藝康 (ECL) 2013 Q4 法說會逐字稿

Welcome to the Ecolab fourth-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.

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 earning 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 in our most recent Form 10-K under item 1a 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.

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

Looking ahead, we expect to continue to outperform our markets and show outstanding 18% to 25% earnings gains in the first quarter, and strong double-digit growth for the full year, as good sales growth, appropriate pricing, innovation, synergies, and margin leverage more than offset slow markets and unfavorable currency effects.

Moving to some highlights from the fourth quarter, and as discussed in our press release, reported fourth-quarter earnings per share were $0.93. On an adjusted basis, excluding special gains and charges, and discrete tax items from both years, fourth-quarter 2013 earnings per share increased a very strong 17% to a record $1.04. The adjusted earnings per share growth was driven by volume and pricing gains, new products, account gains, synergies, cost savings actions, and the Champion acquisition.

We enjoyed double-digit growth in our global specialty and global energy businesses. We also saw good performances in global food and beverage, global water, and global paper. 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 a good margin expansion.

We continue to be aggressive, focusing on top-line growth. We're emphasizing our innovative product and service strengths, as well as our wide range of effective solutions, to help customers get better results and lower operating costs, and through these, drive new account gains 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 as drive merger synergies. We also continue to make investments in key growth businesses to sustain our technology and sales and service leadership. We remain on plan for achieving our Nalco and Champion synergy targets, and our Europe margins remain on track for further strong expansion.

Looking ahead, while economic trends and unfavorable currency exchange rates present ongoing challenges, we look for our first quarter to show continued attractive sales gains and margin improvements. First-quarter adjusted EPS is expected to increase an outstanding 18% to 25%, to the $0.71 to $0.75 range, and compare with last year's adjusted EPS of $0.60.

Business growth and the benefits from synergies and cost reductions should more than offset moderate economies, the effects of unusually severe weather on our customers, and an estimated $0.02 from unfavorable currency. In addition, the quarter will compare against a strong 20% adjusted EPS gain in last year's first quarter. For the full year 2014, we look for a very strong 16% to 19% increase, to the $4.10 to $4.20 range.

In summary, our fourth quarter performed very well. And we expect fourth-quarter and full year 2014 will also show very strong gains, earnings growth, as we more than offset challenging economic conditions, while we also make the key investments to drive superior results this year, as well as for our future.

Slide 4 shows our fourth-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 fourth quarter increased 18%. Acquisition-adjusted fixed-currency sales rose 6%.

Looking at the growth components, volume and mix increased 5%; pricing rose 1%; acquisitions and divestitures were 12%; and currency was a negative 1%. Reported fixed-currency sales for the global industrial segment rose 4%. Adjusted for acquisitions and divestitures, global industrial sales increased 5%.

Fourth-quarter reported fixed-currency global food and beverage sales increased 9%. Acquisition-adjusted fourth-quarter fixed-currency sales grew 6%. Growth was led by beverage and brewing, dairy and agri, 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 the other regions.

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 our customers.

This has enabled us to win business with key global customers and offset sluggish conditions in several of our regional markets. Looking ahead, we expect further good organic sales growth in the first quarter, as we develop further benefits from our innovation pipeline, better customer penetration, and new business capture.

Fixed-currency global water sales increased 5%. Gains were led by good growth in the heavy, light, and mining businesses. Regionally, we saw strong growth in Latin America and Asia Pacific, with modest increases in North America and EMEA. We continue to drive market penetration with innovative solutions to optimize water usage, using our powerful 3D TRASAR platform technologies.

We're also developing new commercial solutions for water recycling and reuse, mining, and wastewater. We are focused on building our corporate account enterprise sales, our growth synergies, and product innovation to drive revenues. We expect to show another good gain in the first quarter, as continued growth in our core heavy and light markets is again bolstered by favorable mining results, and these more than offset the ongoing deemphasis of non-strategic business.

Fixed-currency global sales for paper enjoyed a strong quarter, increasing 5%. We saw double-digit growth in Latin America and Asia Pacific, with flat results in EMEA, and a decrease in North America, resulting from continued low plant utilization and customer closures. We expect global paper to show modest sales growth in the first quarter, as new business and technology penetration more than offset the challenging paper market conditions.

Fixed-currency sales for the global institutional segment rose 4%. Fixed-currency sales for the global institutional business grew 3% in the fourth quarter. Institutional's end markets remained subdued, 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 showed good gains, and Asia-Pacific sales were up slightly, and Europe was modestly lower.

Sales initiatives targeting new accounts and effective product and service programs around our core segments continued to lead our results. To drive our 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 increasing our customer focus around service intimacy.

We are also making further investments in field technology to enhance execution in sales and service, and we have better aligned our sales teams' efforts around our global value proposition. Longer term, our new global institutional structure is helping to accelerate global deployment of our innovation and technology, which we expect will help improve growth by driving better market penetration and new account gains. We expect continued progress in the first quarter as these growth drivers, new sales initiatives, and innovations in key platforms enable institutional to show solid sales gains throughout 2014, and, once again, significantly outperform its markets.

Fourth-quarter sales for global specialty grew 11% in fixed currencies. 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 their operating efficiency in food safety leveraged the generally modest industry trends. Regionally, the US and Latin America recorded solid gains. Europe saw good growth from new accounts and additional customer solutions, and Asia Pacific benefited from good quick-service foot traffic growth.

Food retail business showed solid double-digit sales growth in the fourth quarter, benefiting from customer additions, new products and increased penetration. We look for similar good sales growth in the first quarter, as global specialty works to deliver another solid performance in 2014.

Fixed-currency global healthcare sales increased 1%. Excluding the impact of low margin business we exited, global healthcare sales rose 3%. Growth from new account gains and new product introductions was slowed by continued soft US and European healthcare markets. Growth from contamination control was partially offset by soft instrument reprocessing sales.

To grow sales in this challenging environment, we've increased our focus on corporate accounts, our integrated value proposition, as well as continued to strategically broaden our product lines, introducing new hand-care products, new infection barriers, and a surface disinfectant that kills C. diff in record time. We expect global healthcare sales growth to improve in the first quarter, as account gains and new product launches in both North America and Europe more than offset continued weak healthcare markets.

Reported fixed-currency energy segment sales grew 78%. Acquisition-adjusted global energy fixed-currency sales rose 12%. Our upstream business saw further double-digit growth in the fourth quarter, resulting from strong international performances in onshore, deepwater, and oil sands. Downstream sales were strong, resulting from a pick up in North America refining, and in global market share gains.

The integration of energy in the Champion businesses has gone very well. Looking ahead, we expect acquisition-adjusted energy segment sales to continue showing good growth, driven by continued production strength in the deepwater and oil sands businesses, and steady growth in downstream, which should more than offset moderated growth in North America shale. We expect first-quarter and full-year 2014 acquisition-adjusted sales growth will be in the 10% range.

Sales for our other segment increased 1%. When adjusted for the vehicle care divestiture, sales rose 6% in the fourth quarter.

Fixed-currency global pest sales increased 5% in the fourth quarter. We enjoyed good growth in the food and beverage, healthcare, and restaurants. Regionally, we saw double-digit growth in Asia Pacific, with good growth in North America and Europe, reflecting solid execution in spite of the continued challenging conditions in that region.

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

Equipment care sales grew double digits in the fourth quarter, rising 11%. New account sales, better penetration, pricing actions, and improved technician capacity and productivity drove strong service-revenue growth, while parts sales also increased.

We continue to see good results from both chain-account headquarter relationships, as well as by our work to drive sales through their regional and franchise organizations. We expect equipment care to show further strong gains in the first quarter, as continued good service trends, improved parts sales, and streamlined operations benefit results.

Slide 6 of our presentation shows selected income statement items. Fourth-quarter gross margins were 44.8%. Adjusted for acquisitions and special charges, fourth-quarter 2013 gross margins were 45.4%, 30 basis points below last year. Volume and pricing gains, as well as merger synergies and cost efficiencies, were more than offset by the business mix impact of higher energy sales, which on average have a lower gross margin when compared to our other businesses.

SG&A expenses represented 31% of our fourth-quarter sales. Adjusted for acquisitions, the SG&A ratio improved 120 basis points versus last year. The improvement reflected sales gains and cost savings efforts, including merger synergies, as well as the mix of higher energy sales, which on average have a lower SG&A ratio when compared with our other businesses.

Fixed-currency operating income for global industrial increased 5%, with margins up 10 basis points. Pricing, volume gains, and cost synergies and efficiencies led the gain. Fixed-currency operating income for global institutional increased 6%, with margins up 30 basis points. Pricing, volume gains, and cost efficiencies drove the increase.

Reported global energy fixed-currency operating income increased 54%. Acquisition-adjusted global energy operating income increased 31% in fixed currencies. And acquisition-adjusted margins expanded 230 basis points, led by the volume gain, synergies, operating leverage, and pricing.

Fixed-currency operating income for the other segment declined 6%. Adjusted for the sale of vehicle care, operating income declined 2%, as improved operating results were offset by a deductible of an insurance claim, and on the writedown of certain field software.

Corporate segment and tax rate are discussed in the press release. We repurchased approximately 700,000 shares during the fourth quarter, completing the $1-billion share repurchase we committed to, following the Nalco merger close. 2014 repurchase activity will be made under an existing Board authorization, which had 12.7 million shares remaining to be purchased at December 31, and will focus on offsetting the impact of share-based benefit plans.

The net of this performance is that Ecolab reported fourth-quarter diluted earnings per share of $0.93, compared with $0.77 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 17% to $1.04 when compared with $0.89 earned a year ago.

Turning to slide 7 and looking at Ecolab's balance sheet, total debt-to-total capital is 48% at December 31, compared with 52% a year ago. Our net debt-to-total capital was 47%, with net debt-to-adjusted EBITDA at 2.5 times.

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 challenging market conditions and unfavorable currency exchange rates, which could negatively impact sales by a percentage point or two in 2014.

We expect to show good acquisition-adjusted sales growth and margin expansion, 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 first-quarter 2014 diluted earnings per share to increase an outstanding 18% to 25%, to the $0.71 to $0.75 range, despite weather impacts on our customers and an expected $0.02 of unfavorable currency. Further, the first quarter will also compare against a very strong period last year, when adjusted earnings per share rose 20% to $0.60. We look for full year 2014 to show very strong growth, as adjusted earnings per share are expected to increase 16% to 19%, to the $4.10 to $4.20 range.

In summary, we once again delivered on our forecast in the fourth quarter, with solid sales gains and continued margin improvement, while offsetting market challenges and investing in our future. We look for further solid acquisition-adjusted sales growth and continued double-digit profit gains in the first 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.

Hello, good day. I just thought I'd make the following thoughts, or share them with you. First, clearly Q4 was a good end to a very good year, with EPS in the quarter of 17% to adjusted EPS, and that gave us 19% adjusted EPS growth for full 2013.

I would say the most important point would be, we left the year with solid top-line momentum. We had over 6% organic sales growth -- it was our best organic sales growth of the year. We had very strong new business results again in the quarter, they have continued into Q1, and we have real traction on our new product innovation launches, which also is very key to us continuing to drive margin expansion.

For 2013, we expanded margins about 110 basis points at the OI level. We delivered 150 basis points OI expansion in Europe, and we are on or above our plan in Champion and Nalco regarding our synergy commitments.

So, as we indicated in our release, and as Mike just finished with, we expect 2014 to be another very good year. Our forecasted EPS for the year is between 16% to 19% growth. It's going to be driven by continued strong organic growth and a continued OI leverage.

We're going to drive it the way we always do -- we will be nimble; we'll react to whatever the world throws us; we will make sure that, while reacting, we maintain our focus on new business, on great innovation, disciplined operations, and synergy realization. So, I would say, more of the same. We feel we're in a good position. We know what we need to do, and the team is doing a great job executing.

So, with that, I'll turn it back to the operator for questions.

Thanks, Doug. That concludes our formal remarks. A final note before we start Q&A. We plan to hold our annual tour of our booth at the National Restaurant Association Show in Chicago on May 19. If you have any questions, please contact our office.

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

(Operator Instructions)

Our first question comes from Mike Ritzenthaler from Piper Jaffrey.

I'd like to drill down a little bit more into the energy results. We've seen a couple quarters in a row where we're in the low teens, 12% growth, but it sounds like your expectations are a little lower than that, looking at 2014. Does that exclude the lumpier pockets of demand like the dispersants? I'd be interested your thoughts there.

Yes I guess if you looked at fourth-quarter growth, I think what we said is expect low double digit growth in the energy business, and when you adjust for one-timers, i.e., the disbursements, either in third quarter or fourth quarter that's what we grew at in the second half, and I think that's what you should expect moving into 2014. So the reported was 12.5%, if you take out some of the one-timers, it would have been 11% in the fourth quarter. If I remember high single digits reported in the third quarter and when you adjust it for one-timers in the base, it got you back into the low double digits.

Okay, on Renaissance real quick, you've been talking about a moderation in the margin expansion in Europe, and it sounds like that's come to fruition with the 150 basis points this year. So as you look at 2014, do you expect the cadence to be more or less consistent with that with your 100 basis point target going forward?

Yes, I think 100 basis point has remained our target. We indicated I think in the second quarter that we expected to do about 130 to 150 basis points in 2013 in Europe. Some of that was a catch up because we were a little behind our pace early in the program, as a result of raw materials, so we caught up a bit on pricing.

So we had more expansion in 2013 than the 100 target. I think a 100 target is the right thing to think about. Our plan of course is for more, but I think the right way to think about it is 100 basis points a year, and we are confident we can continue to do that.

Great thanks, Doug.

Our next question comes from David Begleiter with Deutsche Bank.

Thank you. Doug, just on US institutional what was top line growth in Q4, and what's your expectation for 2014? Same up front, Europe is still lagging, how much do you think that can grow up at all, in 2014 on institutional?

Yes, US Institutional all year has hung in there at 4% to 5% growth and remained in that range in the fourth quarter. So US Institutional continues to do the right thing. It's expanding margins, it's growing the top line, so that business is performing as we would expect.

Europe we've had soft sales, but we've had strong margin expansion. We certainly, if you will, inverted our equation for a bit of time, which is we are prioritizing in Europe broadly in institutional Europe in particular, margin expansion over growth, but that equation is going to change and it's starting to change now, where we are going to reprioritize growth as job number one.

I would expect you to see steady improvement in terms of top line improvement, it's not going to be a big inflection point, so flattish for this year, accelerating through the year and starting to grow next year. With that said, it will be accretive, we will make more money in 2014 in institutional Europe than we made this year, and the team's doing the right things to get that business structured the right way for long term growth.

And Doug just on paper, were you happy with the results, and what are your expectations for 2014 on paper?

Since I guess after acquiring Nalco, everybody was kept inquiring why we would want the paper business. We ended the year, the paper team I think has done a great job, certainly in the time that they've been part of our team. And they ended the year with very strong top line growth of 5%, in obviously an industry that is not the healthiest industry.

But they're positioned well. They focused on selling the value-add technology, it's the most advantaged technology from a margin standpoint too, they've had two years of outstanding operating income growth, so that business has performed quite well. I think that team has done a great job.

Thank you very much.

Our next question is from Nate Brochmann with William Blair & Company.

Doug, wanted to talk a little bit, and this is much bigger picture, and maybe too far to look beyond right now, but as you have done a great job getting the synergies as you said with Nalco and Champion and there's still a little bit of ways to go there. But as we look further out beyond just the good old Ecolab playbook of blocking and tackling on innovation and new products, where do you think the next big opportunities are going to be?

I mean is that like China becoming more consumer oriented, is that water, or is that really still energy for the next foreseeable future, in terms of just new developments across the globe? Just wondering where you think the next big opportunities are that move the needle beyond the every day.

Well I guess I would start with this perspective, Nate. We chase a $100 billion market and we're only 13th, so without any quote-unquote big change or big win behind our back, we've got huge opportunity, and blocking and tackling will take us a long way for a long time. So I would say that's point number one.

Point number two, our markets are going to grow. I think they grow faster than GDP, because of the macro trends around safe food, clean water, energy demand, and the position that we have in the energy business, as well as environmental hygiene. And all of those are moving forward at a very, very rapid pace.

So in China, if you look at their five year plan, you clearly have food safety and clean water, as well as clean air, but we don't participate in the air part, but those are big, big priorities. We have food safety legislation in the US, which is now just being enacted, and you have changes going on in other markets around the world. Water is going to become a bigger issue, not a smaller issue, so we think that propels us, even in spite of the fact that we already have $87 billion in front of us without any growth.

So we do not feel like we're sitting here. We think the moves we made entering the water and energy business in a material way were smart moves. We think they have long legs.

We have a lot to do to fully leverage that move going forward and our historic business in the food safety business has also got a lot of legs, so I don't feel I'm sitting in a position where we have to make any radical moves to position ourselves for growth. We are a faster growth profile Company than we were before we did these acquisitions with Champion and Nalco, and right now, the team's focused on executing, leveraging, making sure we're well positioned to capture all the trends that I just discussed.

That's great. and then just one smaller one, just in terms of the weather impact, obviously that's impacted a lot of businesses, particularly in the US. Could you, I mean is there any way to quantify, in terms of maybe the headwind on the top line results that might have caused either in the fourth quarter or kind of now into the first quarter?

Yes, it's going to be more a first quarter impact, and it's foreseen in the still fairly hefty growth target that we gave for the first quarter. But I mean, look, we live in Minnesota, so of course we don't complain about the weather here, otherwise that's all we would do. But the rest of the team that lives outside of Minnesota, I hear from them that the weather has been quite difficult around the country.

And I guess I would say it's going to have an impact in the first quarter. It's foreseen there. It's a one-time event. We don't believe it's really anything to worry about for the year.

There's going to be some positive offset in the year, that of course we won't talk about, that will offset or neutralize whatever we realize negatively in the first quarter. We'll deal with it.

Okay, great. Thanks for all that.

Our next question is from John Quealy with Canaccord Genuity.

First, in terms of Latin America, and some of the currency changes that have gone down there, have you seen any change in local currency demand? I'm not interested in the translation effect, I think you covered it. But across the business lines, what are you seeing now in terms of that environment?

You mean in consumption? I guess I want to make sure I understand.

Yes, you're exactly right. In terms of your customers' consumption, how is their currency, as inflation picks up in some locations, is that changing demand patterns for your products and services down there?

We haven't seen that. We've been through a lot of these in the past.

They're never much fun, because you end up if you're going to go manage this correctly, doing a lot of things that you don't normally do in business. You want to make sure you shrink receivables before you walk into this. You're on a big, big pricing jihad right after it, and you got to make sure that you manage your customers in the right way for the long term.

We are taking all those steps. I would say, typically, we come through these just fine. There's always an unfortunate immediate impact that you really can't avoid completely, and I think the teams have done the right things preparing and managing in the aftermath. And we'll continue to do it.

Thanks, and then the follow-up on mining, it looks like I came back as expected and it looks like it's going to spill over into Q1, some of that goodness. Can you quantify it for us, or just give us a little bit more detail around the snapback in mining? Thank you.

Yes, we expect mining to be about the same in 2014 as it was in 2013, maybe modestly better, but not dramatically. And I would say mining is going to, it's a good business, we have a good position, it has got a cyclical component to it, we'll ride it. It's a very small piece of the overall portfolio, so it's not going to have any material impact on us overall, but the mining team is doing the right things during this period of time, which is securing more share. That's how we're growing.

Our next question comes from Gary Bisbee with RBC Capital Markets.

Doug, you cited the best revenue momentum in this quarter of the year, and a lot of the numbers look like they've ticked a little higher. Can you give us any incremental color on what's driving that? Is that real momentum in the new business you talked about, or is there anything, any one-time-ish stuff or easy comps anywhere that's driving that? Or should we think that business has really gained a bit of momentum in the last few months?

Yes, I think we felt like we gained momentum through the year last year. In virtually every business, second half was better than the first half in terms of sales. And certainly, as we talked all last year, we had a very strong year in terms of new business productivity, as well as a strong innovation pipeline.

So those things, we think, they started bearing fruit through the year, and so we left the year, we believe, with better momentum than we frankly entered the year last year. So that should pay dividends as we go through this. There will be some probably near-term noise on what the numbers looks like as a result of the weather, but fundamentally we have more customers, they will buy more stuff this year, and that's the key to making sure you grow the top line, and I think we've done a good job in those areas.

And how much of the better sales performance is new products versus just better execution, or maybe the macro getting a little easier? In the past, you've given us the vitality index, or you might call it something different, but has that changed meaningfully?

No, I think the vitality index has remained in the same camp, but I would say some of the new innovation, much of which was launched late last year, and will probably be a bigger impact this year from a sales standpoint, is right in the core of what we offer to customers, be it new technology in the water space, new technology in F&B, new technology in energy and in institutional, are all in the biggest categories we sell, and have the most influence on yeses and nos from customers.

Last year, I would say you probably had more impact from good old fashioned securing new customers. This year, it will be a little more balanced, we expect to secure more customers and have higher productivity in sales, but we also expect to see bigger benefit on a new innovation, simply because of the launches that we made at the end of last year will bear more fruit this year.

Great, thank you.

Our next question comes from Edward Yang with Oppenheimer. Your line is now open.

Doug, I was just wondering what your thoughts are, now that a few months have passed regarding the US Foods/Sysco merger. I know you have -- both are customers of yours, and are there any puts and takes? I've heard from some restaurant customers that if they use both maybe they will pick up a smaller distributor, just to keep them all honest, but what are your thoughts there?

Well, I think two things. This stuff happens all the time, and one of the reasons we typically want to be with the biggest players in the industries we serve is they tend to be the acquirers, and that certainly proved true here.

We've got great relationships with both. We will have a great relationship with the new entity, once it emerges, or post close. We don't know what the puts and takes are going to be between now and then, in terms of any requirements from the government. We've lived that firsthand, so we know it's tough to predict.

But I guess I would just call this as probably not something that we're particularly worried about, because we think our position is solid, and we're in good shape, and we'll manage through it. Our goal will be to help Sysco, the new Sysco succeed as much as we worked to help the old Sysco succeed.

Okay that's helpful. Your pension and post retirement liabilities went down quite a bit. It was down 34% year-over-year. Is that going to have any benefit for you in terms of corporate and other, and what drove that improvement, was it just planned returns et cetera?

Yes. Well absolutely. I mean pension, because the discount rate changed, in this brilliant accounting move that we have at a point in time at the end of the year.

So yes, it's favorable this year, after being unfavorable for a number of years. So I would just say we're clawing back some of the money we coughed up over the last few years.

I would still say pension charges are high relative to actual pension costs, because the discount rate, while improved from a P&L standpoint, is still relatively odd, given history, so that's the view. I would say the benefit this year most of it is going to be completely chewed up by FX.

Okay, thank you.

Puts and takes.

Our next question comes from David Ridley-Lane with Merrill Lynch.

Sure. For the first time in 10 years, Diversey grew its revenue in North America, albeit modestly, and the Company has a goal of building critical mass in the US. Have you seen any impact in Ecolab's US institutional business, did the win/loss rates change and are you approaching new accounts with perhaps more competitive pricing?

Look, no, we've not seen any material change, certainly in results vis-a-vis any key competitor, including Diversey, and including institutional in the US. So we continue to take much more business from every competitor, including Diversey than we give up. We're growing at least double their rate, and we're double their size so in absolute dollars, it's a considerable growth advantage, and we will work hard to maintain that type of advantage going forward, because that's what we've worked to do all the years.

So it's a big market. It doesn't necessarily mean if Diversey grows that it's going to be at our expense. So as I said we have a 13 share, and we're the biggest guy, so there's plenty of room in the market, but right now, no, we don't see any impact on our business from Diversey.

As a follow-up, Ecolab's had really great operating leverage in the industrial segment, as you've exited some lower margin customers and products in both water and paper. Are you comfortable with the client product mix today, or are some of these actions will continue on in 2014? Thanks.

Yes there's a little more in the base, so most -- I would say the vast majority of the actions have been taken in water and paper. We do like the product line. We think those businesses are well-positioned. We think the team is doing a very good job.

I already talked paper but I would say that's true in water. Water started coming out, if you will, from the shadow of some of those exits in the fourth quarter, hence you saw a 5% growth rate, which is not that different than we've been telling you water has been growing at.

The change is you're starting to get out of the shadow, and so we would expect water and paper to continue to perform well moving into 2014. And really they are focused on securing new business, getting after, leveraging the new technology that they've developed, et cetera.

Our next question comes from Laurence Alexander with Jefferies.

Just a quick one. Are you seeing in any regions or niches more difficulty taking share, or customers starting to shift -- introduce any menu shrink, that would be more of a theme into late 2014 and 2015?

I would say you probably did ask me this in 2008-2009 and I would have had a different answer then, because of course we did see in particular food service and lodging, as we were going into the 2008-2009 crisis you typically get guys pushing back on the number of products they buy. No, I don't think that's the environment we're looking at right now or facing.

I think what's critical, though, to succeed, is you have to really have a very sharp economic story, as to why your program makes sense. So, what's it going to do from a process standpoint, how's it going to help them make money, how will you help reduce water footprint and energy footprint, and how does that all add up to a good business proposition for customers. If we do that successfully, we have a very good success rate and where we get a little sloppy in that equation, it's not a great environment to be sloppy.

Thank you.

Our next question comes from John Roberts with UBS.

This is Bill Carroll on for John. It looks like you paid down about $350 million in debt in the fourth quarter and based on your interest expense guidance, it looks like your overall debt level will stay about the same in 2014. Is that the case, or are you expecting that you'll continue to pare debt, if you don't see any meaningful bolt-on acquisitions that you like, and if you repurchase shares to offset options dilution?

Yes, well I think you covered it. Debt will go down maybe a couple hundred million bucks this year, but won't have a big dramatic impact on debt.

We will end this year with an EBITDA debt ratio of about 2, and we're starting to get into the range that we talked about. So this is, if you will, the last year where we will have debt pay down as a priority moving through this, other than when debt comes due.

So you'll see share repurchase this year, as you just stated, and I think Mike indicated in his comments to neutralize any option redemption et cetera, so we have a constant share base. But clearly as we move into 2015, 2016, and 2017, share repurchase will move back on, if you will, the cash use chart as to how we'll think about using cash.

In terms of acquisitions, we have money in our plan for acquisitions this year. We are out actively looking for what I would call our traditional bolt-on type opportunities, not just in our traditional businesses but obviously in water, and in energy as well, and we would expect that we will start, if you will, rebuilding that pipeline, which we're doing and you'll see the fruits of that in the second half.

Okay, thanks. Also, you noted that integration progress on Nalco and Champion is outpacing your own timelines. Is that the case in terms of dollar amounts as well?

Yes, I think we said we're on or modestly over plan in terms of dollar delivery, versus our $150 million target, overall. What we're ahead of in a number of areas is the steps that we needed to make to actually realize these.

And also the changes you have to make in terms of benefits and compensation and all of the other stuff. That work has been done, it's been introduced, and so as a result, you take a lot of risk off the table when you move through that quickly.

Great, thanks.

Our next question comes from Robert Koort with Goldman Sachs.

Doug, I'm impressed by the way you keep delivering on the energy side. I was wondering a couple questions around that, because I haven't seen that from a lot of other chemical suppliers into that market.

Is there something special, some secret sauce you can share with us in terms of market share gains? Have you completely overlapped the customer bases of Nalco and Champion, and done the cross selling at least awareness and acknowledgment of what you could do there, and executing against that?

And are you getting any price in that market? And lastly what do you think the end market is growing? Obviously you are growing, I assume, at some multiple.

Yes, I think as we walk through it, the end market we think is growing in the high single digits, and that's really a function of, if you will, new oil, which commands much more of the types of products and services we sell, displacing old oil. And as a result of that, we have market growth even in a relatively flat oil environment.

And that's a big part of the story, so you say secret sauce. A big piece of it is our position vis-a-vis new oil and old oil and then we have out sized share in new unconventional oil, in offshore, and other places where it takes more of our types of services than in the wells that are going dry. And just that move and that shift in mix is a big part of the growth.

With that, we continue to work hard to secure new business. I think the team has done an excellent job managing clearly a big integration, and keeping their eye on the ball. We have lost virtually no customers as a consequence to this other than those that we were forced to exit as a result of the DOJ ruling. And so I think the team has done a very good job.

As we manage going forward, we've talked about this. We're in the production phase of this business. It's not the highly cyclical phase of the business, hence you do see fairly steady patterns in this business, which is what we saw historically when we looked at it, and what we predicted we would have after we secured the business.

And I just think that's what's playing out here. We will have quarters where we will be high single digit, not low double digit, like the third quarter and everybody wonders if we have given up the ghost on double digit growth. We think we'll bounce around, high single, low double, but average low double digit growth in this business, for the foreseeable future.

Our next question comes from Andy Wittmann with Robert W. Baird.

Just one or two questions, two quick ones. To complete the picture on the cash flows and the debt deleveraging, I didn't hear a CapEx guidance number for the year. Do you happen to have what you're looking to spend?

Yes, 5.5% of sales would be the CapEx model guidance.

Got you, and then Doug, just in terms of the price cost curve, I think you gave maybe a couple comments on raws, but can you just talk about -- I think 2013 was a year where you were recovering price. Are we still recovering price? Is that the expectation for 2014, or can you talk about what your outlook is for raws and for pricing, versus those for the year ahead?

Walking in we thought it would be a benign raw market, if you asked me third quarter last year our forecast for 2014, I would say we think it's going to be not as benign we thought. So we're assuming that we are going to have some raw material pressures throughout the year, and we're taking the actions to get after that. But again, I would say that's built into our forecast.

So to do what we say we're going to do, we need to continue to get after pricing. We have by and large recovered, if you will, from the last raw material run-up and we are confident we'll offset any raw material run-ups we see from a dollar standpoint, and we'll see on the margin side.

But we're pretty confident we have the game in hand and we're assuming probably less favorable raw environment than we thought, if you will, third quarter last year. But we need to think that way, otherwise you aren't going to get on pricing.

Our next question comes from Mr. PJ Juvekar with Citi.

Just a quick question on energy again. It seems like you had strong upstream business with deepwater oil sands. Can you just compare your upstream business with downstream, in terms of growth and margins?

PJ, you faded out. Could you repeat the last part of your question?

Yes, sorry. Can you compare your upstream versus downstream business in energy, in terms of growth rates and margins?

Yes, well the downstream business has improved all year. It's not a double digit growth business, though its growth rate in fourth quarter, I'm looking at a chart, I think it was 8%. It was 8%.

So that business is performing well, but obviously, it's part of the total portfolio there, and that overall business grew at 12.5%. So the rest you can figure out is growing at a faster rate.

And I think that's what we'll continue to see, that both our well chem business, which is drilling and additives, and our OFC business, have been performing quite well, and we would expect to see that trend continue. The downstream business on a standalone basis is a very good business and very well run.

And just all the water that is used in fracking, is that a significant opportunity for your water treatment business?

Yes, I think there's a significant opportunity for all kinds of technologies there. Certainly, you can think about how do you treat water post frac, so that they can reuse it again, and we are deploying technologies there. Even some of the anti-microbials I've talked about that energy took from F&B is being deployed for that purpose, and retention ponds and the like.

So there are mechanical ways to do it, there are chemical ways, there are new treatments that have been developed that basically create a situation where you could use a lot less water to create the same advantage via the frac. That's probably even more impactful for those running fracking operations, because they don't need to truck in the water to begin with, and they have less to deal with post frac. So there's a host of technologies that we're working on to take advantage of the fracking opportunity, and the challenges that our customers in that business face.

Thank you.

Our next question comes from Gary Bisbee with RBC Capital Markets. Your line is now open.

Just one quick follow-up. Can you give us a sense what the FX rates for a couple of the major currency are that you forecast for 2014, in terms of the segment revenues?

Yes, what's your favorite rate, Gary? The euro?

Yes, sure.

$1.35 is our management spot rate Is our forecast which is about $1.36 is what we had to forecast at.

Okay.

Any others you like?

You tell me. What are the next two biggest?

Well most people miss this. The second biggest impact we have is, trivia for a $100. The Canadian Dollar.

Canada, yes.

So there we've got a spot rate of $0.915.

Okay, thank you.

Our next question comes from John McNulty with Credit Suisse.

So with regard, I believe in your comments about the outlook for energy in 2014, you'd indicated deepwater and oil sands were going to be the big drivers, and it was going to help to offset weakness on the North American shale front. Can you walk us through what weakness you're actually seeing there, and is it negative, or is it just more moderate growth out of that business?

Yes, moderation of the growth rate, not negative growth by any means, so it continues to grow. I even think that outlook is changing with $5 gas and other things that are going on right now.

So yes, I would say look, all businesses have their challenges. I think, as we look at the energy business, there's certainly more in the positive ledger than the negative.

Okay that definitely makes sense, and then just one follow-up. I know there was a large scale water and paper transaction that happened in the market in the last week or so. And I guess I'm wondering if you looked at that and whether it was an attractive opportunity to you, or it was just something you didn't even look at.

Yes, look we shy away from commenting on that, but I think we've said before, a big piece of that was paper. We like our paper business, but we don't plan to get bigger in that area, so that's just not where we're going to go fish. We think we are -- we have a great team, great technology in the water business, in the paper business, we don't feel we're subscale or missing anything, so we're happy where we are.

Great. Thanks very much.

Our next question is from Rosemarie Morbelli with Gabelli & Company.

Congratulations for a great 2013. Following up on the paper side, Doug, I was wondering, as your business is growing at 5%, and there is still shrinking in North America, and Europe is not going anywhere. What is the percentage of your business in Asia Pacific where growth is actually quite substantial, and what are you doing in terms of increasing that share?

We're looking.

You sent us into a deck.

Oh, sorry.

Asia is about 20% of our paper sales in total, and is growing faster than paper on average, how's that?

Okay, so do you have any programs in place, so it can eventually become, let's call it, 50% of your paper sales? Asia Pacific, I mean by that, India as well is growing, if you look at that region.

We're fairly well-positioned in Asia. The program, I mean it's going to take awhile, because we want to grow all regions, and so the fastest way to flip a mix is to have a disaster in another region. So our plan is to continue growth in all regions, but have out sized growth in Asia Pacific so I don't think you'll see 50% any time soon, but I do think you'll see continued increase in terms of size of AP, relative to the whole paper business.

And is the profitability of that business higher in Asia Pacific than it is in North America and Europe?

We don't disclose profitability by region, but what we would focus on there, Rosemarie, is not necessarily OI. What we care a lot about is gross margin. If you have your gross margins right, then over time scale will work for you.

And we want to make sure that the business we're securing in these new regions is at a gross margin, that will ultimately enable us to make a very handsome OI. And so we are very disciplined there. But for periods of time in these markets, we will go with negative OI or very low OI, as long as it's just high SG&Ä and not a lousy GP.

Okay, no, that is great. And I have a question regarding textile care.

Obviously it seems to be the only one of your operations that has a negative top line growth, which is to a very large degree related to the industry. But I was wondering if you were to exit that, not offer textile care to your existing customers, would you lose business in other areas? In other words, you are stuck with it?

No, I wouldn't say that. We've been in the business because we're good at it and over periods of time we think this business works for us. But no, I wouldn't call this like there's some kind of strategic pull, and you would be penalized in other businesses.

So with that said, the textile business we expect to perform much better in 2014, and it's predicated on understanding of what our new customer pipeline is, both already secured or nearly secured. And so I think that business will do much better in 2014.

Okay, thank you.

Next question comes from Eugene Fedotoff with Longbow Research.

Doug, just wanted to follow-up on the severe weather impact in the first quarter. When you look at the portfolio of your businesses, can you share your thoughts where you think you'll see the most of the impact of weather?

Well weather would impact. It's going to be US, it's going to impact -- our business is exposed to food service, food retail, and energy. Energy to some extent, not huge extent but energy is impacted too.

Okay, thanks. And then the question on the equipment repair business, it seems like the business has been growing top line over the last couple quarters, mid single and even double digits this quarter. Was that business profitable in 2013, and what's happening with operating profits there?

Yes, first of all, I should thank you for the question because I got this question for 12 straight years, and I was not able to say this. So we made money in 2013, not just cash but actual profit, fully loaded. We expect to continue to drive that business and expand its margins in 2014, so the business has been accretive for quite awhile, and continues to be so, and the business is doing well.

Great, thanks.

Our next question is from Shlomo Rosenbaum with Stifel Nicolaus.

Doug, just, I noticed you talked about the change pretty soon in Europe that you're going to switch from the focus on more cost cutting over there, to driving the top line a little bit more. Is that sensing a change in the end markets or is this sensing a change in the cost cutting opportunities? What time frame are you talking about there?

I think the time frame is over this year. It's not on Tuesday, so it takes some time to enact this shift. You can call it right away and we have called it.

What's driving it? I would say it's where we are in the development. A lot of the cost saving activity is going to be shifting into the product supply arena, so it doesn't have the same direct impact on the organization that some of the other work did. So the organization shift can occur right now, and I would say in some of the markets, you're going against a pretty easy comparable, so the market looks a little steadier than it did, say a year ago.

Okay, and then just given where we are right now in the global economy and what you see, where do you feel your opportunity is for your organic growth rate in the current environment over the next few years? You talked about 6% to 8%. Does the low end of that sound right, the mid point, the end? How does that sound?

Yes, look, we're in the low end of our range right now, and that's with Europe down modestly, and it's 20% of our business. You start getting Europe to move a point or so, it starts kicking you quickly into the middle of the 6% to 8% organic range and plus. Without Europe, we're already at 8%.

So I think that range is a way to think about it. We're going to have businesses that go through some rework at any one period of time. I think the 6% to 8% is sustainable for us. I think you'll see, with some bolt-on acquisition work, that we may trip over that in terms of reported numbers.

But organic 6% to 8% is our target. We think it's the right one. There's opportunity in almost every region and almost every business, and I guess when we start getting pinned in a business, where we don't think we can grow it, we start becoming less enamored with it.

Got you. If you don't mind just a kind of housekeeping. What was the free cash flow for the year and how should we think of that for 2014?

Free cash flow was basically $900 million for the year, up substantially from last year, and we would expect it to be up substantially again in 2014.

Okay, thanks.

Our next question comes from Mr. Richard O'Reilly with Revere Associates.

On the margins for the energy business, the footnote says the adjusted was up 230 basis points. That's up from the 17.4%, is that what we should be comparing against?

Richard, that's acquisition adjusted.

Pro forma. Right, so it's as if we owned Champion in the fourth quarter, as well, so what we're comparing there is saying if Champion and Nalco were a combined business in Q4 of 2012, when we compare Q4 2013 versus that pro forma, we're up 230 basis points.

Oh, okay, fine. I don't know if we had that exact number.

We're seeing the synergies roll through. We could talk synergy numbers but if I don't see them show up in the P&L, you aren't very confident in the addition.

Right, and does that include the Champion goodwill amortization too? The $19 million?

Yes, it's in both.

Okay fine, good, thank you.

Our final question comes from Mr. Mike Harrison with First Analysis.

Had a question on the 3D TRASAR solid technology that you just announced. Obviously looks like a nice example of you cross-pollinating the Ecolab and Nalco technologies in that field.

Can you talk about some of the advantages or new applications that the solid technology gets you into, versus the legacy 3D TRASAR for cooling water? And is there going to be any cannibalization there or is this not really something that where you can migrate legacy customers over to the new technology?

Well you could migrate existing customers over to it, but the focus is going to be on securing new business. So what this does, is it positions water in a unique way to go after the institutional or the light water market and it gives them a way to compete that no other competitor can compete.

So the solid benefits in that industry are very similar to the solid benefits in all of the other industries we apply them. Easier to handle, much safer. High control of cost, lower plastics, bigger sustainability benefit, it goes on and on.

I would say the reaction of customers once we put this together has been very favorable, and interestingly, pre-merger, Nalco worked along an initiative like this, sort of like Ecolab worked on an initiative to duplicate or replicate 3D TRASAR, Ecolab got pinned by the IP. We couldn't quite get there. Nobody else had been able to either.

And on the solids, know-how is very important in how you do this, and Nalco didn't have solidification knowledge within their R&D. Clearly we do now as a combined organization. So what we've really done is to your point, marry great technologies for both companies to create a new offering.

The great thing about the light industry we'll go after is high margin, high retention. This used to be a big area of emphasis for Nalco, if you go back in the 1990s, pre-Suez and the rest, and everybody's quite excited about our capabilities there, and clearly there's great cross selling, because we've got very good share and established relationships in those industries. So it's spot on to what we thought we would do when we made this acquisition, and so this is the type of work that we want to get after, because it will grow the business.

Okay, sounds good and just one last one. You referenced the gross margin, maybe seeing some pressure related to the increasing mix of the energy business, within the overall margin picture. How much lower than the 46% gross margin number you're pointing to for next year for the whole Company, how much lower is the energy gross margin?

I guess we don't disclose it but here is how, I'll just share how we think about it. I don't care if our reported gross profit is going down because of mix, if all these subcomponents of the gross profit mix are healthy, which is really the case here.

If you looked at fourth quarter, and you took out the energy mix component, we're up about 20 basis points on GP year on year. So what's important to us is how is the institutional GP doing, how's F&B doing, how's specialty doing, how's pest doing, how's water doing, how's paper doing and how's energy doing? If all those GPs are moving the right direction, then I don't care if mix, because one's growing faster than the other, has a dampening effect on the reported GP, because it doesn't have anything to do with the health of the business.

Our equalizer is OI. And OI is a metric that we look at, because you got different places, you've got geographies of the P&L of a pest versus a soap business, et cetera. and OI is the one that we really make sure that we focus on, and want to a see drop through of all good efforts.

And you saw that. You saw it in energy, virtually every business we were in last year had nearly a triple point basis point improvement in OI, and to us, that's really the strong measure we look at. Are we successfully growing top line and creating more leverage as a result of both volume and good efforts inside the business?

Okay you answered my question, so thank you.

That wraps up our fourth-quarter conference call. This conference call and the associated slides will be available for replay on our website. So thank you very much for your time and participation, and our best wishes for the rest of the day, everyone. Thank you.