藝康 (ECL) 2014 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions). Welcome to the Ecolab first-quarter 2014 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 first-quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO. A copy of our earnings release and accompanying slides referenced in this teleconference are available on Ecolab's website at Ecolab.com/investor.

Please take a moment to read the cautionary statements on slide two 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 discussed in the section of our most recent Form 10-K under item 1A risk factors, in our first-quarter earnings release, and on slide two. We also refer you to the supplemental diluted earnings per share information in the release.

Starting with an overview on slide three, we delivered strong results in the first quarter. We leveraged solid sales volume growth, pricing and our synergy and cost efficiency work to substantially improve our acquisition adjusted operating margins and produce a very strong adjusted earnings per share increase.

Looking ahead we expect to continue to outperform our markets and show outstanding 16% to 21% earnings gains in the second quarter and strong upper teens EPS growth for the full-year as good sales growth, appropriate pricing, innovation, synergies and margin leverage more than offset mixed markets.

Moving to some highlights from the first quarter and as discussed in our press release, reported first-quarter earnings per share were $0.62. On an adjusted basis excluding special gains and charges and discrete tax items from both years, first-quarter 2014 earnings per share increased a very strong 23% to a record $0.74. The adjusted earnings per share growth was driven by volume and pricing, new products, account gains, synergies, cost savings actions and the Champion acquisition.

We enjoyed strong growth in our specialty, food and beverage and energy businesses. Latin America led the regional growth once again and was bolstered by strong gains in Asia-Pacific and good growth in North America. These and other increases were leveraged by good margin expansion.

We continue to be aggressive, focusing on topline growth. We are 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 customers segments. We also continued 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 are on track for further strong expansion.

Looking ahead, while mix trends in our markets present ongoing challenges, we look for the second quarter to show continued attractive sales gains and margin improvements. Second-quarter adjusted EPS is expected to increase an outstanding 16% to 21% to the $1.00, $1.04 range and compare with last year's adjusted EPS of $0.86. Business growth and the benefits from synergies and cost reductions should more than offset lackluster economic trends.

In addition, the quarter will compare against a strong 19% adjusted EPS gain in last year's second quarter.

For the full-year 2014, we continue to look for a very strong 16% to 19% increase to the $4.10 to $4.20 range.

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

Slide four shows our first-quarter results both as reported and with adjustments for special gains and charges while slide five shows our sales growth detail. Please note as detailed in the press release effective in this quarter, we made immaterial changes to our reportable segments. They had no impact on our consolidated sales or operating income. The impact of these changes on 2012 and 2013 results are shown in the appendix slides and the following comments regarding both our 2013 and 2014 first-quarter results include these changes.

Ecolab's consolidated fixed currency sales for the first quarter increased 18%. Acquisition adjusted fixed currency sales rose 5%. Looking at the growth components, volume and mix increased 4%; pricing rose 1%; acquisitions and divestitures were 14%; and currency was a negative 2%. Reported fixed currency sales for the global industrial segment rose 3%. The net impact of acquisitions and divestitures on the segment was not significant.

First-quarter reported fixed currency global food and beverage sales increased 5%. Acquisition adjusted first-quarter fixed currency sales grew 4%. 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 and Asia-Pacific with moderate growth led by share gains in the other regions.

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 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 second quarter as we develop further benefits from growth synergies, better customer penetration and new business capture as well as leverage our innovation pipeline including the introduction of 3D TRASAR for cleaning place systems and food and beverage plants in the second half.

Fixed currency water sales increased 4%. Gains were led by good growth in the heavy, light and mining businesses. Regionally we saw strong growth in Latin America, good gains in Asia-Pacific, modest increases in North America and flat EMEA results. We continue to drive market penetration with innovative solutions to optimize water usage using our powerful 3D TRASAR technologies. We are introducing 3D TRASAR for hotel and other institutional cooling systems in the second quarter utilizing solid chemistry and advanced dispensing, marrying leading technology from both Ecolab and Nalco in a premium customer solution.

We are focused on building our corporate account and enterprise sales teams delivering our growth synergies and improving product innovation to drive revenues. We expect to show another good gain in the second quarter as better growth in our heavy, light and mining businesses outperform mixed end markets.

Fixed currency sales for paper increased 3%. Acquisition adjusted first-quarter fixed currency sales were up 1%. We saw double-digit growth in Latin America, modest growth in Asia-Pacific and declines in EMEA and North America resulting from continued low plant utilization and customer closures. We expect paper to show modest sales growth in the second quarter as new business in technology penetration offset the challenging paper market conditions.

Fixed currency sales for the global institutional segment rose 3%. Turning to the businesses that make up the segments, fixed currency sales for the institutional business grew 3% in the first quarter. Institutional's end markets remain 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 while Asia-Pacific saw moderate growth and Europe sales were up slightly.

Sales initiatives targeting new accounts and effective product and service programs around our core segments continued to lead our results. We leveraged our global technology through the rollout of our next-generation warewashing platform, Apex2 in Europe. To drive growth in the future 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 reduce water, energy and labor costs while also increasing our customer (inaudible) through outstanding sales and service execution.

We are also making further investments in field technology to enhance execution in sales and service and we have better aligned our local sales team efforts around our global value proposition. Longer-term, our new global institutional structure is helping to accelerate global deployment of our innovation, technology and training which we expect will help improve growth by driving better market penetration and new account gain.

We look for second-quarter institutional business sales to improve as global sales initiatives progress and continued aggressive efforts to outperform challenging markets yield better growth in the second quarter and over the balance of the year.

First-quarter sales for specialty grew 9% in fixed currencies. Quick service sales were strong increasing 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 and food safety, leveraged generally modest industry trends. Regionally the US and Latin America recorded solid gains. Europe saw good growth from new accounts and additional customer solutions while Asia-Pacific benefited from good quick service foot traffic growth.

The food retail business increased modestly in the first quarter benefiting from customer additions, new products and increased penetration. We look for good sales growth again in the second quarter as specialty works to deliver another solid performance in 2014.

Fixed currency healthcare sales decreased 1%. New account growth, better penetration and new product introductions were more than offset by continued weak surgical and in-patient hospital trends and uncertainty in hospital buying decisions in the US healthcare market. Regionally, North America sales declined while Europe sales rose moderately.

The growth sales in this challenging environment, we have increased our focus on corporate accounts and our integrated value proposition and continue to strategically broaden our product lines rolling out new hand-care products, new infection barriers and surface disinfectants. We expect healthcare sales to increase in the second quarter as account gains and new product launches in both North America and Europe more than offset a continued weak healthcare market.

Reported fixed currency energy segment sales grew 78%. Acquisition adjusted global energy fixed currency sales rose 8%. Our upstream production business saw good growth in the first quarter led by strong international performance and deepwater results. Downstream business sales were good as North America refining improved and we gained market share.

Looking ahead we expect acquisition adjusted energy segment sales to show similar growth in the second quarter. We look for stronger second half as new business drives better growth and delivers full-year 2014 acquisition adjusted sales growth in the 10% range.

Sales for our other segment increased 4%. Fixed currency past sales increased 3% in the first quarter. We enjoyed good growth in food and beverage, healthcare and restaurants. Regionally we enjoyed double-digit growth in Asia-Pacific and good gains in both North America and Latin America. However, Europe sales declined reflecting the timing of service calls that should be made up in the second quarter.

We continue to drive market penetration with innovative service offerings and technologies including the global protect programs, Bedbug Assurance, STEALTH Fly Station, STEALTH Fusion and expanding solution offerings. We expect pest sales to show better growth in the second quarter led by gains in all markets.

Equipment care sales grew 8% in the first quarter. New account sales, better penetration, pricing actions and improved technician capacity and productivity drove strong service revenue growth. Part sales were off slightly. We continue to see good results from both chain account and 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 second quarter as continued good service trends, pricing initiatives, improved part sales and streamlined operations benefit results.

Slide six of our presentation shows selected income statement items. First-quarter gross margins were 45.5%. When adjusted for acquisitions and special charges, first-quarter 2014 gross margins were 45.8%, 50 basis points above last year. Volume and pricing gains as well as merger synergies and cost efficiencies more than offset the business impact of higher energy sales which on average have a lower gross margin when compared with our other businesses.

SG&A expenses represented 34.1% of first-quarter sales. When adjusted for acquisitions, the SG&A ratio improved 70 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 lower SG&A ratio when compared with our other businesses.

Consolidated operating income margins or 10.5%. When adjusted for acquisitions and special charges, fixed currency operating income margins were 11.6%, rising 120 basis points over last year's comparable margin.

Fixed currency operating income for global industrial increased 7% with margins up 40 basis points. Volume gains, pricing and cost synergies and efficiencies led the gain.

Fixed currency operating income for global institutional increased 7% with margins up 60 basis points. Pricing, volume gains and cost efficiencies drove the increase. Reported global energy fixed currency operating income increased 83%. Acquisition adjusted global energy operating income increased 36% in fixed currencies and acquisition adjusted margins expanded 270 basis points led by the volume gain, synergies, operating leverage and pricing.

Fixed currency operating income for the other segment increased 2%. Improved operating results were offset by investments in the field salesforce and field technology. The adjusted tax rate was 27.9% in the first quarter 2014 and compared with 28.2% in the same period last year. This improved tax rate was the result of favorable geographic income mix which more than offset the cost of the expired US research and development tax credit. Please note our tax rate assumptions for the full year assume passage of the R&D tax credit in the fourth quarter.

We repurchased approximately 2 million shares during the quarter. The net of this performance is that Ecolab reported first-quarter diluted earnings per share of $0.62 compared with $0.53 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 23% to $0.74 when compared with $0.60 earned a year ago.

Turning to slide seven and looking at Ecolab's balance sheet, net debt to total capital was 49%.

Looking ahead and as outlined in slide eight, 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 impacts 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 our future.

We expect adjusted second-quarter 2014 diluted earnings per share to increase an outstanding 16% to 21% to the $1.00, $1.04 range. Further, the second quarter will also compare against the very strong period last year when adjusted earnings per share rose 19% to $0.86.

We continue to 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 $4.20 range.

In summary, we once again delivered on our forecast in the first quarter with a solid sales gain 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 second quarter as well as for the full-year 2014 as we work to deliver yet another strong year and build for our future.

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 my office.

That concludes our formal remarks. Operator, please begin the question-and-answer period.

(Operator Instructions). Nate Brochmann, William Blair & Company.

Good afternoon, everyone. I was wondering -- I know you hit on it briefly and I know that end markets are pretty mixed across the board but I was wondering if you could give us a little bit more of a regional update in terms of some specifics in terms of what you are seeing in terms of traffic or improvement in Europe, North America. And it was nice for you guys to mention too Asia picking up a little bit. Just wondering if you could tell us a little bit more in terms of what you are seeing there and where the trends are?

Yes, this is Doug. I guess you are referring to restaurant traffic?

For the most part, yes.

I would say our business traffic still is somewhat impaired in the US. Our business if you look at underlying business in the US institutional, field sales was in the 5% range which is pretty consistent with how it has been running the last few quarters. We continue to do a very good job driving new business.

If you look at Europe, it is I would say marginally improving across the board. Our business is starting to improve and I would say importantly, we had a very sizable new business activity or success in Europe in institutional in particular in the first quarter, best as long as we have been tracking it to be honest. So it was a very sizable portfolio series of wins.

Asia is getting better. Latin America continues to be very solid to strong. So I would say the economy this year is predicted to improve. We still feel that is true. I think the first quarter was a little tough to read particularly in the US because of the weather.

Okay. Then just a follow-up on that in terms of the improvement over in Europe. Is part of that now your ability to be able to focus a little bit more on the topline and growth as we have some of the transformational projects kind of behind us or do you think that is just the overall economic improvement coming off the bottom?

I think there is some bottoming that has occurred in Europe no doubt but new business is a consequence of us shifting focus if you will towards external topline activities which is what we focus on most of the time. So we have had very good results there, a very good start and so we look forward to having that show through the P&L.

That is great. Thank you very much.

Gary Bisbee, RBC Capital.

Coming out of the fourth quarter fall, all of the commentary was very positive about new business wins and pipeline and all of that type of stuff and then we saw the growth rates slow quite a bit in the industrial and institutional businesses. Can you do two things?

Number one, quantify weather impact if that is possible? And number two, just give us some more color on you talked about account wins here in Europe being good and you talked about it in the back half of last year overall. But when do we start seeing that flow through into better revenue growth? Thank you.

I would say two things, Gary. Weather, we didn't mention it in the release. It is hard to quantify. Our internal numbers suggests it was nearly a point of growth. I would also say I am not sure I have ever said in any release that great weather drove our results so we are a little reticent to say bad weather got in the way. Whatever the weather was, we were able to I think comfortably deliver our EPS.

Here is how I feel about topline. I think we've got underlying very good momentum across the board. You have got a number of things that may hide this fact. First, if you look at energy, energy activity, new business activity picked up particularly in the fourth quarter moving through the first quarter. That takes several months at minimum to start showing up which is why as Mike mentioned in his formal remarks up front, we are quite confident that energy while it is going to run at high single digits the first half is going to run double digits the second half and our math suggests right now end the year at double digits.

Energy is going against a pretty big base particularly in Champion in the first quarter and even the second quarter, right as we were taking it on, we didn't own it the first quarter. So you are seeing some of that comparison when we give you the acquisition adjusted numbers that you are looking for. So we feel confident energy is on track doing what it needs to do and will be in range of what we have always talked about which is this is a double-digit business.

The other businesses, the institutional businesses, the industrial businesses are all forecasting across the board stronger growth as we go through the year. And if you look at underneath all of these, they are strengthening. We had a record first-quarter new business. The quarter was plus 20% versus the prior two quarters in terms of net new business sold so it was a quite dramatic increase in terms of productivity from new business. And we know that translates into sales.

So for the year we feel pretty confident that we will be accelerating, ticking up and hanging in the 6% to 8% organic growth rate that we talk about in total.

That is great. Thank you.

John McNulty, Suisse.

Good afternoon, thanks for taking my question. So it sounds like you are looking to have a relatively large launch on the 3D TRASAR side in F&B and some other parts of the business that haven't seen it before. How should we be thinking about what that may do to the growth looking out over the next year or two?

Well, we have been in test for a while. We are now rolling. Industrial launches always take a bit longer, i.e., to get to the peak average sales that we look for. I would say our early results particularly in the industrial area have been very, very strong. And so I don't think we are going to have any challenge meeting our internal targets for 3D TRASAR particularly in CIP which is what we are doing in food and beverage.

In terms of solids, CIP, 3D TRASAR, is our targeted lodging effort. It is going to be lodging and hospitals. There we are also having a lot of success; that is just rolling out. We see incremental sales in the $70 million range from that but that is going to take several years to generate as well.

But I would say all those things will continue to drive our vitality index and gross margin expansion.

Okay, fair enough. And then just one last question. It sounded like Latin America was an area of relative strength for you which is I guess hearing some of your peers throughout the quarter wasn't necessarily the case for everyone in the industry. So I guess I'm wondering what is driving that -- what specific areas in the industrial segment are you really seeing that strength?

Well, look, we had strength across the board. We were strong in F&B, we were strong in water, we were strong in energy and institutional had a good quarter too. So I would just say our positioning of clean water, food, energy and healthy environment plays well in Latin America. It plays well frankly in all the emerging markets and so we saw very strong growth across the board in our emerging markets not just Latin America.

China was double digits, (inaudible) is going to start showing underlying strength as well as we get moving. We are starting to do I think the right things in Eastern Europe and that will get moving in the right direction as well. So I think it is just right businesses and good execution.

Great. Thanks very much.

Mike Ritzenthaler, Piper Jaffray.

Good afternoon. So we have heard that for rent prices on offshore rigs that they had been declining modestly month over month for the past few months. Can you describe how that influences your outlook seeing as though it runs a little bit counter to that in the energy segment and especially since Ecolab has a little bit higher customer intimacy on the offshore side of things?

Yes, if you are talking the offshore Gulf, there is a bunch of new projects coming in particularly midyear, second half, fourth quarter even. So we are relatively bullish on Gulf and what is going to happen there. We are not in the rig rental business so I just look at it this way.

I think the underlying trends that we have spoken about for the last few years in energy are still the prevailing trends and that is new oil replacing old oil, new oil commanding significantly more of our technology than old oil, therefore you have just got natural inherent growth even at a relatively flat overall oil demand which is not what we are actually seeing. And you have gas on top.

So I think our trends and what we see in that industry still feel very strong.

And then as a follow-up on beverage in particular, it seemed quite strong in 1Q as Mike had detailed in the prepared comments. Is there a way to delineate things like new products from other drivers like enterprise selling in markets like beverage? Is one a better contributor than another?

You know, I don't have that here. We can of course look at that. I would say two things. We do have a bunch of new technology going to the beverage market but we have also had a lot of significant success with large players in that industry and we are gaining share. So it is a combination of both and obviously technology helps you drive share.

So even if you separated out the numbers, I'm not sure that is the complete story because technology begets new business and so it is all related.

All right. Thanks, Doug.

John Roberts, UBS.

Good afternoon. As you roll out 3D TRASAR into food and beverage, how is that going to play out? Is that going to free the field force to be more active prospecting new business or is it going to just lower cost initially in existing business? How are you going to utilize it?

I think it just dramatically or further improves our ability to be best in class with customers and this has got several impacts. One, it will give better usage rates, you are going to have equal to better efficacy. You are going to reduce water and energy usage considerably because you don't have to overshoot all the time and it also has a very tie-in impact in terms of our ability to manage a water process at the back end of the operation.

So this is important data that they need to collect anyway. It is now automated. I wouldn't say that it dramatically changes our field sales productivity measures, but it does give us a very important tool to go out and solidify new business and upsell existing accounts. That is really where we are going to focus on driving this.

Just wanted to clarify how you are going to handle the US R&D tax credit so it is not in your Q1 results or Q2 or Q3 expectations but in the fourth quarter, you expect to take a full-year catch-up retroactively in the fourth quarter for the year?

Yes, that is exactly how we have it in the plan.

Okay. Thank you.

David Ridley-Lane, Bank of America Merrill Lynch.

Sure. Have you completed cycling through the deemphasized business in water or is that a drag in the first quarter and if so, when would you expect to completely cycle through that?

Yes, we will be through most of it by the end of this year but you are going to see it even in Q3 and very small in Q4.

Okay. And then was paper OI still ticking up despite the declines in North America and EMEA volumes?

Yes, paper OI was up -- I'm looking for the exact number -- paper IO it is slightly up but yes, it was up.

If I could squeeze one more in, could you give us some details around the globalization of sales initiatives you have particularly in the institutional business? Thanks.

Talk about the initiatives?

Yes.

(multiple speakers) make sure that we have the right global product line and make sure that we can get our new solids Apex et. al. across the globe. Right now we have not had the capability to manufacture around the world. We have developed what I will call a much lower capital manufacturing process which will enable expansion of that program i.e., with localized manufacturing in a much faster manner than it would have if we had not figured out how to do this.

Two, we are driving global 360 which is a fuel technology tool that enables heightened productivity, better service, better ability to capture information which is an important way to merchandise with particularly large enterprise accounts about what we are doing, what we see and what we can suggest they do to improve their operations which many times involves more of our technology and products and service.

The other is just how do you operate a sales and service team and taking some of our know-how and spreading it across the globe so it is in all those dimensions. So it is certainly higher end product lines. It is the field technology tools and what I would call just general management know-how that we are driving right now. We worked last year very aggressively on corporate account efforts and the like and you are starting to see that bear fruit.

Thank you very much.

John Quealy, Canaccord Genuity.

Good afternoon. On healthcare I know it is a relatively small and promising area but can you give us an update in terms of your satisfaction with results? I'm not necessarily talking about the quarter but midterm platform expansion opportunity including external M&A there?

Yes, you know from a M&A front I would say our list of promising properties has been increasing and that is not only in healthcare but that is across the board as we start I would say reemphasizing bolt-on acquisitions be it geographic expansion, a share play or new technology and certainly our healthcare list has benefited too from getting back on this focus which is I think a natural stage of where we are.

In terms of healthcare, we don't like the results that we are seeing. We understand many of the drivers. The business is looking hard at how they improve their ability to go drive new business impact. So fundamentally in the US in many of the areas that we compete, we have had same-store sales -- the equivalent challenges, this isn't unique to us. It is pretty much across the board in many parts of the healthcare industry.

We have seen this in many environments before and we overcome it by selling through it and right now our sales efforts aren't significant enough to overcome negative same-store sales. It is about as simple as that.

So our business is sticky, we are keeping it. There are a lot of metrics that we like. But we are really if you will, in the shop working on how do we drive that forward and work on it?

Now I will say that is a competency that we have in this Company. We are good at this and we are quite confident we will get this moving the right direction and the healthcare team is all over it but it is not going to be an overnight success. We are not going to start seeing the 6 to 8 high single-digit collectively for a number of quarters and so we've got to start ramping up sales which we believe we will start seeing but we are not going to be where we are comfortable for several quarters.

Okay. Then a quick follow-up on global energy in terms of the guidance in the back half of the year with some acceleration in growth, I would assume that is still more geared toward upstream and offshore than downstream relative incremental benefits in the back half of the year?

Absolutely.

Okay, great. Thank you.

PJ Juvekar, Citi.

Doug, this is Eric Petrie in for PJ. Just a question in terms of your global energy margins, it looks like some of your segment adjustments led to a revised lower 2013 margin, a 13.4 from 14.2; first quarter was at 13.1. How do you see the trajectory of the margins going forward this year?

The only change was a happy corporate allocations. The underlying business margin in energy has been improving steadily and is forecast to improve fairly significantly this year.

Okay. Then could you also talk a little bit about your sales growth in Europe and institutional and if you have seen in terms of operating margin improvement of your 100 basis points, is there any attrition to that with you now focusing on topline growth?

Yes. No, our forecast in Europe for margin growth this year was 100 basis points plus and we see that as achievable. Obviously we've got to execute the rest of the year. Our first-quarter margins in Europe are up several hundred basis points. It was a very strong start, stronger than forecast initially in fact. But these margins come in lumps at times so it is not the smooth 100 every quarter so we don't expect -- it was north of 250 -- we don't expect to see that every quarter. So it was a good start.

We do not see the focus shift if you will externally impacting our ability to drive the 100 margin point. What we do see is as we start seeing topline solidifying and growing, which is what we saw in the first quarter solidifying, we expect to start to see to growth as we move throughout the year. You are going to see a lot more leverage out of all of that margin work that we put in over the last few years.

Okay, lastly, if I could, as you roll out 3D TRASAR into the light industries and water, can you just remind us your light heavy mining sales breakdown?

Yes, in terms of percentage of sales in each?

Yes.

It is roughly -- just give us a second. So light is about 40%. Heavy is about 25% and mining is 10% to 15%.

Great, thank you.

I don't think that added up.

Mike Harrison, First Analysis.

Yes, I think that adds up to 80 but close enough I guess.

We just got the same number.

Was wondering if you could talk a little bit about Apex. If memory serves, you guys never really rolled out the Apex1 platform in Europe the way that you had initially expected. So can you talk a little bit about the Apex2 rollout and how meaningful that could be for the European institutional business?

Yes. No, we did not do Apex1, we skipped right to Apex2. It is in the process of being rolled out right now in Europe.

Right, but I mean in terms of how beneficial it could be, I mean this is sort of as you say, skipping a generation and really bringing a value creating platform to a set of customers that has been kind of behind the times. So how important is that to growing going forward?

As I mentioned earlier, we had a number of very large new customer wins in the first quarter in Europe Institutional and certainly Apex is critical in at least two of those. So it is going to do a number of things.

It gives you a tool to go after entrenched business because it is by far the most advanced technology in that industry and so we know we have been handicapped for a while in Europe without the latest technology and without some of the tools that we have deployed in other geographies. So this is one of the ways that we are going to start turning around negative sales growth to positive sales growth.

I think -- we looked at institutional, we were positive for the first quarter, it is the first time we have been positive there in a long time and we don't even have yet the benefit of the new business that we sold because that is really being rolled out in Q2 as we speak right now.

So without getting into specifics, we need to get Europe -- as I have always said, our expectation is Europe will not be in the 6% to 8% but we do believe it needs to start getting in the 2% to 3% to 4% range and it is going to roll out technology getting the right field tools and driving the sales performance the way we drive it everywhere else are the keys to doing that. That is the agenda we are on now.

The P&L is much more right than wrong at this point in time in terms of balance of investments and cost structure so that the good work that the new business will actually accrue to profit at this point in time given the structure of the business, and so that is what we are on and new technology is a key part of it.

And then just a quick one on energy. Are you seeing any disruption in the Black Sea related to the situation with Crimea and Russia, Ukraine?

No, it is not the drama. I mean if there are issues as a result of that, I don't think that is how we will see it.

All right. Thanks very much.

Andrew Wittmann, Robert W. Baird.

Thanks for taking my questions. Just a couple here on guidance. I noticed you tweaked the gross margin guidance here for the year from 46 to 47. Can you just talk about what is behind that? Was that this accounting thing where you moved an immaterial amount of cost from cost of goods to SG&A or were there other things there?

Yes. Mostly, Andrew, it was one rounded down and now rounded up. We are probably indicating more precision than we meant to as we went through this. I would say from a GP standpoint for the year, we feel we are in good shape. It was up, if you do apples and apples, 50 basis points Q1 versus last year. We expect that spread to widen as we go throughout the year.

And so I think we are taking the steps we need to, to make sure that happens. So it is going to be a positive contributor, but we weren't trying to indicate that it is going to be 100 basis points better than we indicated in the last call.

Can you just talk in maybe a little bit of detail on kind of the raw material environment that you experienced in the quarter, and how that outlook shapes up and factors in that gross margin number?

Yes, raws are pretty benign as we look at it. So we do not expect raw materials to be a big conversation point this year. I mean, they are plus/minus. And on the amount we buy, it is very, very small.

Pricing will certainly -- pricing is going to be near what it was last year, and in the benign raw market it is one of the key drivers of increased GP.

Got it, great. And just maybe final question on cash flow; do you still feel kind of like the $1 billion plus number is the right way to think about the year with the start that we have and where we are here so far in Q2?

Yes, we do. We think we are on track on cash flow.

Thank you very much.

Dmitry Silversteyn, Longbow Research.

Good afternoon, guys. Thanks for taking my call. A couple of things in terms of the food and beverage market. I think the one area that we consistently keep hearing about weaknesses in the protein market. Is there anything taking place that would reverse or alleviate that issue? Or maybe you can talk a little bit about what the issues are and how you are dealing with them.

Yes, this business goes through cycles, and right now more animals would probably be the single most important driver in terms of improved business. Here you have got rising prices and shrinking birds. This is really kind of -- this happened a few years ago. This is well predicted for quite a while, so we are going through it.

So this has nothing to do with changing diets or changing population dynamics or anything like that.

No. If anything, long-term we think protein is going to be moving forward, not backwards, as diets change in the emerging markets.

Okay. And then on the Nalco/Champion integration and the process you are making there, can you update us on what the cost synergies to date realized were and where do you think you are going to be by the end of 2014 and 2015?

Yes, this is on the Champion side, I don't know what --. So on Champion, we had 25 last year. We are forecasting 80 this year we had about 18 million in the first quarter and 130 the year after.

Very good. Then the last question on --there was a question about the situation in Latin America and you answered it nicely as far as what you are doing to sort of offset the issues there. But the other thing that other companies will be complaining about besides sort of economic conditions is currency devaluation. I haven't heard you mentioned that as a problem so is that not impacting you or is it you are just dealing with it in terms of getting pricing up or just weathering through it?

Yes, no, we have business in Venezuela, Argentina and the other countries in Brazil but Venezuela, I mean we are pricing to recover where we have already had devaluations so it is a normal cycle that we have all lived through in the past and so we are on the other end of that. But certainly there is still risk of further devaluation in that market which we talk about in our releases. So it is an issue. Venezuela is about 1% of sales so it doesn't seem like the thing to focus on.

Got it. Thank you, Doug.

(Operator Instructions). Rosemarie Morbelli, Gabelli & Co.

Good afternoon, all. Doug, you talked about the lack of impact from the issues in Russia and Ukraine on the energy side. Could you talk about what it could do to the institutional side as tourism may come down so we are talking about restaurants, hotels. What size is your business in that particular neck of the woods?

Yes, on the institutional side, it is very small. In total, Russia is just a little over a percentage, 1 point of sales in total. That includes the energy business, the industrial business and the institutional. The institutional is by [far] the smallest of those businesses.

So I don't think that is going to be the impact we talk about. We are in 170 plus countries. There is always something happening somewhere in the world every year and every quarter. There are certainly risks with the Russian business right now in terms of what may or may not happen, none of which is very predictable. But we will just have to figure out like we figure out everything else including weather in the first quarter and all the rest of the stuff how to get through it and I am confident we will.

That is helpful, thank you. You talked about several large new accounts in Europe. Was the first quarter helped by filling up a pipeline or is it a question of those particular accounts showing revenues over the course of the year as opposed to one big lump in one quarter and then stop until they need more products?

Yes, I don't think we shipped anything to any of those accounts in the first quarter. And if we had, there are sometimes a small pipeline at front but it is not that dramatic. It is principally an annuity business and so as the business comes on it starts consuming product but it is a fairly gradual pace. It is not a big lump, a big spike and then a downward trend, it is an upward trend.

If you put them all together can you give us a feel for how much they could generate incrementally?

We don't typically name names or disclose size. How about this, they are big enough to mention.

Okay.

It is going to be meaningful and I think you should expect to be able to see yet in the P&L, in the sales trends in Europe as we move forward.

Okay, thanks.

Shlomo Rosenbaum, Stifel.

Thank you very much for taking my questions. Doug, I just wanted to ask you a longer-term holistic question. When you bought Nalco, the cost synergies were supposed to run through 2014 and we are in 2014 now and you are going to have some benefit from Champion in 2015 it looks like about 30 basis points for the margin. Can you just talk holistically about the levers you are going to be going after to get the 50 to 100 basis point margin expansion when you don't have as much benefit from acquisition synergies?

Well, I guess first I would say this. When we announced the Nalco deal, we first talked about $150 million then we upped it a month later to $250 million in total synergies and that was through 2015. The sales synergies of $500 million were through (technical difficulty).

With that said ,they still ultimately come to an end which is I think is the heart of you second part of your question and I would say two things. Our underlying business and we believe confidently we will grow in the six to eight range. We have for decades driven margin expansion and we will continue to do that plus we will be adding two historic but relatively, they will be new tools because they have been on the blocks for awhile which is we will be back in the share buyback business and we are going to be back in the bolt-on M&A business as we move forward.

And shares have been a negative for the last few years, not a positive but as we stop debt paydown which is really only remaining of this year and then we are out of the debt paydown business going forward except for the stuff that comes off but it's natural occurrence and we are going to have cash to utilize first for M&A which is accretive typically. And then second, for some share buyback.

So you take all of those together, I think we are quite confident that we can play in the 15% EPS range post synergies.

But is the 50 to 100 basis points on the operating margin still the way that you think about it or is there going to be more share buybacks than we had been thinking about before?

No, I think the roughly 75 basis point operating margin is how we think about it.

Okay. And if I can just sneak in just the tone last quarter sounded like Europe was starting to get better at least it felt that way. Would you say that you are incrementally feeling better about your -- just kind of reiterating what you said last quarter? I will leave it after that.

Starting at the same trend. Yes, we are a quarter further in and I would say that yes, we think Europe is showing improvement, our business in Europe in particular.

Edward Yang, Oppenheimer.

The large new customer wins in European institutional, I was curious, was that from one of your larger competitors or how was that distributed in terms of competitive wins? What are you seeing in terms of price competition from some of your competitors there?

I would say broadly on price competition, I would say we still see a lot of the same activity we have seen for a long time which is typically the way our competition in many cases we've got after our businesses by promising significant price reductions and so unfortunately that hasn't changed. But we have looked at that -- I have been here almost 25 years and we have seen it for 25 years so probably won't change anytime soon.

In terms of who is the business from, we won't get into it. It was the institutional business, it was large customers in Europe.

Got you. And pest elimination, that moderated a bit, it grew 3% and had been running at 5%. Is there anything to read into that? Was there weather impact or was that just kind of lumpiness?

It was mostly in Europe and France where we had delayed service and we only bill for the service when it is performed. So we see catch up there so ultimately we will be fine.

Thank you.

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

That concludes our call for the day. Thank you very much everyone. We appreciate your time and attention and have a good rest of the day. Thank you.

Thank you for your participation in today's call. You may now disconnect.