藝康 (ECL) 2014 Q2 法說會逐字稿

Welcome to the Ecolab second-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.

Hello, everyone, and welcome to Ecolab's second-quarter conference call. With me today with me today is Doug Baker, Ecolab's Chairman and CEO.

A copy of our earnings release and the accompanying slides referenced in this teleconference are available on Ecolab's website at Ecolab.com/investor. Please take a moment to read the cautionary statements on slide 2 stating that this teleconference and the slides include estimates of future performance.

These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent Forms 10-K and 10-Q under Item 1A, Risk Factors, in our second-quarter release, and on slide 2. We also refer you to the supplemental diluted earnings per share information in the release.

Starting with an overview in slide 3, we delivered strong results in the second 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 strong 13% to 17% earnings gains in the third 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 mix markets.

Moving to some highlights from the second quarter and as discussed in our press release, reported second-quarter earnings per share were $1.02. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, second-quarter 2014 earnings per share increased a very strong 20% to a record $1.03. The adjusted earnings-per-share growth was driven by volume and pricing, new products, account gains, synergies, and cost savings actions.

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

We continue to be aggressive, focusing on top-line growth. We are emphasizing our innovative 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 our 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 third quarter to show continued attractive sales gains and margin improvements. Third-quarter adjusted EPS is expected to increase a strong 13% to 17% to the $1.18 to $1.22 range and compare with last year's adjusted EPS of $1.04. 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 very strong 20% adjusted EPS gain in last year's third quarter. For the full year 2014 we continue to look for a very strong 17% to 19% increase to the $4.14 to $4.20 range.

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

Slide four shows our second-quarter results, both as reported and with adjustments for special gains and charges, while slide five shows our sales growth detail. Ecolab's consolidated fixed currency sales for the second quarter increased 8%. Acquisition adjusted fixed currency sales rose 5%.

Looking at the growth components, volume and mix increased 4%, pricing rose 1%, acquisitions and divestitures were 3%, and currency was a negative 1%. Reported fixed currency sales for the global industrial segment rose 3%. The net impact of acquisitions and divestitures on the segment was not significant.

Second-quarter fixed currency global food and beverage sales increased 3%. Growth was led by beverage and brewing, dairy, and agri, which more than offset lower sales in the weak protein market.

Regionally, Asia-Pacific and Latin America led results with modest growth driven by share gains in the other regions as we more than offset plant closures and weak volumes. Food and beverage continues to benefit from its total planned assurance approach to customers in which we combined 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 difficult conditions in our North America and Europe markets where lower volume, as well as customer capacity and plant closures, have impacted sales.

Looking ahead we expect moderate organic sales growth in the third quarter. We look for further benefits from growth synergies, better customer penetration and new business capture, as well as leverage from our innovation pipeline, including the introduction of 3D TRASAR for clean-in-place systems in food and beverage plants to more than offset tough industry conditions.

Fixed currency water sales increased 5%. Good growth in the heavy, light, and mining businesses led the increase. Regionally, we saw strong growth in Latin America, good gains in EMEA and Asia-Pacific, and moderate growth in North America. The introduction of 3D TRASAR for hotel and other institutional cooling systems in the second quarter, utilizing solid chemistry and advanced dispensing in a premium customer solution utilizing both Ecolab and Nalco technology, has been well received by customers.

To continue to drive market penetration with innovative solutions to optimize water usage using powerful technologies, we are focused on building our corporate account and enterprise sales teams delivering growth synergies and improving product innovation to drive revenues. We expect to show continued growth in the third quarter as market share gains drive our heavy and light businesses to outperform mixed end-markets.

Acquisition-adjusted second-quarter fixed currency paper sales declined 1%. We saw double-digit growth in Latin America and modest growth in Asia-Pacific. However, these were offset by declines in North America and EMEA that resulted from continued low customer plant utilization and customer closures. We expect paper to show flattish sales in the third quarter as new business and technology penetration offset the difficult paper market conditions.

Fixed currency sales for the global institutional segment rose 3%. Adjusted for a small divestiture in Europe, institutional segment sales grew 4%.

Turning to the businesses that make up the segment, fixed currency sales for the institutional business grew 3% in the second quarter. Institutional's end-markets remain subdued with moderate growth in global lodging room demand and still soft food service foot traffic across North America and Europe.

Looking at regional sales trends, North and Latin America continued to post solid sales growth while Asia-Pacific saw moderate gains and Europe declined. Sales initiatives targeting new accounts and effective product and service programs around the core segments continued to drive our results. We continue to leverage our global technology through the rollout of Apex, our next-generation warewashing platform in Europe.

To drive our future growth and improve on our industry leadership positions, 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 intimacy 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 gains. We look for third-quarter institutional business sales growth to improve as we make further progress on our global sales initiatives and continue our aggressive sales efforts to help us outperform challenging markets and show better growth over the balance of the year.

Second-quarter sales for specialty grew 7% in fixed currencies. Quick service sales were solid as we enjoyed steady growth from small to midsized customers. New accounts, along with increased service coverage and additional solutions for customers to help improve their operating efficiency in 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 saw solid sales momentum in the second quarter, benefiting from customer additions, new products, and increased penetration. We look for good sales growth again in the third quarter, especially works to deliver another solid performance in 2014.

Fixed currency global healthcare sales increased 3%. New account growth, better penetration, and new product introductions more than offset continued weak hospital trends and delayed buying decisions in the US. To grow sales in this challenging market we are strengthening our corporate accounts approach and our integrated value proposition, as well as improving our product portfolio. We expect global healthcare sales to show modest gains in the second half as we continue our work to strengthen our business.

Reported fixed currency energy segment sales grew 20%. Acquisition-adjusted global energy fixed currency sales rose 8%. Our upstream business saw good growth in the second quarter led by strong international performance as well as solid oil sands, shale, and deepwater production results. Downstream business sales increased as North America refining showed overall improvement.

Looking ahead, we expect acquisition-adjusted energy segment sales to show double-digit growth in the second half as new business resulting from ongoing share gains and new production coming online drives growth and delivers a full-year 2014 acquisition-adjusted sales increase in the 10% range.

Sales for our other segment increased 7%. Acquisition-adjusted sales grew 4%. Fixed currency global pest sales increased 6% in the second quarter. We enjoyed good growth in food and beverage and restaurant. Regionally we enjoyed double-digit growth in Asia-Pacific and solid growth in EMEA, Latin America, and North America.

We continue to drive market penetration with innovative service offerings and technologies and are making progress in globalizing our market-focused capabilities in field technologies. We expect global pest sales to show further good growth in the third quarter and second half led by gains in all markets.

Equipment care sales increased 9% in the second quarter. New account sales, better penetration, pricing actions, and improved technician capacity and productivity drove strong service revenue growth. We expect equipment care to show further strong gains in the third quarter as continued good service trends, pricing initiatives, and streamlined operations benefit results.

Slide six of our presentation shows selected income statement items. Second-quarter gross margins were 46.5% and adjusted for acquisitions and special charges second-quarter 2014 fixed currency gross margins were 46.6%, 60 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 32.3% of second-quarter sales. When adjusted for acquisitions, the fixed currency 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 a lower SG&A ratio when compared with our other businesses.

Consolidated operating income margins were 14.4%. When adjusted for acquisitions and special charges, fixed currency operating income margins were 14.3% rising 140 basis points over last year's comparable margin. Fixed currency operating income for global industrial increased 8%. Acquisition-adjusted operating income grew 9% with margins up 60 basis points. Volume gains, pricing, and cost synergies and efficiencies led the gain.

Fixed currency operating income for global institutional increased 3%, benefiting from pricing, volume gains, and cost efficiencies, which more than offset investments in the business. Fixed currency global energy operating income increased 44%. Acquisition-adjusted global energy operating income increased 40% in fixed currencies and acquisition-adjusted margins expanded 340 basis points led by synergies, the volume gain, operating leverage, and pricing.

Fixed currency operating income for the other segment increased 7%. Acquisition-adjusted operating income grew 8%. Improved operating results offset investments in the business and higher costs.

The corporate segment and tax rate are discussed in the press release. As before, please note that our tax rate assumptions for the full year assume passage of the R&D tax credit in the fourth quarter.

We repurchased approximately 800,000 shares during the second quarter. The net of this performance is that Ecolab reported second-quarter diluted earnings per share of $1.02 compared with $0.69 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 20% to $1.03 when compared with $0.86 earned a year ago.

Turning to slide 7 and looking at Ecolab's balance sheet, net debt to total capital was 48% 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 mixed market conditions and unfavorable currency exchange rates which will likely negatively impact sales by a percentage point 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 third-quarter 2014 diluted earnings per share to increase an outstanding 13% to 17% to the $1.18 to $1.22 range.

Further, the third-quarter will also compare against very strong period last year when adjusted earnings per share rose 20% to $1.04. We continue to look for the full year 2014 to show very strong growth as adjusted earnings per share are expected to increase 17% to 19% to the $4.14 to $4.20 range.

In summary, we once again delivered on our forecast in the second quarter with a solid sales gain and continued margin improvement while offsetting market challenges and investing for our future. We look for further solid acquisition-adjusted sales growth and continue double-digit profit gains in the third quarter as well as for the full year 2014 as we work to deliver yet another strong year and build for our future.

Now here is Doug Baker with some comments.

Thank you, Mike. I'm going to offer just a couple of points perspective on the business overall and thoughts on Q2.

Business overall, I would say we are getting better. Our integrations remain on track. Our margins continue to expand. Our business top line is accelerating. We had a solid first half and we expect an even better second half.

Regarding Q2, if you look at our sales, they grew at roughly 0.5 point faster rate than they did in Q1 when we strip out and look at pure organic results. When we look at individual components we had energy growing at 8%, which was what we expected in the second quarter. We are on track to accelerate that.

The core business, if you exclude Europe, grew at a 5% rate and Europe was roughly flat, but here I am taking out energy. So total we had a 5% organic rate when we take out acquisitions and divestitures.

Every one of these components we expect to accelerate in the second half. Energy moving from 8% to 10% to 12%; the core business excluding Europe moving from the 5% to 6%-plus; and Europe flat, moving to 2% or even maybe a little better. In total, this will move our overall, if you will, acquisition-adjusted sales from 5% to 6%-plus in the second half.

Now there are a number of drivers of this acceleration. Number one is new business. We had another great quarter of net new business adds. This means back-to-back record new business quarters. For the first half, our net new business results were 30% ahead of last year's first half so we are fully back on stride now regarding new business post integration.

Our innovation continues to fire well. CIP 3D TRASAR, [solids] for water, Apex in Europe, antimicrobials in energy, etc., all are meeting or exceeding our expectations. M&A is picking up, both bolt-ons and also technology plays, and we are looking to make some things happen here in the second half.

Finally, the market in total should be roughly the same, meaning global GDP second half we don't expect to be materially different than the first half, even though there is a lot of volatility in the world as we all know about. But in total we would expect the market to be either a headwind or a tailwind, so the fruits of our labor should show up as we expect in better results in the second half.

So now that we like where we are positioned, we see a stronger second half. Accelerating sales as I said; mid- to upper-teens EPS delivery. We see another great full-year delivery of 17% to 19% EPS.

And probably most importantly, we like how we are positioned for the out-years, too. We have got a great business, we have got a lot of opportunity, we have the right team, and we like our plan. We believe the combination will allow us to consistently deliver against our 15% annual EPS objective post synergies.

With that let me turn it back to Mike.

Thanks, Doug. That concludes our formal remarks. Operator, would you please begin the question-and-answer period?

(Operator Instructions) John McNulty, Credit Suisse.

Thanks for taking my questions. So with regard to Europe, we have seen some other companies putting up some growth in Europe and it seems like you didn't have really much to speak of on it this quarter, but you do expect things to get better in the back half of the year. So I guess can you walk us through what may have been an issue, what some of the issues were around growth this quarter?

And then what gives you the confidence that it is going to get better in the back half of the year? Are you already starting to see those trends improving already?

Our Europe -- look, if we total our business in Europe, including energy and all the other businesses, it was down 1% in the first quarter and up 2% in the second quarter. So we have seen some sequential improvement in our European business and this is driven in large part by new businesses coming on, stabilization of the market, and other efforts. And we expect Europe to get better in the third quarter and the fourth quarter still.

So I think we are seeing some of the same trends that you are referring -- you might be seeing in other people's business. But our focus in Europe remains on profitable growth, cleaning up the business that we don't want to be in long term. So I would say we are also artificially covering some of the good work in Europe as we exit some businesses and do this really just on the P&L, not through any restructuring activity.

Our Europe business we think is in good shape. We had another very strong margin performance against our goals. And so we are set up to at least deliver in the 100 basis points to 150 basis point improvement for the year and are going to be seeing run rates in the 7% EBIT margin basis by year-end, which is good. Big improvement.

Great. Then just as a follow-up; one area that we haven't seen much improvement in from the rest of the world and yet you seem to be exhibiting some really solid strength is in the Lat Am side. So maybe if you can flush out what is driving that, maybe where you are seeing it and some of the trends that you are seeing down there would be great. Thanks.

Sure. Latin America is a fairly strong story. We are seeing it in our core food and beverage, institutional businesses. We are seeing it in water, where we have had strengthening of the management team down there through some internal promotions on the water team.

Energy remains strong as well, so it is pretty much across the board. Also, we have got strength in Brazil, which I think is relatively unusual versus some of the other reports that we have seen. So the team down there continues to execute. We also continue to make sure that we are doing the right thing around margin simultaneous to top-line growth and we have seen improvement there as well.

Great. Thanks very much for the color.

David Begleiter, Deutsche Bank.

Doug, thank you. Doug, just on the new business; very impressive first-half results. In what businesses or areas is this really focused on, this 30% year-over-year improvement?

You know, it usually differs by quarter because, as you know, we go after large pieces of business and they are a bit lumpy. In the first quarter, as we talked about, we have a lot of terrific success in both institutional and F&B in particular. Water was pretty steady in both quarters, first and second, and energy had a blowout second quarter, which we had anticipated and expected, which was one of the reasons that we have been forecasting a much stronger second half.

And so I think the events that we believe were going to come true in the second quarter leading into the second half have come true, which is why we continue to forecast energy in particular up in the 10% to 12% range for the second half. But all the businesses are going to benefit from the work that happened in the first half.

And, Doug, just on energy, as it picks up to double-digit growth back half of the year, what happens to the margins? How much have they improved from Q2 levels?

They continue to improve in the second half simply because it is the bigger volume half for energy, so you have got volume driving some of it. But we believe the margin improvement that we are seeing is sustainable and we have still synergies yet to be realized in that business, so we will continue to work and drive margins as we go forward.

Thank you.

Nate Brochmann, William Blair & Company.

Good afternoon, everyone. Doug, wanted to talk just to follow-up on that just a little more specifically. I mean, granted, I know things kind of were a little bit light of some of where you wanted to be in terms of the core growth in the first quarter.

Could you talk a little more specifically what you have done either in terms of execution or with the salesforce in terms of spurring those new business wins? I know it is about the Ecolab playbook in terms of great new innovation and new products, but how you have been able to accelerate that in terms of the outlook to get to that 5% to 6% for the second half of the year?

Nate, I would say from the new business perspective it is continued efforts, but we have expanded our corporate account team over the last couple of years, particularly in the WPS business but also in other businesses. We have strengthened we believe -- further strengthened the leadership in our regional positions around the world in, say, institutional and others.

And we have clearly identified and targeted the largest players in the industries and put together specific plans to go after them. All this is helping contribute to a very strong result.

I would also say we didn't make a lot of noise; we continued to deliver quite well through the heavy integration periods. And while I can't go and point to exactly how that took a toll on any one thing -- I don't think it took enough of a toll to make it into a call -- but certainly as the integration work lessens we know we will have even more energy going towards offense, which long term is the key to driving value.

That makes sense, I appreciate that. Then also, too, just thinking a little bit bigger picture -- and who knows where some of these rumblings ever go. But if there is ends up getting to be a broader across-the-board minimum wage hikes in some of your end-market businesses, how do you think that impacts your business in terms of some of your customers' desires to automate things and reduce costs in terms of that being maybe a net benefit for you?

One of the obvious impacts would certainly be in the institutional US business, which continues to perform well. It grew 5% in the second quarter, on both the field sales and actual shipped basis.

I would say if you look across the institutional business, and I am going to throw KAY in here and QSR as well, certainly increase labor cost are going to have to be offset somewhere. And so in many cases, you can see our customers looking at how they would further mechanize either the kitchen operation or the front part of their operation and they are working on those technologies.

Now we have got a number of technologies that fit in with that thinking obviously. Warewashing in QSR would be an obvious one. We would expect that that will continue to have great uptake that increases our sales in those restaurants, but is also a great deal financially for the restaurant to install and take the plunge from a capital or a lease standpoint.

So those would be some of the examples, but this is going to be further and wider reaching than that. Typically whenever there is cost pressure on the business our philosophy, if you will, comes to bear and tends to prove quite valuable. So we like what we do so our lower energy, lower water, and in many cases, lower labor promise is the right promise in the eventuality that these rates get raised.

Great, thanks, Doug.

Mike Ritzenthaler, Piper Jaffray.

Good afternoon. Question on the margins in the institutional segment and just looking year-over-year flattish margins. Is that a function of incremental leverage in emerging economies from better volumes offsetting decremental margins from lower sales in Europe or is there more to that story?

Mostly I would just say it is timing. We have had some growth investments that we made in that business, a lot of them came disproportionately in the second quarter so it had sort of a neutralizing affect on any volume lift so margins were flat. We expect margins to be up for the year and up for the balance of the year.

Okay, that is helpful. Then for business outside the US and Europe there is a few headwinds that I would be interested in some additional color on, such as the slate of sanctions on Russian businesses potentially affecting energy, the difficulty doing business in Venezuela, the Argentine default. Maybe each one geography not huge in terms of revenues, but kind of when you add it together.

You know there is probably a longer list. Do you want to go to the Middle East?

I would say I don't think Venezuela is any particularly new news. It has been a challenging situation for quite a while now. It is a situation we have been managing and we think we will continue to manage.

We forecast in the Q, like other people, we expect another devaluation. We go through those and the team there has been very adept at them getting behind that and raising local prices in the bolivar. So that we will continue to manage.

I would say Argentina is more similar to that than dissimilar. We will continue to manage our business there and I think we are equipped to do it.

Russia is a harder one to predict. I don't know who can predict what is going to happen there. We certainly don't believe we can predict, so I think we have done all of the smart things there.

Our Russian business, for perspective, is probably at a run rate of around $200 million, so it is not a huge business in terms of impact globally given our $14-billion-plus size, but it is an important market for us. We have taken, I think, a lot of the smart steps to put us in a position to manage further sanctions and other things. And, of course, we are going to comply with all laws and anything that may or may not happen as we go forward, but it is very tough to predict what that might be.

From an energy standpoint, it is not a huge piece of their business but it is an important piece. And I think we are just ready to manage as wisely as we can given what unfolds there and predicting what unfolds is quite difficult.

Sure. All right, thanks, Doug.

Gary Bisbee, RBC Capital Markets.

This is the third straight quarter you have talked about very strong new business signing and yet we haven't seen real acceleration. I know you are expecting it, but how do we think about the lag from new business when you sign new business and talk to us about it and when it begins to generate revenue? Is it very different from segment to segment or is it a similar lag? Thanks.

When we say on average, it usually takes a couple of quarters to show up. So institutional, we talked last quarter about a number of new pieces of business in Europe specifically, and a lot of that business was installed in the second quarter. But they still have to run out their old inventory, and you really don't see a lot of the activity until really even the quarter following install.

So this is, I don't think, any great surprise. I will be surprised if we are not seeing some pickup from this in the third quarter. We would expect to. We think we are already seeing it, so we would expect third quarter to be better than the second.

Okay, then the follow-up. Both in the institutional and other services businesses, you mentioned investments that offset the normal leverage and cost savings. What exactly are the investments? Is it salespeople or is it other stuff, and how quickly do you expect to earn a return on the investments? Thanks.

It is a little different by business, but headcount in both institutional and also in pest training and pest in particular is we're arming the team to be even more specialized when they get after specific segments. And this is a lot of the work that has been helping drive pest organic sales growth faster, and also there have been some R&D investments that we have made.

I would just say it's more -- coincidental may not be the best word, but the timing is just the timing. We didn't trying to manage it to make each quarter look beautiful. It is just the right time to get after some of these initiatives, and they will be helpful in the second half.

Great, thanks.

Dmitry Silversteyn, Longbow Research.

Yes, good afternoon. Just wanted to ask a couple of questions and clarification. When you look at your energy segment and the business sort of that was the legacy Nalco business versus the Champion business that you are looking to globalize perhaps a little bit more aggressively, was there a difference in the growth rates if you can discern at all between those two businesses? Or is it more appropriate to talk about upstream/downstream growth rates?

Well, there were some differences in the growth rates. You might recall Champion had a huge second quarter last year right as we were putting it together. So one of the challenges is energy is going against a very big base number in the second quarter, and still accelerated versus the first.

So Champion, that business is all upstream. We didn't take any of the downstream business, as you might recall. There are differences historically and we would expect going forward in terms of expected downstream growth rate versus upstream growth rate. Downstream has been much more in the upper single-digit type growth rate and we expect double-digit from the upstream businesses including WellChem.

And then as a follow-up on the pest elimination growth, was there much of a difference between the domestic pest elimination, which is an older I guess more seasoned business if you will, and the international pest elimination business where there is still quite a bit of white space filling left to do?

No, it was very similar. I mean the US growth rate was very similar to the global growth rate, 6%. So we have got -- that business has been steadily improving as we talked about. We had it in the shop not that long ago. It has come out and doing well.

All right, thank you.

Edward Yang, Oppenheimer.

Good afternoon. CapEx picked up sequentially and it was up 30% year over year. Was there anything to read into this? I think, Doug, you mentioned that you had made some heavier investments in the second quarter than in the past.

Yes, I would chalk it up to timing. Our CapEx forecast that we had given before and expected use of capital remains the same.

Okay. I think you launched Apex2 in North America and Europe at the start of the second quarter. What is the update in terms of adoption and contribution growth?

Apex is launched in Europe, Apex2, and I would say it is exceeding targets. It is off to a very strong start, nearly 3,000 installs to date. We expected total opportunity in the $60 million to $70 million range for Europe and majority of that, but not all of that, would be incremental.

It is early. It is going well and we expect it to continue to go well, so it is doing what we expect it to.

Thank you.

David Ridley-Lane, Merrill Lynch.

I wanted to get an update on the run rate of cross-sell synergies in the second quarter and how Ecolab is tracking to the $150 million run rate target for the full year 2014.

Yes, we are on pace. We will look up a second-quarter number if we have it, but I would say all the growth synergies that we expect are on pace for the year. So I guess second quarter we are saying it was $119 million is what we saw, but I think the big number was we had forecast -- that is the run rate right now -- we had forecast we would get to $0.5 billion, I mean $500 million, by the end of 2016. We are tracking a little ahead of our forecasted pace.

Sure, okay. And then on -- it has been almost a year since we heard about the enterprise selling initiative Ecolab was piloting in F&B and water. Just wanted to get an update on maybe how many teams you have selling those integrated solutions at the highest level with clients. And any thoughts about expanding that into other segments?

We have corporate account people in both the water business and in the food and beverage and institutional business. A given enterprise will have a lead business in the lead division who takes responsibility for driving the total Ecolab portfolio in that customer. So I would tell you virtually every large customer in the industries that we serve has, quote-unquote, a team lead whose job it is to drive the complete enterprise sale at that customer.

With that said, I would say, as I have talked about in previous calls, we have had great success. More success early than I think we anticipated. We continue to have very good success against the terrific numbers I shared with you earlier.

I don't have a specific number of discrete teams whose only job is to go sell F&B and water together. It is really the corporate account team members on both sides of both divisions are working together to go drive that.

Thank you very much.

John Quealy, Canaccord Genuity.

Good afternoon, folks. First question, in institution you talked about QSR being solid again in the small and mid account area. Can you talk about is that foot traffic and volume, or are there other underlying trends there, like for the example, I know a year or so ago Starbucks did convention ovens and things like that? So if you could just characterize that a little bit more.

A lot of it I would just say is new business and the new business that was brought on by our QSR business was principally the medium- and smaller-sized chains. This is good news because they tend to grow into larger chains over time and it is where you will probably see disproportionate unit growth going forward.

That was the single-biggest driver, but we do see different chains adding food products, be it wings or other moves, which tend to change the cleaning needs in a given environment and then also then drives additional products in the unit simultaneously. But the biggest move was new business.

Okay, great. Thanks. Then a broader one-off question. I know the DOT has suggested new regulations for oil transportation by rail, specifically on some of the heavy stuff out of Canada.

I know this is early and I know this is common periods in all this; are you working with some of your heavy oil clients about different formulations of what that could look like? Give us any characterization there; that would be helpful. Thanks.

I would say the transportation of oil will be at Keystone Pipeline. If you don't build the pipeline, you are going to end up having the stuff ship on rails. And now I think there is a realization that that may not be the best answer because it creates risk too. Everybody wants to manage one risk and they forget about the other risks that they got to deal with.

I don't have any great -- I would tell you shipping heavy oil is a little safer than shipping light oil if you want to get down to it. We work with our customers on any of these issues. I think it is too early to say exactly how this is going to go play out.

Great. Thanks, folks.

Laurence Alexander, Jefferies.

Good afternoon. Two questions around the acceleration that you are seeing across your business. Do you see this as a multiyear surge or do you need an end-market recovery to maintain it?

Secondly, given the acceleration that you are seeing, has the underlying growth algorithm in terms of how many salespeople you need to hire to maintain the growth, has that changed or should we see a step up in hiring practices over the next 12 to 18 months?

Start with the formula or the algorithm question first. I don't think it has changed. We have been hiring sales team members this first half and have a couple hundred more than we did at the start of the year, so it is a couple percent more. But if you annualize it it starts turning into four if we continue on this pace. So we are investing in the business while growing margins and doing the other things that we are expected to do.

I would say, look, we would benefit by an economic recovery. I don't think it is needed for us to get into the lower end of our 6% to 8% organic range that we talk about, nor is it needed to add the 2 to 3 extra points from M&A. But for us to play around the top of that range, yes, I think you are going to ultimately need to see some uptick in the underlying economy.

The way the economy is working right now, which is below two digits globally, I think we can get into the 6%, maybe up to 7%, but it is going to be very difficult to get to the 8%, 8%-plus range.

Thank you.

John Roberts, UBS.

This is Bill Carroll on for John. Can you remind us of your capital allocation priorities, particularly with respect to debt reduction? You mentioned a desire to get back to an A credit rating, so what is your timing for getting the credit metrics there in light of using free cash flow for share buybacks and bolt-on acquisitions as well?

I would say our uses of cash have not changed materially, with the exception of the addition of some debt paydown. The debt paydown is about $300 million. It is foreseen that it is going to occur this year.

Following that we expect our net debt to EBITDA ratio to be low 2s by the end of the year and hitting the 2 range sometime early next year as we go forward and continue to grow EBITDA. So following that I think we have said that things then are on the table like additional share repurchase and/or more aggressive M&A. They tend to complement each other. They will end up to be, I would say, a bigger EPS driver than they have been the last couple years. And, of course, I am excluding the big deals we did with Nalco and Champion in that conversation.

Okay, thanks. Another one on water. What are your capabilities and appetite for pursuing opportunities in areas that you are not involved with now, like treating municipal water or agricultural processing?

I would say we do treat some municipal water systems today; had historically. We will continue to serve that business as long as we can do it in a way that is reasonably profitable and moving forward. It is not our target market by any stretch.

I would say, look, there is a lot of places in water that we see additional opportunity moving forward. Certainly our energy team is looking and getting after additional opportunities in their space using water technologies that are developed corporately. But we also see other opportunities, both in the pure water space and in the institutional F&B and other spaces and we will continue to expand our capabilities as we move forward.

I would say that is our formula. We want to grow the business every year. We want to expand the margins, but just as importantly, we want to expand the opportunities every year so we never run into a wall and get into a situation where we are, if you will, at the end of a realistic share gain period.

We chase over $100 billion today. We think we have got about a 13, 14 share and we expect that $100 billion opportunity to grow as we look at new arenas.

One of the areas we are going to be more aggressive in is going after desal. Not inventing the technology, but serving the installed desal units, be they the boil-the-ocean units or the membrane units. Either one we will get after; there are big service opportunities there.

So there are plenty of opportunities in water. Our water business is performing well. Second quarter, if you take away the paper business and the business that we are exiting, our water grew at 7%. So it has shown continued sequential improvement, as we said it would, and we are excited about the opportunities in front of us.

Great, thanks.

P.J. Juvekar, Citi.

Looking back the Nalco and Champion acquisitions were very timely, but your core institutional business really hasn't picked up steam yet. Can you comment on what is holding it back? Is it more on the hospitality side or is it more on the restaurant side?

I would say it is more on the Europe side. I would say you have got to recognize, we are now -- what we are reporting in institutional isn't just the US business. We are reporting the global results for institutional.

If you went back pre-Nalco acquisition, because we hadn't globalized institutional yet -- we would have with or without the Nalco merger, by the way -- but we were really reporting principally US institutional numbers.

I said earlier the US institutional number for this quarter was 5% growth. We have had -- last quarter was 5% underlying growth, as this quarter was, but I think 3% reported and we said there was a bit of takedown in terms of inventories. This quarter both numbers were 5%, 5% consumption, 5% shipped.

And so I think the institutional business as it has historically been reported is very consistent with where it has been, and this is in spite of, I think, difficulties in that market. Restaurant traffic continues to be soft and decline. Lodging has been strong throughout this period once it recovered from the recession.

What we are really working on doing is getting the business right in the other geographies and so really the particular whole that we have is Europe. So Europe for that quarter was down negative 4% in the second quarter and it was a series of one-timers, some of them we did purposely, some just happened to fall into this quarter. But we are quite confident that we are now going to see Europe grow in institutional for the next couple of quarters.

So I think institutional is going to be fine. Some of this we just took on, went after the business. You know the priority in Europe hasn't been on growth, it has been on getting the margins right.

Our Europe institutional business now makes money. It didn't every quarter previously and it is now consistently, and now we have got to get the top line moving. There are efforts around new business, the new technology they are introducing, hence the earlier Apex question and answer. All are, I think, showing the right trend.

So institutional we think will be climbing back on a global basis in the 5%-plus type growth business here relatively soon.

Thank you. Secondly, post-Champion can you size for us the revenues and profitability in your upstream and downstream businesses in energy?

Well, if you are asking on Champion per se, we can no longer split out the Champion business from the legacy Nalco energy business just by nature of the type of integration that we have gone under, which is why we even handled the restatement. We are trying to give you guys a picture of what is happening organically.

I would say overall that business performs. We would expect going forward we are going to continue to have very strong results in WellChem, which is the combined business of the two, Nalco and Champion.

We expect OFC to accelerate. It is going to be the big beneficiary of a number of the new businesses or the new business opportunities that we secured in the second quarter. And downstream has been performing solidly, I would say, in the US and around the world and we would expect that to continue to grow solidly. But really Champion brought both WellChem assets and OFC assets, zero downstream assets.

Thank you.

Bob Koort, Goldman Sachs.

Good afternoon. It is Brian Maguire on for Bob today. Doug, I appreciated the comments on the sources of the growth rate acceleration in the second quarter. To that I was maybe surprised not to hear were some weather normalization; would have thought that maybe that helped.

And also just curious to hear, given the strength in Latin America and Brazil you cited, any material benefit from the World Cup there or any potential hangover there?

Well, I can't speak to the individual's hangover status. There wasn't a huge uptick in Brazil institutional for World Cup. Interestingly, we rarely see one.

You host the Olympics every other year; we tend to have a lot of that business. We serve a lot of the partners who serve that business. We certainly are in most cities of the world.

We typically don't see monstrous uptick in our business during those events and we saw the same thing in Brazil, simply because there is kind of a trade of influx of tourist dollars somewhat. Those who live there tend to stay out of restaurants and others because I think it turns into a bit of a hassle. So, anyway, no big news there.

I think the balance -- I don't expect -- we don't really worry about that. These events happen all the time, so even if you did see a big lift, these people are traveling from somewhere and they are spending their dollars in one city and not the other. We are in 170-plus countries; we tend not to focus on that stuff too much.

Okay. And just on energy, there have been some upstream project delays we have been kind of hearing about or tracking. Just any change in timeline on projects, any slippages there that you are seeing any impact from?

We have certainly had projects that were part of slip, but our forecast takes all that into account. And so the forecast that we have given for the second half is based on data that we know right now. So obviously if something materially slipped in September we make talk to you about it in the next call, but we don't anticipate that. All the projects we are on we think we have got a good handle.

Thanks very much.

Shlomo Rosenbaum, Stifel.

Thank you for taking my question. Could you just give us a little bit more detail in what is going on with healthcare? It sounds like you guys are expecting maybe a modest pickup in the second half, but then being positioned to be a lot better in 2015.

Given what we have seen over hospitals for the last many years, could you talk a little bit about the investments in innovation and what you are doing over there? Any thought as to what is going behind the expectation for the pick up there?

Last call we talked healthcare and basically said we are working on a couple areas, certainly around innovation, how we are going to position our technology, and how we are going to go sell bundled programs even more effectively going forward. I would say that work is progressing nicely. But we basically try to set an expectation that you are not going to see a material change in growth rates until probably early next year, end of this year.

With that said, the business isn't off the hook, nor do they consider themselves off the hook. They improved first quarter to second quarter; we had 3% growth this quarter. We aren't shooting off flares, but it is certainly better than first quarter, and I think the team is on the issues they need to be on. I like the work that they are doing.

We have a good track record of taking businesses and sometimes you got to retool. We aren't asking for any forgiveness on quarterly expectations or overall company growth rate or anything like that. We have just got healthcare and we think we can make some tweaks to put this business in a position to grow high single digits and do the things that we expected it to do going forward.

Just as a follow-up, based on what you are doing over there, you just mentioned high single digits as a potential. What is a realistic, do you think, kind of near-term, say, 2015 to 2016 type of thought? You can get back to those mid-single digits on a regular basis sound realistic or what do you think about that?

Certainly that would be our expectation that we think the healthcare business, and particularly the part of the healthcare business we are in, should be an upper single-digit growth business for us. So I guess, yes.

Okay, great. Thank you.

Rosemarie Morbelli, Gabelli & Co.

Thank you and thank you for taking my question after the bell. I was just wondering, Doug, if you have seen recently more competitive change, especially in Europe, where your main competitor is pushing price increases or so they say. Is that helping you? Are you seeing them take business or lose business because of that particular change in the way they are conducting business?

I would say we haven't seen a material change in the way any of our competitors are approaching the business, specifically in Europe and I guess specifically in institutional was your reference. I am not sure that we would always see that right away anyway, so I don't know exactly what they are doing. But if you are going to raise prices, you are going to do it with your existing customers, not necessarily with new ones, and so that wouldn't be as visible to us anyway.

And are you able to raise prices in Europe as you are now focusing on growth, or is growth actually not conducive to raising price?

There is always a trade-off but, no, we are getting price in Europe. We are getting price, frankly, everywhere. Not huge amounts; I would say the traditional on average 1 point across the globe, which is I think what we had forecast we expected and that is about where we are.

I would also say that that never includes the mix changes, so when we talked the Apex launch in Europe, when we trade out old solids for new solids we do it at a much higher price. And that is not reflected in the 1 point of pricing I spoke about, which was a global number.

All right, thanks.

Andy Wittmann, Baird.

Thanks for taking my questions. Doug, just your comments on M&A and bolt-on M&A kind of heating up that there is more going on there. What should investors be looking for in terms of what do you think the total dollar deployment towards M&A could be maybe in the next year?

You said it was going to be higher. Is this hundreds of millions? Is this billions? What kind of order of magnitude do you think we could be looking at here?

Well, I guess I signaled that there is no really huge targets on the horizon for us simply because it is not really as much an appetite challenge as it is, frankly, a good fit challenge. As a result, you are talking hundreds of millions, not billions.

Got you. Then just a quick follow-up here. This quarter for the first time in a long time we have seen GAAP EPS and adjusted EPS starting to converging a little bit more than we have seen. Is this a pattern that you think we can continue to expect going forward, or do you think that the restructuring charges and other things are going to continue to -- is this more of an anomaly or something that we should expect to go forward?

It is both. I would say you will see continued convergence. I don't think the $0.01 delta that we had this year of $1.02 and $1.03, part was because we had a legal settlement that was in our favor and in there too. So unless I can convince our GC to deliver that every quarter, which would be terrific -- you should put that in your report -- we don't expect that every quarter. But I think you will see starting 2015 and on we expect really pretty much they are the same.

Great, thanks.

Mike Harrison, First Analysis.

Good afternoon. Doug, can you talk a little bit about how the Champion integration is going now that it has been in the fold for a little over the year? And I'm speaking specifically from a cultural standpoint where Champion may have had a different approach to customer service as opposed to the Nalco approach. Have you had any key customer or personnel losses and, if so, how are you handling those?

I would say on balance and in total I think the integration is going about as well as you could hope for. I would give you stats -- I guess field level attrition is lower than it was premerger, so that is good news.

Have we lost anybody? Certainly, but that is because this is a hot business and both companies were losing people before the merger and they have lost some people post merger. Guess what? We have taken some people, too. I don't think there is any big news there.

Customers, we haven't lost any customer that we can really identify as a consequence of this. We had a couple customers that I would say we had on our concern list, particularly going into due diligence, and that business has all stayed. We have had a number of the large players who were buying from both increase their share with us post merger, so all of that I think has gone quite well.

You mentioned earlier a different approach from service. I would say, as I think we did very successfully when we brought Ecolab and Nalco together, the goal here was to take good ideas wherever they come from and not be just convinced that however you were running it before was the best way.

So some of the customer service methodology that we have adopted came with Champion, particularly in some of the North American fields and how we get after and serve and deliver product was really what I would say is much more of the Champion model than it was the previous Nalco model, because we think it was a smarter way to go into business. There are other examples, too.

As we have talked in the Nalco/Ecolab merger overall, there has been plenty of things that we have adopted, I would say, from legacy Nalco: safety programs, on-boarding of people programs. And certainly our financial modeling and I would say discipline around business reviews we have adopted from Ecolab and thrown across all the businesses.

I think that is the only way you can really have a successful merger. If you buy a company, you are buying a lot of know-how, and if you wipe out all the know-how with the thought that whatever you were doing must be superior, you are going to lose value by approaching it that way.

Then just in terms of the Asia-Pacific market in institutional, are we starting to see a pickup in places like China as those markets are getting a little bit more mature in terms of restaurants and hotels per capita? Or are you still pretty early on that curve?

I would say yes and yes. We are seeing, in China in particular, continued strong growth in the institutional business really across the portfolio. And I would say it is very early days there, so you have got still fairly uneven situations.

You can go to Shanghai and it is one of the most sophisticated cities in the world. You don't have to travel far before it becomes, let's just say, less sophisticated. And as that economy, as GDP grows, as people's incomes grow we would expect that we would see the same evolution in food service, lodging as we have seen in the other economies that have gone through this same growth curve. So we are quite excited about the long-term potential there and we are seeing it in growth rates right now that are quite attractive.

All right. Thanks very much for taking the questions.

At this time I would like to turn the call back over to Mr. Monahan for closing comments.

Thank you. That wraps up our second-quarter conference call. This conference call and associated slides will be available for replay on our website.

Thanks, everyone, for your time and participation and our best wishes for the rest of the day.

Thank you, this concludes today's conference. At this time all participants may disconnect. Thank you.