies, operating leverage and pricing. Fixed currency operating income for the other segment declined 10%. Adjusted for the sale of vehicle care, operating income was flat, as improved results from the equipment care were offset by pest elimination field sales investments and nonrecurring costs.

Corporate segment and tax rate are discussed in the press release. We repurchased 600,000 shares during the third quarter. The net of this performance is that Ecolab reported third-quarter diluted earnings per share of $1.00 compared with $0.80 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 20% to $1.04 when compared with $0.87 earned a year ago.

Turning to slide 7, and looking at Ecolab's balance sheet, total debt to total capital was 51% at September 30, compared with 50% a year ago. Our net debt to total capital is 50%.

Looking ahead, and as outlined in slide 8, we continue to take aggressive actions to drive both our top and bottom lines. We are expanding our market share and customer penetration among major accounts, and leveraging our positions in key growth markets in food, water, energy and healthcare, as we work to offset continued generally soft global conditions and higher delivered product costs.

We expect to show good acquisition-adjusted sales growth and margin expansion again in the fourth quarter, driven by innovation, pricing, merger synergies and better operating efficiencies. We expect to deliver on these aggressive goals while building growth for the future.

We expect adjusted fourth-quarter 2013 diluted earnings per share to increase 13% to 18% to $1.01, $1.05 range compared with very a strong period a year ago when adjusted earnings per share rose 27% to $0.89. We narrowed our outlook for the full year 2013 and now look for adjusted earnings per share in the range of $3.51 to $3.55, representing a very strong 18% to 19% growth.

In summary, once again, we delivered on our forecast in the third quarter, with solid sales gain and substantial margin improvement, while offsetting the weaker economy and investing in our future. We look for further solid acquisition-adjusted sales growth and continued double-digit profit gains in the fourth quarter, as well as for the full-year 2013, as we drive to produce yet another strong year and build for our future. That concludes our formal remarks. And now, here is Doug Baker with his comments on the quarter.

Thanks, Mike. I appreciate the attention. I would sum up the position this way, our team and business I believe are performing quite well.

We're on track to deliver another outstanding year with a forecasted EPS growth of 18% to 19%. And just as importantly, we're building momentum in the back half of this year heading into next year, setting ourselves up for continued strong results in 2014.

Turning to the third quarter, we had a very strong quarter, the P&L was solid top to bottom, so reported sales plus 15%, 5% adjusting for acquisition and FX. Our read on underlying performance is that it's a bit stronger than the 5%, more like 6%, as we continue to refine our portfolio on water in Europe in particular, to improve growth going forward.

We're driving momentum here, we had our best new business quarter from a reported dividend standpoint in Q3. We're off to a very strong start from a new business standpoint in Q4. Gross margin was solid with a solid improvement of 50 basis points. If you exclude the mix of Champion, that impact OI was up over 100 basis points if you adjust for Champion. And all of our major initiatives are on track.

Renaissance, the Europe margin program delivered 290 basis point improvement in the quarter. We do not expect that much of an improvement going forward. So it was a bit of an anomaly, but it does indicate that we continue to gain traction here. We continue to expect 150 basis points for the year.

Nalco growth and cost synergies remain on track. And Champion, while still very early, is also on track and off to a very strong start. But obviously we have plenty to do in Champion since we're only six months into it.

Going forward, we certainly have a lot to do. But there's a lot of upside remaining from a top-line growth standpoint. There's a lot of business to be gained. There's a lot of margin to be grown as well. So all in all, we feel very good about where we are and about the future. And I'm quite proud of the team's performance all year, including in Q3.

Thanks, Doug. Operator, would you please begin the question-and-answer period?

Yes, thank you.

(Operator Instructions)

David Begleiter, Deutsche Bank

Thank you, Doug, very nice quarter. Doug, on the institutional business, in terms of acceleration for this business, what are your thoughts on this business picking up steam heading into 2014? What do you need to see here?

Institutional, I would say is a little bit masked by Europe. There's a lot going on in the European institutional business. I would say underlying metrics there are improving.

If you take that out, we really have had very strong performance in institutional. US reported, I think a 6% growth in Q3. I would say it's more like a 5% and a day adjusted if you take it down. But continued solid performance if you take Europe out. They have improved from 3% to 4% to 5% in the last three quarters. They continue to strengthen quite a bit in their underlying performance. And they've had very solid new business productivity.

Europe, we expect will start lapping and improving from a sales growth standpoint. It has been improving fairly dramatically from an OI standpoint. But we expect to see both top- and bottom-line improvement next year, which again will quit masking, I think, the overall good performance you see in institutional in the balance of the world

And just on paper, how is paper profitability in the quarter and looking ahead into Q4?

Paper continues to be quite strong. Our paper was up 3% on the top line and it was up OI over 35%.

Thank you.

So, they're doing exactly what we wanted them to do. They're doing a good job.

Thank you.

Nate Brochmann, William Blair.

Good afternoon, everyone. I'm wanting to tackle a similar question, just shifting over to the general industrial segment. Doug you hit on the water business a little bit. I know that those trends are in line with the sluggish global growth you have been seeing and trending pretty much similar to the previous quarters.

But, what do we need to see there getting going? I thought coming out of last quarter we felt a little bit more of a positive vibe in some of those end markets. I feel like we're coming down to things still being a little bit weak and doing what we can. I was wondering if you could go through that a little bit, and seeing where we could feel some acceleration there?

I would say, there's a couple of components obviously in the industrial segment. But the two large ones are WPS water paper business, and also our food and beverage business. We'll just talk paper.

Paper has been sequentially stronger from a top-line standpoint. A lot of what is happening is we're starting to lap, if you will, the contract deletions and re-negotiations that we went through starting last year in Q3.

But, what you see is now a strengthening top line and continued very strong performance on the bottom line. I think we expect to see modest growth continue in paper and still strong OI performance moving forward.

On water, if you get, again, if we walk through and look at our core business, and take out mining for a minute, and also the deemphasized business, we're in very much the same range. That moved up from a very low level of first quarter to 4% to 5% range in the second quarter. And that's exactly where we remain in the third quarter, and frankly, expect to be in the fourth quarter.

We believe that business will continue to improve as we continue to concentrate on driving the business that's most important to us long-term. The business has increased resources in particularly the light part of that business. It's going to take a little time for that to manifest itself into sales growth. But we like with that team is doing and we've got high expectations and expect the water business to continue to going forward. Right now we would call it in the 4% 5% range on the bulk and the important part of the business for our future.

And then F&B. F&B has been I think, a very good story. They've been improving throughout the year. They've been doing a great job in securing new business. That business has got very good top-line momentum. It's a business where you can count on top-line ultimately accruing to good bottom-line momentum. So we're pretty comfortable with what's going on in the F&B business as well.

So I think that sector will take care of itself as we move forward. We like the fundamentals. We like the stuff underneath, which is important, the leading indicators, i.e. new business productivity et cetera, which indicates that we continue to plan on increasing momentum

Great, thanks for all that, Doug.

Mike Ritzenthaler, Piper Jaffray.

Trying to drill into the energy results a little bit more. On gross margins I think the mix was a bit unfavorable, but that mix component did not necessarily filter into OI. I was wondering if you could elaborate a bit more about the relative importance of pricing and volume versus synergies as that mix drops to the OI line?

I would say a couple of things on energy. One, when we go through and look at the overlying business, we would say it's growing much more at the 12% rate, is our estimated rate. And if you want the parts, and I'll get into some of the other, because I think it's important to lay this out.

Our [well can] business is growing about 11%, our OFC business on a consolidated was growing around 13%, and our downstream business is growing at 7% in the third quarter. And all those numbers we think are very much in line with what we expect everything else.

Now, they were masked in part by the deepwater Gulf business, went off-line faster than we had predicted. This is a result of the DOJ ruling, if you will. So it happened a quarter earlier that we anticipated. Not a big deal in the enterprise history, but it does have impacts on the quarter.

And then we have a one-time business that comes and goes, which is dispersants and also gas plant products. Those products were much lower this quarter versus last year same quarter. That will come back and is episodic.

Gross margin, frankly, was quite strong in this business. The underlying base gross margin, if you take out synergies and the impact of some other things, was up over 1 point. So, our gross profit in this business, we think feels pretty good, and the team is doing a good job there.

Our OI was obviously fairly strong, particularly when you adjust, if you will, last year for Champion. We own it, and the depreciation that you have to put on the business. And so our OI overall was up 1.5 points, 150 basis points.

And so, we think -- we like this business. We think it's doing quite well. And we think when you look underneath, the performance is quite solid in the third quarter

Okay, that frames it up nicely. Switching to specialty, it sounded like from the prepared comments that we're starting to -- almost sounds like we're starting to see an early peek at the synergies between food and beverage and specialty that you outlined on the Analyst Day, versus new customer wins. Clearly both are important.

Are we starting to see some of those synergies? Is that a fair characterization? Does that give you more confidence in that strategy?

Yes. A lot of what's happened, I would say a couple of things are showing up in the specialty number. One, continued very strong success in new business acquisition. That's been a driver so, big businesses in that segment are our QSR business, our food retail business and pest business are the largest.

Then you also have GCS. I would say pest and GCS continue to improve, particularly on the top line Absolutely that's a result of enterprise selling. And they're also benefiting, if you will, from our approach both with water and F&B together. We're bringing a lot of pest business in as we talked about in our Investor Day. So certainly, that's having an impact there.

And, I guess I would just say, you brought up enterprise selling. I would say since the Investor Day, September, we've continued to have very good success there. We continue to have a couple of other very major wins. We continue to feel quite bullish about that strategy and its ability to continue to impact our top line positively.

Thanks, Doug

John McNulty, Credit Suisse.

Just a quick question. With regard to your cleaning and sanitizing business in general, have you seen any change in approach from any of your competitors in any geographies at all?

Well, John, I would say it's more the same. More like past practice than I would say highly different. But certainly over the history, there's different tactics and different geographies. But I wouldn't say there's a clear new pattern taking hold.

I would say the typical approach remains, selling price and trying to price underneath us. I'd say most important is this metric. We look at, in particular the corporate account arena, wins losses versus all key competitors. In every one of our businesses, institutional, F&B, water, paper, energy. In no instance are we losing more than we're taking, i.e. we're taking share in every case against every major competitor that we monitor against.

And so I guess we want to continue to focus, be aggressive, go after new business, leverage our new innovation, leverage our strength in the field. We think we've got key competitive advantage, and we want to make sure it translates into top-line success. So far, so good.

Great. As a follow-up, I believe when you made the Champion acquisition, you had targeted to, in a relatively short form, to get your share count back to pre-acquisition levels. Is that something we can expect by, say, the end of 2014? Or how should we be thinking about share repurchases going forward?

We announced after, shortly after, the Nalco announcement that we would do a $1 billion buyback. Basically we asserted that we planned to complete that by year-end, which we're mostly there but have a little to do in the fourth quarter. But by and large we're done.

That was the share buyback commitment. I think what we have said is our use of cash going forward, for the near-term is going to be a little different, in that we're going to have some debt payment, which normally is in our cash use. It will probably slow down share repurchase, but we still expect share repurchase to offset dilution in 2014 and 2015, at minimum

Okay, great. Thanks very much for the clarification.

John Quealy, Canaccord Genuity.

First, more broadly, a very respectable organic growth number at 5%, yet guidance gets tweaked a little bit from the bottom end of EPS guidance, rather than expanding the top. Can you comment, the puts and takes on why you decided to do that?

The short answer is, it best reflects what we believe we will deliver in the fourth quarter. We worked very hard to guide to what we actually think we're going to go do. If anyone asks, why more from the bottom than the top, I would say it's good news. I think what's happening is, we're firming up and obviously we've moved the mean up considerably versus our original guidance by moving the bottom up 3% and I think, taking the top down 1%.

So, I think it's just confidence that we are going to deliver where we expect it to deliver. Top line, I would say we continue to do well. I think we've seen a number of things from EPS come through. We made some decisions in the third quarter which we like, which we're frankly taking some risks off the table.

We didn't know we'd be taking all these risks off the table in Q3. It's smart long-term, but we start reflecting the fact that we've already done this in our forecast. Because we really didn't know if they're going to happen in Q3, Q4, Q1 or Q2, previously.

So, it's all those things. I think that the best estimate we have right now of where we're going to deliver. We're into the quarter and feel pretty good.

Okay. And then quickly an unrelated follow-up, if I could. You talked at Analyst Day about moving 3D TRASAR into the cleaning place market with food and beverage. Can you comment on, under the waterline, how that progress is going? And if we should see some tangible market impacts in the 2014 or 2015 time frame? Thanks.

We remain in, and we would call that test phase right now. It's going quite well, we're learning a lot. We have a lot of customer interest. The watch plan is next year, so it will have some impact on 2014. But typically our launch is really -- the volume really develops in year 2 and 3. A launch is not necessarily in year 1. So I would expect more the outsize impact in 2015, 2016 versus 2014.

Gary Bisbee, RBC Capital Markets.

Two questions. The first one, when we plug in the aggregate Nalco and Champion cost savings into our models, it would seem to indicate potential for another year in 2014 well above the 15% long-term EPS growth target.

What factors should we be thinking about at this point that could be counterbalancing negatives or things that might be slowing the growth a little bit? For instance, this year you had a quite a bit bigger year-over-year pension contribution, pension expense. Is that something that could happen next year? And other than just macro economic stuff, which we all understand, any other factors we might think about at this point? Thank you.

We're in the middle of planning, so we've got our scoreboard and it's not unusual every year. The other factors that are somewhat out of control that could impact anybody's ability to deliver, including ours, FX; what are people's view; raw materials, though we don't believe that's in place now, but that always seems to show itself weight.

And we're going to continue to invest in our infrastructure and make sure we're doing the smart things during this time period. But, we did that this year we plan to continue doing that in the next few years. Because it could be important that we get that right. We expect to be ultimately a $20 billion business and larger, and we want to make sure we've got the right systems in place to manage at that level.

So, I would say it's those factors. You've got the underlying business, you're right. We still will have synergies positively impacting the business, not only this year but next year. We'll continue to manage this business wisely.

We're doing what we need to do to assure that the business has got the right momentum. That's the smartest thing that we can do right now. Drive top line and do the things underneath that we know drive value long-term.

And then a follow-up. Can you give us a sense how in Europe or the EMEA region has done overall on a revenue basis? With the new segment reporting, you're not specifically putting in your PowerPoint the different regions. But is the 2% volume growth needed to allow that margin to flow through the next couple years, still the case? Have you done that year to date? How are we thinking about trending?

This year, I would say couple things. When we break Europe out and split it from the Middle East, Africa, Europe this year is bouncing around negative 1%, 1.5% for the year believe is how the top line's going to be, is our guess. That's been about what it is so far this year.

It's gotten a little better, first quarter is our worst quarter. I would say we are comfortable with what's happened in Europe right now. But obviously we can't sustain negative 1%, 1.5% sales growth long-term and continue to expand margins. It just doesn't work.

So, certainly going forward that needs to move to the positive side. As I've always said, we don't need magical growth in Europe to drive margin, we just can't have negative growth. So, this year even with the sales forecast I talked about, part because we're managing some of this, we do expect to see 150 basis points improvement.

We've talked, going forward, to expect 100 basis points per year. We still think that's the right expectation to have. But certainly it's predicated on our confidence that we're going to flip that from negative to positive next year, albeit fairly modest growth next year.

Thank you.

David Ridley-Lane, Bank of America, Merrill Lynch

What energy end markets it would you expect to generate the most growth for you over the next two or three years? I'm thinking among, say, the oil sands, shale gas, deepwater exploration? Those sorts of markets?

Unconventional oil, broadly. But certainly deepwater, which has been a focus area for that business for a number of years, and, still have a number of large platforms, installations coming on board. But, other unconventional is actually a positive too.

By and large, we make more money per BTU in oil than we do in gas. The gas is additive. And so certainly, the gas exploration, the fracking, the water treatment requirements, all of that is on top of what we think is strong, fundamental characteristics coming from the unconventional oil.

Great. As an unrelated follow-up, can you go into some of the details on the sales realignment in the institutional business?

The sales realignment is, I would call this evolutionary, not revolutionary. And a lot of what's been going on in North America is just making sure we continue to have the right focus on the opportunities that we have consolidated some sales management positions so that we can add more sales positions.

This goes back and forth and ebbs and flows over time. I don't think this is necessarily a headline, it's called continual refinement. We get a little fat in an area, we try to make sure that we understand it. We want to make sure that we've got enough feet on the street to get after the opportunities.

The North American business has been steadily improving. They have momentum. And they've got a number of opportunities they've identified that they want to get after.

Thank you.

Dmitry Silversteyn, Longbow Research.

Congratulations on another good quarter. Just wanted to follow-up on a couple questions if I may. You talked about the paper operating income in the paper division being up, I think, 35% and about 3% growth in volumes or growth in sales.

So, is that a function of the restructuring actions you've taken? Or would lower raw material costs? What's driving such a strong leverage from a 3% volume growth?

I would say several things. Fundamental, the paper business for a number of years, and we're continuing to invest, has done a great job creating innovation that matters to its customers. This innovation commands better margins.

I think our focus in paper has been drive and leverage the most advantage innovation, make sure you get favorable mix, get the pricing you need to sustain this business long-term, and be smart. And if you end up in contracts with customers that create an unsustainable economic environment, don't worry about the optics of top line, do the right thing from a business standpoint.

So all those things have driven, if you will, this leverage that we've created, 3% and 35% plus over time. Now obviously, you're not going to see 3% and 35% for five years running.

Sooner or later you run into your base, and you end up continuing to improve OI, but not at a 35% plus clip. But that business, I think, and that team, has done a very good job managing a very difficult environment, and you will continue to do it.

That's helpful. And then if you can talk about a couple of things. First of all, the difference in performance of pest elimination in North America versus your international businesses. And then a general comment on the mining trends that you're seeing that impacted your industrial business in the quarter. Is that getting any better, worse in any particular region? And what's your outlook is for 2014?

I'll do mining first. Mining started off like 7% down in the first quarter, and then second and third quarter has been relatively flat plus minus 1 or 3 points. We expect it to improve starting in the fourth quarter, going forward, but obviously mining as an industry isn't in full recovery yet. We think we've found the bottom and we'll start building back from here.

That team through this whole cycle has done exactly what teams need to do when you have downturns. They have been on major share acquisition. And they have done a very good job securing new business. So as that business recovers, we expect to see outsize growth as a result of their work. So I think the mining team has managed the situation exactly as we would have them do.

Pest. The pest business, I would say North America and global are about the same numbers. The real difference in the pest business, they're growing about 6% in North America. That's a steady improvement over the last few years.

You recall four or five years ago we were stuck in the 1% to 2% range. We've gotten a break-out for several years now, where we're in the mid single-digits. Our expectation for that business remains the same. We expect that business to be double-digit growth business.

We believe they are building the programs, driving the training, doing all the things that we know create that situation. So that's the focus on that team right now. And we expect the business to continue to strengthen from a top line and ultimately the bottom line follows.

Thank you very much, Doug, that was helpful

Edward Yang, Oppenheimer

Maybe, Doug, a clarification on the European Renaissance that seems to be going well with 290 basis points year-over-year margin improvement in 3Q. That was better than the 160 basis points last quarter, but expect that to moderate for the rest of the year? So what drove the upside in the third quarter?

Some of it is just our base in OI year on year and where some charges fall. So, I think the second half is going to be right on top of the 150 basis points. Fourth quarter is probably going to be fairly even on margin. It is simply just how the chips fell this year versus last. And we don't look at it, there's no real drama to the story. We feel very good about the underlying performance of that business. We have changed economic equation in Europe.

Okay.

It's better

Okay, thank you for that. And a follow-up on global specialty. Strong growth this quarter, up 14%. You expect that, I think Mike mentioned, up high single-digits in the fourth quarter and it's been alternating between mid-teens and high single-digits. What accounts for the lumpiness there? You mentioned new customer wins, but are the size of the customers so significant relative to the overall size of the business that accounts for that lumpiness?

The two businesses that are -- the two markets that we serve that are really comprised of giants, would be our specialty business, our QSR and FRS business and our energy business. And so they are big customers, they have outsize impact.

The lumpiness comes when you start comparing against the prior-year rollout, where you have to basically move in, put your product in the channel. You've got outsize sales in a given quarter for a given customer as you prepare for a rollout.

When you start lapping against that, you start moving from teens to single-digits. But, what we really look at is consumption, what's going on in the business. All in all, that business is doing very well.

It remains very healthy, but their growth is going to be predicated on their continued success acquiring new business, plain and simple. They got a great team to do it and we're confident they will continue to do it, but that's what's going to determine future success.

Thank you, Doug.

John Roberts, UBS

Good afternoon. Can you hear me? Hello. Hi, John. As you begin your planning here for 2014, how are you thinking about acquisition activity? So in six months we'll roll off, we won't have these acquisition-divestment adjustment changes.

Are we going to go back to a series of bolt-ons across the Company? You used to have a nice steady stream of bolt-on type acquisitions across the global institutional segment. That's paused, I don't know if we're going to go back. And now with the bigger portfolio, there are a lot more things of small size that can bolt on a lot more places now.

John, I would say, yes, back to our historical pattern of a number of smaller bolt-on acquisitions is what you should expect to see. Small being anywhere from, I don't know, make it up, $30 million to $200 million.

We have, I think, a rich list of opportunities. We have a number, as you might expect, ready to go. I can't even keep track of where they all are in announcement cycle, quite candidly. We've already announced several this year, and we will expect to continue to announce those going forward.

So do not expect any outsized deals from us in the next several years. One, we don't see anything on the horizon that we think makes a lot of sense for our Company. And two, we want to take this time, as I mentioned earlier, to get our systems right, to do all the other things that we know need to be done to get to the next level of margin enhancement. And so that's going to be the work that we're going to be doing.

We should expect that M&A line then on slide 5, to maybe be like a 2%, 3% kind of number on a more continuing basis?

Yes, it's probably back to our old, back to the napkin, 6% to 8% organic, 2% to 3% extra points from acquisition, and 50 to 75 basis points of margin expansion. So we will be back to that formula

Thank you.

Mike Harrison, First analysis.

A question on the F&B business. Mexico is one of the largest per capita consumers of soda. There is a proposal to tax soda consumption there. How much of an impact do you think that could have on the FMSA business that you recently purchased?

I don't have a great answer for you. I would say you're right, that could negatively impact us in the beverage business in Mexico. I would say that would be, in total a relatively small impact, corporate wide or even F&B wide. But you're right, it's not one that we're tracking, but I will take the time to go look at it

Not keeping you up at night, then? At your Analyst Day you had some new floor care products that you were showcasing. As you think about trying to unseat a competitor that has a very strong floor care position, can you talk about whether you're seeing traction with some of the bigger customers with those new products? And then if you do take the floor care business, how likely is it that you win other cleaning and sanitizing business as well?

I would say in floor care it would be like trying to unseat anybody in any industry. You're going to need a significant innovation to take a person in a lead position out. It can't be 5% better, it needs to be dramatically better.

I think we have some innovation in that camp. We're somewhat liberated in this area, simply because we don't have an entrenched position.

So, we can innovate in a way that can also be harmful to the category, which is always difficult for companies to do when they have a leadership position. We're not in that position in floor care.

So, does other business come with it? Yes, but it's not guaranteed, simply because we have many instances where I would say we have the rest of the business and not the floor care business. I think those businesses typically have to be earned separately, and that's our assumption going in.

Thanks very much.

Shlomo Rosenbaum, Stifel.

I just have some technical questions, in terms of getting back to Europe, and the improvement, the 290 basis points. Can you talk a little bit more on specifics where there was some particular cost takeout that you guys had done that were in the progression that you were working towards last quarter that hit all of a sudden this quarter? Can you give us a little bit more detail?

Maybe in the run rate. I would say that the benefits are coming both in the gross profit line and the SG&A line.

The gross profit and SG&A benefits are fairly steady. They increase over time as we continue to reduce the number of people it takes operate the business and become more efficient.

You get lumpiness in an OI line for other reasons. This is a classic. I just don't want to over commit and everybody excited that this 290 is some new magical run rate. It's not.

I have other numbers that I say look a little worse than they are. I think our 5 is more like a 6 on the sales line. And I would tell you I think this 290 basis points is more in line with our 150 basis points on a going line. It's just favorable for a number of base reasons and one-time reasons, not bad news anywhere, it's just this happens to be how these things fall.

The quarters are 13 week periods. So funny things happen, they're not that big. And so you can get some outsize responses or results. For the half, think 150 basis points, think that run rate for the year. That's really what this business is doing right now, it's good. We expect to continue that trend at least at the 100 basis point level next year

Okay, fair. And then, a little bit more detail in paper. The last couple quarters you had, looks like you're starting to get a decent growth trajectory started over there.

Over last year it had been bouncing around, some of the quarters were negative. Is it really that your lapping on the comps of where you had to get out of some of those bad contracts? Or is there something more specific to that? You talked a little bit about innovation, can you talk a little bit about the specific points that are driving growth over the last two quarters?

Yes. Certainly I'd say all those things came to bear, but if you wanted to boil it down to three points, it would be yes, the base got easier; yes, some startups came on line particularly in China, that had been postponed but finally came on line; so there is net new business in there as well, i.e. more plants consuming. And certainly innovation continues to play a role, but it's role is larger on the gross profit line than it is necessarily on the top line.

What you mean by that?

Well, innovations is one of the ways we've been driving favorable mix. Its outsize impact is it could be neutral if we flip one technology out for another on the top line, but it drives a much more favorable gross profit. Your GP in that business is up several hundred basis points.

Okay, thank you very much.

P.J. Juvekar, Citi

This is Eric Petri in for PJ. A question on your energy margins. Could you provide a little color going into fourth quarter in 2014? And now considering that you've moved amortization expense to global energy from corporate?

I mentioned earlier, first of all on the amortization, our practice is when a business buys another business, the amortization that came with the business that was bought goes into that segment. Frankly, we just made a mistake putting it in corporate in the second quarter. That's not our normal policy.

And we want more transparency for all of our investors. Frankly, the depreciation amortization of that deal belongs in the energy segment. Otherwise I'd show you an unrealistically favorable view, where you get all the synergies, but you don't have any of the costs of the deal. It's not a smart way to look at a business. This is our past practice, so we just righted a wrong. We made a mistake and we fixed it early.

In terms of the margin expectation, I think if you get down to the fundamentals and we've talked about $150 million synergy expectation on top of continued strong top-line growth, we would have good margin improvement if we had zero synergies, plain and simple. Simply as volume overwhelms inflation and normal growth costs, you're going to see margin expansion on OI as a consequence of double-digit growth.

When you add on the $150 million, I think that's what you're seeing here. When we talked, we think a fair year-on-year comparison is a 12.2% margin last year. When we load last year with both Champion and the DNA, and this year we're at 13.7%, so it's 150 basis points.

We don't think that's going to be an unusual performance while we're realizing these synergies over the next couple years. So, my expectation next year is the same kind of top-line and margin performance that we've come to expect.

Okay. And then just house cleaning. Is the $14 million similar to what it was last quarter on a go-forward basis? And then second, your energy operating income has been running at two times top line. How sustainable is that?

What you should expect for depreciation going forward is $19 million a quarter. It was $14 million in Q2 because of the partial quarter, because we didn't close on the business at the beginning of the quarter. So $19 million, I think it's $18.9 million if you want to get really precise, is the amortization rate by quarter, going forward.

Okay.

Rosemarie Morbelli, Gabelli and Company

Thank you for taking my question at this late hour. Congratulations on a great quarter. Going back to Europe, Doug, are the improvements and the growth on the top line mainly solely because of your own doing? Or are you beginning to see some change in the markets you are serving? And can you give us a feel for what is happening in the underlying markets there?

Rosemarie, you broke up in the early part of that question. Was that regarding Europe?

Yes. What is happening in the market versus what you are doing in terms of helping yourself?

I would say in Europe, two things. We typically when downturns come, we go down late and when upturns occur we go up late. We aren't the early guy in these cycles, typically, just for a reminder because we always have to remind ourselves.

And I would say, so that's one. So the markets feel like they've been stabilizing. I hear a lot of conversation with both customers and other people I know running businesses in Europe, who talk about an improving environment. It is very typical for us to hear this conversation before we feel it, number one. We have not -- we did not feel it yet in Q3.

With that said, why is our business down? Some areas, we are focusing on the areas that we believe are the highest priority. We see better traction there than in other areas. Certainly equipment businesses we have seen more negative impact as a result of the downturn in Europe than we have seen in our annuity-related businesses as we go forward.

That's not unexpected, it is what we've seen in the past. But I'd characterize Europe, the best case you could make is we would deserve like a flat to a 1% growth. So it's not dramatically different than what we're seeing.

What really is happening, and needs to happen, is we are shifting our focus to top line now. We are increasing the number of corporate account people. We are increasing the efforts to get after the large customers there. It is early days, but starting to bear fruit because this pipeline has been worked on for months now. So our expectation is that our efforts are going to start increasing, and that we will start seeing better results in the top line going forward. And we need to.

And those top-line growth, can the margin improvement of 100 basis points annually increase because of the top line and all of the steps you have taken?

Yes, I think top line just works better leverage, the reduction in fixed expense that we've created in Europe. So certainly, I would expect a good piece fall through, which is what we see in the rest of the world when we have volumes. Unfortunately in Europe, we had created too high of a fixed overhead, so our volume didn't translate into much leverage, it got chewed up.

Okay. And then lastly if I may, could you give us a little more detail as to what you are doing in terms of what you referred to as field technology investments? What are you giving your guys so they become more efficient than they already are with their tablets and everything you already have in place?

We are doing a whole host of things. One, we're pushing on what I would, call lower-cost, higher performance field technology products, i.e. we could buy iPads at list and be better off than amortizing laptops over a three-year period.

So, one, we're changing out the technology, which requires us to change how we basically manage the technology, i.e. cloud versus in-unit. So we're doing a host of things, I would say simultaneously.

We're rolling out in institutional what we call our global 360 program, which we plan to globalize over the next 18 months. That will be a big benefit for us as we start seeing the benefit that we've realized in the US over the years and the other geographies as well. We have enhanced technology we are rolling out in WPS, enhanced technology in pest, enhanced technology in food and beverage.

So all of those that have similar stories in terms of making it easier for our people to gather the information they need, for us to collate the information, for them to place orders, track shipments, do all that stuff, which frankly takes too long today.

Andrew Wittmann, Baird.

This actually builds a little bit on Rosemarie's question. Doug, in the next, what, three years you've got another commitment for another $163 million of pretax cost savings. That's all pretty visible because you've scoped that out.

I'm starting to hear you talk more about the $20 billion Company and the preparation to have the systems in place to get at that. Can you give us a texture as to what those out year investments in the systems can do for your margins after you get these discrete programs out of the way? What's your view in terms of what the margins look like in that timeframe?

Well, Andrew, I'm not ready to give a forecast for 2014, but I'll be liberating and give you one for 2018. (laughter) Here is what I would say. I think we feel, one, these investments many of these are thinking about how we're investing today and repurposing the investment to make sure we that we get even more leverage on of it.

I'm not trying to signal some kind of monster ramp-up in spending by any means. What we're really going to do is start channeling the spending. We have a different scale today than we have in the past. So certainly what we're going to be able to do is get much more leverage out of the spend that we make in terms of infrastructure. So this is the advantage of the size we are today.

You don't need to start penciling monstrously different capital expenditures or anything else. We think the numbers we've given in the past are going to be the best indicator of what we're going to do going forward.

In terms of benefit, when I was asked earlier about what to expect in terms of acquisitions, do we expect bolt-ons and the traditional Ecolab model, and I said yes. And I also referred of the back of the napkin equation that we've had for long time, which is a 6% to 8% organic plus 2% to 3% additional growth points from M&A and 50 to 75 basis points a year. And just underlying performance improvement in terms of OI and NI ultimately margin improvement.

That really comes from leveraging these innovations and everything else. It's not in addition to that, it's how we deliver that. And I think what we're doing is saying yes, we've got a runway, we see a lot of this stuff, and we're also starting now to make sure that we've got you continue the virtual cycle beyond the synergy period. And continue to perform at the level that we expect from ourselves and frankly our investors expect from us, which is, you only have a 15% EPS target. As we've told you, we don't manage to cap it at 15% as this year would indicate. And where we have outsize earnings potential because of synergies and other things, we won't be afraid to have that accrue to the benefit of our investors.

At the same time, we know we've got to make sure we're doing the right things to prepare when synergies aren't there to give us the extra lift. So, that's how we're thinking about it.

All right, that's helpful. Thank you very much.

I'll now turn the call back over to Mr. Monahan for closing remarks.

Well, that wraps up our third-quarter conference call. This conference call and the associated slides will be available for replay on our website. Thanks for your time and participation today, and our best wishes for the rest of the day to you.

This concludes today's conference. Thank you for participating. You may disconnect at this time.