藝康 (ECL) 2014 Q3 法說會逐字稿

Welcome to the Ecolab third-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 over the call to Mr. Michael Monahan, Senior Vice President External Relations. Sir, you may begin.

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

A copy of our earnings release and accompanying slides referencing 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 slides include estimates of future performance. These are forward-looking statements and the actual results could differ materially from those projected.

Factors that could cause actual results to differ are described in the section of our most recent Form 10-K and 10-Q under item 1A risk factors in our third-quarter earnings release and on slide 2. We also refer you to the supplemental diluted earnings per share information in the release.

Starting with an overview in slide 3, we delivered strong results in the third quarter. Sales volume growth was strong improving from the second-quarter rate. We leveraged that growth along with pricing and our synergy and cost efficiency work to substantially increase our 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% adjusted earnings gains in the fourth quarter and upper teens EPS growth for the full year as good sales growth, appropriate pricing, innovation, synergies and margin leverage more than offset weak international markets.

Moving to some highlights from the third quarter and as discussed in our press release, reported third-quarter earnings per share were $1.19. On an adjusted basis excluding special gains and charges and discrete tax items from both years, third-quarter 2014 earnings per share increased a strong 16% to a record $1.21. The adjusted earnings per share growth was driven by volume and pricing, new products, account gains, synergies and cost savings actions.

Our fixed currency acquisition adjusted sales growth rate improved from the second quarter rising 6% and was led by our energy, specialty and other businesses. Latin America led the regional growth once again and we enjoyed good growth in North America and Asia-Pacific.

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 cost and investments in our business. We expanded our adjusted fixed currency operating margins 110 basis points in the quarter as we continue to emphasize productivity and efficiency improvements 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 again this year.

Looking ahead while end markets present ongoing challenges we look for the fourth quarter to show continued strong sales gains and margin improvement. Fourth-quarter adjusted EPS is expected to increase 13% to 17% to $1.18 to $1.22 range and compared with last year's adjusted EPS of $1.04.

Business growth and the benefits from synergies and cost reductions should more than offset lackluster global economic trends. In addition, the quarter will compare against the 17% adjusted EPS gain in last year's fourth quarter.

For the full-year 2014 we continue to look for a very strong 18% to 19% EPS increase to the $4.16/$4.20 range.

In summary, our third quarter performed well and we expect the fourth quarter 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 the future. Slide 4 shows our third-quarter results both as reported and with adjustments for special gains and charges while slide 5 shows our sales growth detail.

Ecolab's consolidated fixed currency sales for the third quarter increased 6%. Acquisition adjusted fixed currency sales also rose 6%.

Looking at the growth component, volume and mix increased 5%, pricing rose 1%, acquisitions and divestitures and currency were not significant. Reported fixed currency sales for the global industrial segment rose 3%. Adjusted for acquisitions and divestitures sales increased 2%.

Third-quarter fixed currency global food and beverage sales increased 4%. Growth was led by dairy and agri with moderate sales growth in beverage which more than offset lower sales in the weak protein market. Regionally, Asia-Pacific and Latin America led results with the other regions showing modest growth driven by share gain as we more than offset plant closures and weak volume.

Food and beverage continues to benefit from its total planned assurance approach to customers in which we combine industry-leading cleaning and sanitizing, water treatment and pest elimination capabilities to deliver improved food safety results, lower operating cost 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 volumes as well as customer capacity reductions and plant closures have impacted sales.

Looking ahead, we expect modest organic sales growth in the fourth 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 3D TRASAR for Clean In Place systems in food and beverage plants to more than offset tough industry conditions.

Acquisition adjusted fixed currency water sales increased 3%. The heavy and light businesses showed good growth and mining recorded slight gains as industrial markets generally weakened during the quarter.

Regionally we saw good growth in Latin America, moderate growth in North America and modest gains in both EMEA and Asia-Pacific. The introduction of 3D TRASAR for hotel and other institutional cooling systems utilizing solid chemistry and advanced dispensing is going well. We also continue to drive better penetration in our other water markets using our innovative solutions to optimize water usage.

We remain 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 a further moderate growth in the fourth quarter as market share gains drive our heavy and light businesses to outperform cost and markets.

Acquisition adjusted third-quarter fixed currency paper sales declined 3%. Latin America recorded double-digit growth. Elsewhere, we saw sales decline resulting from continued low customer plant utilization and customer closures.

We expect paper to show a modest sales decline in the fourth quarter as we drive new business and technology penetration to offset the difficult paper market conditions.

Fixed currency sales for the global institutional segment rose 4%. Turning to the businesses that make up the segment, divestiture adjusted fixed currency sales for the institutional business grew 4%. Institutionals and markets remain mixed with moderate growth in global lodging room demand and still saw foodservice foot traffic across North America and Europe.

Looking at regional sales trends, institutional posted solid sales growth in North America, Asia-Pacific and Latin America while Europe's ongoing business declined slightly. Sales initiatives targeting new customers and effective product and service programs around our core market continue to drive our results. We also 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 position, we remain focused on executing global sales initiatives, globalizing our core competencies and introducing product innovation that delivers increased value with solutions that reduce water, energy and labor costs. We are also making further investments in field technology to enhance execution in sales and service. We have better aligned our local sales team efforts around our global value proposition.

We look for institutional to show further good sales growth in the fourth quarter as we make further progress in our global sales initiatives and continue our aggressive sales efforts to outperform challenging global markets.

Third-quarter sales for specialty grew 9% in fixed currency. Quick service enjoyed strong sales growth. New accounts along with increased service coverage and additional solutions for customers to drive their operating efficiency in food safety leveraged generally modest industry trends.

Regionally, the US and 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 gains in the third quarter benefiting from customer additions, new products and increased penetration. Fourth-quarter specialty sales should see steady progress though comparison to last year's strong period may moderate the recorded growth.

Fixed currency global healthcare sales decreased 1%. New account growth and new product introductions were more than offset by continued weak hospital trends and delayed buying decisions in the US healthcare market. To grow sales in this challenging environment we are strengthening our corporate accounts approach and our integrated value proposition as well as improving our product portfolio.

We expect modest global healthcare sales growth in the fourth quarter as we continue our work to strengthen our business to succeed in North America and Europe healthcare markets.

Fixed currency energy segment sales grew 14%. Our upstream business saw a robust growth in the third quarter led by a strong international performance and good North America results. Downstream business saw a good increase led by strong international performance and share gains in North America.

As a side note, Russia represents less than 5% of our energy sales. Since the bulk of our business in Russia is in conventional wells, current sanctions have little impact on that business.

In addition, while oil prices have declined in recent weeks we believe they are still at levels that support continued industry investment in exploration and production. Further, with our business model heavily weighted to more recurring revenue production refining business we are minimally impacted by short-term changes in oil prices.

Looking ahead we expect acquisition adjusted energy segment sales to show a fourth-quarter and full-year 2014 sales increase in the 10% range as new business resulting from ongoing share gains and new production coming online drives growth. Sales for our other segment increased 7%. Fixed currency global pest sales increased 6% in the third quarter.

We enjoyed good growth in food and beverage and moderate growth in restaurant. Regionally we delivered double-digit growth in Latin America and Asia-Pacific and solid growth in EMEA and North America. We continue to drive market penetration with innovative service offerings and technology to make progress in globalizing our market-focused capabilities and field technologies.

We expect global pest sales to show continued good growth in the fourth quarter led by gains in all markets.

Equipment care sales grew 10% in the third 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 fourth quarter as continued good service trends, pricing initiatives and streamlined operations benefit results.

Slide 6 of our presentation shows selected income statement items. Third-quarter gross margins were 46.7%. When adjusted for special charges third-quarter 2014 gross margins rose 10 basis points above last year.

Volume and pricing gains as well as merger synergies and cost efficiencies more than offset higher cost inputs and the business mix impact of higher energy sales, which on average have a lower gross margin when compared with our other businesses. SG&A expenses represented 31% of third-quarter sales. The SG&A ratio improved 100 basis points versus last year.

The improvement reflected sales gains, merger synergies, and cost savings efforts 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 15.5%. Adjusted for special charges, fixed currency operating income margins were 15.7% rising 110 basis points over last year's comparable margin.

Fixed currency operating income for global industrial increased 2%. Acquisition adjusted operating income grew 1% with margins off 10 basis points. Good improvements in water and food and beverage income were partially offset by a volume driven decline in paper.

Fixed currency operating income for global institutional increased 5%. Results benefited from pricing, volume gains and cost efficiencies which more than offset higher delevered product cost and investments in the business.

Fixed currency global energy operating income increased 39% and margins expanded 290 basis points. Volume gains, operating leverage, synergies and pricing led the increase.

Fixed currency operating income for the other segment increased 15% and margins expanded 120 basis points. 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.

The net of this performance is that Ecolab reported third-quarter diluted earnings per share of $1.19 compared with $1 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 16% to $1.21 when compared with $1.04 earned a year ago.

Turning to slide 7 and looking at Ecolab's balance sheet, net debt to total capital was 46% with net debt to adjusted EBITDA at 2.3 times. Looking ahead and as outlined on slide 8, we continue to take aggressive action to drive both our top and bottom line. We are expanding our market share and customer penetration among major accounts and leveraging our positions in our key growth markets as we work to offset weak economies and unfavorable currency exchange rates which will likely negatively impact fourth-quarter reported sales by a couple of percentage points.

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 fourth-quarter 2014 diluted earnings per share to increase 13% to 17% to $1.18 to $1.22 range.

Further, the fourth quarter will also compare against a strong period last year when adjusted earnings per share rose 17% 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 18% to 19% to the $4.16 to $4.20 range.

In summary, once again we delivered on our forecast in the third 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 fourth quarter as well as for the full-year 2014 as we work to deliver yet another strong year and build for our future. And now here is Doug Baker with some comments.

Hi, good afternoon. First on the quarter, we had a very good quarter. We saw the improvement in the underlying business that we expected and predicted.

Sales accelerated to 6%. New business was again very strong up significantly versus last year's record year.

Our innovation is on track, we are hitting all synergy and Europe Renaissance goals. Energy is back to double digits growing 14% in the quarter and on track to deliver double-digit growth for the year.

This all occurred in an extremely turbulent environment globally. This is an environment we don't expect to change but this is a challenge our team and business, I believe, is well equipped to manage. So looking forward we expect to finish the year in a strong way.

We forecast EPS growth for the full year of 18% to 19%. We expect in Q4 similar sales growth driven by continued strong new business results and double-digit energy growth. Which leads me to the topic of the day if not the week, and that is oil price and its potential impact on our business.

Let me talk two scenarios because it's easier than trying to go through every potential scenario. I'm going to talk about $80 and above oil, think WTI. And then also the $74 scenario, which seems to be the popular scenario given Goldman Sachs' recent call.

So at $80 and above I would just say it is the same as it ever was meaning all production is on, healthy industry, we like it close to $80 because also while you have full production in the oil and gas business you also have economic benefits and favorable raw materials. If price falls below $80 depending on how far and for how long, there would likely be a drop in activity. There isn't any clear consensus on a simple number but if it is $70 over an extended period, we would certainly see a pullback.

At $75 we would expect a modest pullback. The impact on us I would say double-digit energy growth would likely turn into high-single-digit growth as less than 25% of our energy business is exposed to the parts of the industry most impacted by pricing at that level. So this would have a small if any impact on overall Company operating income as we would take a number of steps to offset this top-line impact.

Energy itself would shift from full-on growth to growth and cost savings initiatives. They would balance their portfolio, if you will, of activity.

Lower raw materials would probably occur across the Company as we see lower oil prices. And three we would also likely see improved institutional markets particularly in the US as consumers would have more discretionary dollars to spend as the price at the pump continues to lower.

When you look at our business we've got a business well-positioned to manage through either scenario and/or other scenario. I would say most importantly we have a team that is quite good at reacting to an ever-changing environment and I think we have proven that over the years.

My expectation is that we will continue to grow and perform in any of the reasonable scenarios I have seen so far this year and beyond. So good quarter. We are in good position.

We like what we are doing. We are going to continue to do it going forward.

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

Thank you. (Operator Instructions) Gary Bisbee, RBC Capital Markets.

Hey, guys. Good afternoon. I guess the question is if we look at the global industrial and global institutional businesses, profit growth remains fairly low and energy I think at some point in the next two or three years is likely to slow quite a bit as the synergies are more fully achieved.

The question is, what is it going to take to drive faster revenue and particularly profit growth from the legacy global industrial and institutional segments? Is it just better global economic growth, or what else that you can control can drive better growth in those? Thanks.

Yes, Gary. I would say two things.

Institutional underlying a number of things are going well. I will also say in Europe in particular we have taken a number of steps to get that business what I would say right and get focused on the core institutional business.

While we are going through these steps I would say having an impact on reported operating income. The remains leverage in the institutional business particularly in our APLA and European businesses as we go through and continue to drive volume. So by no means do we feel like we are pinned on institutional profitability going forward.

I would say while you've got a couple engines really firing you often start working on the other engines to make sure that they are going to be in good position as you move forward.

On the industrial side, I would say it is more a function of sales volume. And the sales volume in industrial, which I'm sure we will end up having a conversation about, we've got a pretty mixed result when you look at our industrial businesses.

You have our core water business, which is up 5% globally. Our F&B business, which is up 4%. Mining is roughly flat and then you had paper down 3%.

These businesses are the ones that are probably most knocked around economically. For the year we have seen losses in the neighborhood of $50 million from plant closures in these businesses and those closures have disproportionately impacted mining and paper.

With that said, I think we are in very good position. We are nearing if not in a bottom of a cycle. And as we start moving out of that cycle and we start having volume leverage you are going to start seeing, I think, good OI returns as we move forward.

So the good news is we think we are near the bottom. We think for sure closures are slowing so at least we aren't, if you will, running against a current. And going forward we would expect pretty similar results in Q4 as you saw in Q3 in industrial but significantly improved results as we go through 2015.

Great. And then the quick follow-up, just what exact impact has the European weaker economic environment had like this quarter on results versus two or three quarters ago?

Because I did note in the press release that it did say that there was a slight decline in I believe that was the institutional segment in Europe. And I think you have been talking about flattish. So did it get a lot worse or is it more just that hasn't gotten better? Thank you.

Yes, it did not significantly degrade. I think in our total, our European businesses were up 1% for the quarter.

It's not a number we will celebrate but there wasn't any big degradation as a result of the European economic situation. We would anticipate that European situation is going to remain challenging. We believe we will continue to keep our nose above water and we believe we will continue to show OI improvement as a result of all the efforts that we have undertaken under the Renaissance program.

Thank you.

Mike Ritzenthaler, Piper Jaffray.

Yes, good morning. Question on food and beverage, which continues to post a very resilient growth. I was just wondering on the challenges that your customers are seeing from closures and things like that, is the growth for Ecolab mainly new product launches, is it account wins or something else?

Yes, it is certainly total plan assurance program, which enables us to do more for existing customers but has also secured new business. I would say across the board we have had great success securing new business.

It's the only way you're going to accelerate in the economic situation we find ourselves in and that is true for F&B as well as the other businesses. And I think F&B is well poised to continue to perform well.

So our expectation is that we continue to grow in spite of the economic condition. We expect that we will still see some closures as the customer set tries to make sure that they economize wherever they can because it's a tough environment for them.

This makes sense that our total plan assurance programs, our efforts to lower energy and water costs are particularly important in difficult times which is why I believe we are having such good success securing new business.

Okay. A follow-up on in institutional, this is a bit harder to quantify, are your customers noting anything whether it's the order book or just anecdotally on the slowdown in foot traffic or occupancy on these Ebola fears?

No. Outside of the obvious hotspots in West Africa, no. We have not, anything I have heard of, seen any impact.

The Ebola conversation in the United States is probably overblown to what we anticipate the real impact will be as we move forward. But we've not seen anything in there.

Fair enough. Thanks, Doug.

Dmitry Silversteyn, Longbow Research.

Good morning. Just wanted to -- I found it interesting that in several of your businesses you talked about Latin America and Asia-Pacific as being the growth drivers.

We've seen Latin America struggle as a region for a lot of companies in various businesses in this sector and obviously the slowdown in China and in Asia-Pacific countries in general has got people concern. So you seem to be sailing against that tide. Can you talk about what is allowing you to actually have these territories be the driver of better performance rather than sort of an explanation for why the performance wasn't quite so good?

Well I guess Latin America we have continued to drive share successfully in that market. I don't think there's any magic formula that we have.

Some of our businesses are probably less exposed to the challenges but I would anticipate we will continue to perform well in Latin America. We're not completely immune from economic impacts but we still believe we are going to have healthy growth in Latin America moving forward.

Asia I think clearly on the industrial side you have seen and we have seen and felt impact from slowdown particularly in China. And so in our mining and paper business in particular we clearly felt the slowdown in China. China tends to drop quickly and rebound quickly and third quarter was not a great quarter for us in China.

I would still say we remain quite bullish in China overall and expect that that market is going to be a very important market for us long term. So we don't plan to play any differently there. We are doing quite well in institutional, quite well in F&B and the industrial business we expect to rebound as we start having new business offset shutdowns and the like.

Okay, Doug. That's helpful. Switching gears to the two businesses that continue to give you guys problems as far as getting consistent growth and that is healthcare and paper.

Paper sort of came to you via the Nalco acquisition and you have talked many times about it not necessarily being a business that you're interested in being longer term. But health care was sort of an internal initiatives, had a lot of promise and sort of expectations that haven't been materializing over the last couple of years.

Anything changing either with hospitals getting religion about disinfection with Ebola? Or anything else that you can point to on perhaps some of your own initiatives that will give us comfort that healthcare at some point is going to be at least a mid-single-digit grower for you?

Yes, our ambitions for healthcare are higher than that. I think if you go back to conversations we've had throughout the year we basically said we are putting healthcare in the shop for the year and that we had work to do on the healthcare business, particularly around how do we better package our offering and talk about and merchandise our offerings.

And that work has been ongoing and I think moving along at a very good pace. We really said not to expect any great change in healthcare metrics throughout this year but we would expect a change starting in 2015. And that is still our view.

So that hasn't really changed from the conversation we had in the first quarter. So healthcare we still believe is a great growth opportunity for the Company. We think what the healthcare market needs we are in a unique position to deliver.

I do believe that you see slowly an openness in the healthcare arena to different tactics to get after healthcare-acquired infections. Certainly I think Ebola shows how serious you have to be in a very serious predicament and so as we move forward we expect to gain traction there and have upper-single-digit-type organic growth in that business.

Okay. Thank you.

David Begleiter, Deutsche Bank.

Thank you. Doug, just on energy, how did the Nalco and Champion businesses do back in 2008 when oil dropped quite a bit as well?

Yes, well in 2009, which is really the year it was like $140 mid-2008 and then it dropped down to $40 in change in 2009. Volume was off in the Nalco energy business by 3% in 2009 versus 2008.

In total -- I am looking at going back into a chart. In total the combined sales would've been down to 6% but you had a pretty dramatic drop in price, one that I don't think anybody is predicting.

Any concerns that this current oil price that you can grow double digits in energy in 2015 on the top line?

As I said in my preamble, I think certainly it depends on the price, David, is what I would say. I don't think there is any reasonable scenario that says we're not going to go grow.

We believe the price is going to be north of $80. I would say consensus is north of $90 at this point in time.

If it stays in this range we believe we're going to grow double digits. If it drops in the mid to low $70s growth is going to be impacted somewhat but I think you are still talking upper single digits.

Thank you very much.

Nate Brochmann, William Blair.

Good afternoon, everyone. Hey Doug, wanted to go back to kind of a earlier discussion regarding just like the portfolio and natural puts and takes. But as you said you've got a great team in place to kind of react quickly as some of these different events change and economies do this or that.

Could you give us some examples of how things change like all the sudden, and granted I know that you have the Renaissance program, they already gave you a better OI profitability in general, but what are some of the actions that you take when markets do kind of move on you pretty quickly in terms of moving maybe from offense to defense and how the business is naturally set up that way?

Yes, I would say two things. Traditionally in what I would call tough economic times we have a very strong emphasis on new customer acquisition. Customers are more open to change when times are difficult because they are seeking answers to their own internal challenges.

I think that is one of the reasons we have been so successful with our net new sales success both last year and this year because of the difficult time and our emphasis on new business.

Second, we also have I would say a larger portfolio of cost savings initiatives and efficiency initiatives in if you will kind of our workflow during difficult times. We will ramp these up as times become more complicated simply because you are not necessarily chasing new volume and having to build new volume or capacity.

So we have a pretty strong portfolio right now but there are a number of initiatives that frankly aren't on greenlight right now that if it got worse we would greenlight and start upping our capacity in terms of what kind of cost savings we could generate if we need to. So it's shifting the portfolio of work based on the economic environment.

I think we've got room on either side. If the economy turns to the positive, which is not my prediction, I think we've got a number of very good initiatives that we would turn on. And if it gets a little worse on the other side we've got plenty of initiatives there as well. And this is exactly how we have run the business over a long period of time.

And that makes perfect sense but thanks for that added color. And then just one more question on the energy business and you know given a lot of the great different examples here to support where you are at, but could you give us a little bit of a terms of current discussions with some of your customers or potential customers regarding any new projects that might be coming on and whether there's any apprehension there in terms of there's a long sales cycle and these projects have long upfront leadtimes to it, which helps create that recurring revenue on the production side. But can you just talk about maybe some current examples of where those discussions are?

Yes, I would say there has been zero discussions with people who are talking about major changes in their capital deployment or anything else. I would say it is consistent with what we read in transcripts of other people in this industry. So at this point in time I would say there is no hard indications of any slowdown whatsoever.

I think what you have out there is speculation that if in fact Goldman's production of $74 is more accurate than their 2008 production of $200 comes true, that what might occur then. I would also say this isn't going to occur. These things don't stop on a dime.

There's momentum in this business. Capital is being deployed. That even if there was a shift in thinking it is likely not going to impact us for several quarters.

Great. Thanks for that.

John Quealy, Canaccord Genuity.

Hi, good afternoon folks. First, back to energy if I could. Doug, thank you for the sensitivity analysis and detail you give us.

In terms of moving forward I think in the quarter you talk about some customer capture on the downstream side. How quick or what is the desire to potentially protect against slower E&P activity by moving to the downstream? That's my first question.

The way we are structured is we have focused business teams focused on downstream, on oilfields and on WellChem, the upfront. And these teams are kind of on the gas the whole time, so it's not as simple as flooding downstream with folks out of OFC to go up activity, while it's in the same industry it is a different business and it's got different needs and different technology.

So I would really say the way we look at this is our OFC folks are going to be on share no matter what the environment is. They may start adding a component of cost savings if the market turned against them. And ultimately oil is a cyclical business.

Our business that is positioned here is not a cyclical business and we have gone through chart after chart showing this. So we really believe our exposure to the production phase and downstream is going to mute any impacts that are going to occur either in the near term or long term in this industry. So I don't -- that's probably the best answer I can give you.

Okay, thanks. And then as a follow-up, switching gears to the 3D TRASAR introduction, I think you talked about it more in that sort of 2015-ish timeframe. Can you give us any anecdotes in terms of customers that have got 3D TRASAR in the industrial or institutional markets?

Have they just deployed the first onesie-twosie units? Have they started to deploy throughout their fleets? If you could just give us some flavor or your objectives for that in the next year or so? Thank you.

Yes, this year was really making sure that we understand how to fully leverage our technology for our customers' benefit. So it's nominal sales this year and it's on track and doing what we had expected it to. But that will grow over the next few years.

Typically for us to realize full annual sales potential in a technology like this it takes like five years. It takes a while for adoption.

These are very sticky technologies. We build them for the long term. We like what we are saying but this is going to be a ramp up over the next several years.

Great. Thanks.

John McNulty, Credit Suisse.

Good afternoon. Thanks for taking my questions.

So first question, with regard to the pricing that you saw, the 1% that you reported on a consolidated basis, can you give us a little bit of color as to how the pricing is working from segment to segment if there are any meaningful differences from one to the next?

They are pretty similar. Our strongest pricing activity across the board would be throughout institutional. Energy would be next and industrial would be third and I don't think that's a real surprise given where the significant economic pressure is on the industrial side but all are rounding to the same numbers.

Okay, great. And then with regard to the oil price drop it sounds like you're not overly worried about it, which I think makes sense in this environment. That said there are a lot of stocks that have gotten clobbered because of it and I guess I am wondering with your balance sheet having been cleaned up a bit since the Champion acquisition, are you seeing opportunities for M&A that might be interesting to Ecolab just given kind of some of the price moves that we have seen in some of the stocks?

I can't comment on M&A in particular. I guess I will say that we would rather buy things that are cheap than expensive. So those are real words of wisdom.

All right. Thanks for much for the color.

David Ridley-Lane, Merrill Lynch.

Good afternoon. A few months ago a competitor of yours sold their water business to a private equity firm. Do you think this is an opportunity for potential market share gains and more broadly than not how would you judge Ecolab's water segment versus its competitors, i.e. are you gaining market share?

Yes, we believe we are gaining market share in the water space against our key competitors. I don't have the pleasure of saying I built this water business by any means, so let me say this objectively.

I think it is the crown jewel of the water businesses. The Nalco business has been the leader in the water business not only from a share standpoint but a technology standpoint. And we plan to help strengthen that, not diminish that.

So we like that business. In terms of I would say the earlier part of your question, anytime there is change, it usually brings opportunity. Because certainly when companies are bought or sold, there's distraction. And when we buy companies, we work to minimize it and move forward as quickly as possible because we don't really want to be taken advantage of during those periods of transition.

Certainly we have gone through this in a lot of industries, and we work to go capitalize on transition like anybody would.

Got it. And then just staying with water for one second, I hear you that it takes time to build up for the new products in terms of 3D TRASAR for hotels and hospitals and for food and beverage plants. But as you look at your other end markets, the heavy and light industries, are those feeling like they are getting a little bit of strength, or are they continuing to sort of trudge along here in terms of the end markets?

I guess two things. As I said earlier, combine the heavy and light business -- we strip out the piece of it that we are exiting on the P&L -- grew at 5% this last quarter. We call that good below our target growth rate. I think it certainly reflects challenging economic times, but we are doing a pretty good job in that business offsetting it because they are having a lot of success securing new business.

We have recently introduced new technology to that business through some acquisitions that that team has made. We've got other technology being injected as a consequence of being part of the overall Ecolab team. I think that team is a very good team. I think they are managing very well in a tough environment. Our expectation is that they grow in the 6% to 8% organic range as well, particularly in the core water business, which isn't knocked around to the same degree as say mining and paper are economically. And I think they are on track to get there.

Thank you very much.

John Roberts, UBS.

Good afternoon. I'm interested in how the water business for commercial buildings with the solids in TRASAR will scale. Is it the janitor in the building that will be actually doing the dispensing of the solids? Are these going to be monitored by the Nalco center back in India like the other Nalco TRASAR systems are?

Yes, one, I think every one of these large commercial buildings is going to have an engineering staff. So we would have the capability of monitoring in Pune if we choose to do that and that ends up to be a route that makes sense and is important.

But this system I would say has huge advantages versus the systems that they are using today, which is I think the comparison that you've got to keep in mind. The solids bring a lot of advantage in both safety and convenience in terms of adding product and moving product around buildings.

The capability that 3D brings to this in terms of using water in cooling towers, more cycles and reducing freshwater inflow and the resultant savings that this brings to these buildings both a sustainability story but is outright lower end-use cost are all quite material. I would say the reception that we have had here both from our customers and I think this just as importantly from the sales team has been outstanding.

And so we are ahead of our projections. This will ramp up likely faster than 3D TRASAR and food and beverage simply because you don't have the same food safety legislation governing these areas that you do where using 3D in the CIP arena.

So we are quite bullish on what this is going to do in terms of equipping our light team to get after important business that has higher margins than any of the other water business areas that we compete in. And it has historically been quite sticky if you have the right program.

And if the TRASAR system signals an alert, is it a Nalco person that is going to go check that out, or is it one of the Ecolab institutional salespeople?

No, it is going to be a Nalco person. Somebody with water technology background.

Okay. Thank you.

Laurence Alexander, Jefferies.

Just a quick question on the institutional business. Are there any areas where you are seeing a noticeable change in your ability to take share?

You have talked about accelerating in different parts of the business over the last three quarters. Are there any areas where that trend is looking like it is getting more difficult?

Well I think our ongoing lament is that taking share is never as easy as you wish it was. I guess as I reflect on your question I don't have any areas that I would define as materially different in terms of competitive environment, i.e. a big change in terms of either much easier or much harder to take share.

I think throughout the segment we continue to do well in QSR, we continue to do well in food and retail, we continue to do well in full-service restaurant and hotels. Regionally, the business is getting healthier. Across the region it remains healthy in North America.

It is improving in Europe clearly as we look at the underlying trends. It is doing well in Asia-Pacific and Latin America, so I don't know. Global chains are doing well, so I am not -- I don't have a point I would single out for you.

Okay. Thank you.

Andy Wittmann, Baird.

Thanks for taking my questions. I just wanted to take a step back and kind of reflect on the cost synergies that you have outlined through the years with Nalco and then Champion. It sounds like things are generally on track.

Maybe from here can you give us a sense about I think 2014 was going to deliver $110 million of synergies and a similar amount in 2015. And then falling off of a bit in 2016.

Can you just give us a better sense of where you are? Has any of that been pulled forward, pushed back? And where you see the biggest chunks of that being allocated to or coming from as we look ahead into 2015?

Yes, well the early chunk and as this goes, the early chunks were from one, purchasing; two, a lot of the G&A and regional overhead overlaps that we had. And we always said that the later end stage is going to be in the supply chain.

It takes longer and it's more difficult to get after. Next year we would expect again another I think $105 million is the number that we have used externally, it is not materially different than your number.

And a lot of that is still going to be, if you will, carry-on effects from the work that we have done this year in procurement and G&A. But increasingly as you go in the out in the later stages of this it is going to be in the supply chain, i.e. reducing plant footprint, warehouse footprints and the like.

Got you. So as you look at these numbers, that level of cost savings is about 70 or 80 basis points of improvement so far? You're about 90 basis points year-to-date of margin expansion.

Is the 10 to 15 basis point of underlying operating leverage -- is that the right amount for this economic environment, or do you have vision that it should be more, that you could have delivered more or less from that? I am just curious as to how you feel like the underlying leverage of the business is performing against that?

Yes, Andy, I would say we are doing a little over $100 million this year on $14 billion and we're going to be up 110 basis points or north of that for the year and I think that's what we had for the quarter. So I would say I am not sure.

I would say that indicate more like 40-plus outside of synergies. I think you've got to also recognize that when you have this level of synergies you are taking a number of resources that would be against cost savings initiatives that may not be labeled synergies but that would still be generating savings.

So it is -- the synergies aren't completely additive because we don't have resources that are completely distinct that work on synergies. These are often a lot of the same people who end up working on cost savings.

So getting back to our model, the back-of-the-napkin model, I think when we talk about 6% to 8% organic, we talk about call it 75 basis points of operating income leverage, we think that is quite realistic and consistent with what we're doing right when you take into account some of the people that are working on synergies would be working on other cost savings.

Got it. And if I could just do one final question. You have alluded to a few times the potential that raw materials could be a benefit if oil prices come in.

Are you seeing any or having any discussions on that already today? It seems like it would be early for this but what could that magnitude look like and what have you seen so far year-to-date on the raws?

Well, early returns -- certainly the only thing we are probably seeing that everybody else is seeing is lower gas prices. It's not one of our most significant, if you will, input costs.

I would say it would be fairly premature -- I think of our customers tried to start talking to us about the impact on $75 oil we might point out that oil on average around the world's trading in the $80s. It's hard to give away what we haven't realized.

And I think we would have the same conversation with raw material suppliers at this point in time. The raw material markets have been, I don't know, fairly steady moving up and we would say that we would expect that we are going to continue to see modest inflation going forward.

Okay. Thank you very much.

Mike Harrison, First Analysis.

Hi. Good afternoon. I was a little bit surprised to hear you say that you had seen better foot traffic in Asia-Pacific given some of the issues that some of the fast food restaurants and chains have seen with food safety there. Are you guys seeing the issues in China there as a challenge, or an opportunity?

Yes, I guess you would have to -- China is a big big market with a lot of restaurants. And while you were right there are some big food safety scares that had a real negative impact on a couple of large players, they are large in the world but they're not really large as it pertains to all of China.

Our business in China is up double digits in the food service arena. Traffic is fairly strong. I think our traffic remark was across Asia-Pacific, which obviously encompasses a number of other markets and that is the data that we have.

And then looking at the energy business, can you talk about what the Champion business saw in terms of volumes from 2008 into 2009? I think of that as maybe a little bit more sensitive on the onshore side than in the Nalco business, which is more offshore.

The number I have right here is that combined sales were down 6% of Champion and Nalco, 9% versus 2008. So I don't think it's going to be a dramatically different result.

And then just real quickly, on the Nalco intangibles that $45 million in the quarter, do those start to decline anytime soon, or how long are those amortized?

Yes, not for quite a while. Never soon enough.

All right. Thanks very much.

Rosemarie Morbelli, Gabelli & Company.

Good afternoon and thank you. Looking at Europe, you talked about a 2% impact on revenues from FX. Since that particular business has lower margin than the US or North America, is it fair to estimate that on the EBIT drawing it will have a substantially smaller impact than the 2% on sales?

Rosemarie, I apologize, it is going to be a 2% overall. Obviously not in the US. Did you say where is the impact going to be most significant?

Yes, I was just wondering looking at Europe specifically, I thought that that 2% negative impact on revenues was going to be on the European business, so since it is overall could you touch on the Europe only?

You know it is on our whole basket of currencies as they roll off. I don't know if I've got that's FX impact -- the largest is Canada and then it's a tie between Russia and Europe.

Okay.

Sales impact -- absolute dollars -- which means Canada would be as a percentage much higher.

All right. And then sticking with Europe, when you are discussing business and expectations with your customers, is anyone thinking that they are going back into a recession or is it just more no growth?

I don't know. I don't know if this has got any bearing on what's actually going to happen.

I think broadly I think people are fairly bearish on the European economic situation. But I can't really remember the last time they were really bullish. So I don't know that it is going to -- our outlook on it is we expect it to remain challenging given the share upside in the other.

We're not forecasting miraculous sales turnaround but we do expect to be able to continue to keep our nose above water i.e. modest growth going forward is what we think we are going to be able to do. So we do not see a huge or a material if you will spiral down in the European economic situation. I would just say it is weaker, softer but not dramatically.

That is helpful. And if I may ask one last question, on the protein market given the lower cost of feed, do you anticipate that particular side of your business will tick up in 2015, or does it take until 2016 before the herds can be built back up?

Yes, I would say it typically is kind of a long cycle because they've got to build herds up. It will take a while. It's not a huge piece of our business but my expectation it probably strengthens the back half of 2015 going into 2016.

Okay. Thank you.

Manav Patnaik, Barclays.

Hi, thank you. Good afternoon. Two questions, one just from a modeling perspective.

Can you remind us of how we should think about the FX currency exposure? And then the second one is just around to dig a little bit more into the healthcare business. What is really sort of the roadblock if any in that business for you to sort of take it to the next level, like do you need an M&A or a deal to get that going, just curious on your thoughts there?

The model question, FX impact in the next quarter we expect to be $0.03 but it is built into our outlook. So that is what is in our outlook right now.

Net healthcare. I don't think we are missing any big pieces. I think this is a question of how we put the pieces together in terms of what our offer is and how we better articulate our offer.

How we think about going to market and those are the things that we have been working on and modeling and testing this year. And that is the work that we are undergoing. I guess what we have said is we expect a change in performance beginning in 2015 and I think once we get out there proof is going to be in delivery.

If we start seeing improved results you know we are on the right track. If we don't we're going to have to continue to work. But I believe that business will be a very good business for us for the long term.

All right. Thanks, guys.

Bob Koort, Goldman Sachs.

Excellent, thanks for your patience guys. Two quick ones.

One, is there any scope for fuel savings and can it become meaningful if oil stays down here? And then secondly, can you talk about the specific markets in Latin America that have been so healthy. It seems like somewhat of an anomaly to what a lot of industrial companies face, so maybe it is more consumer-oriented that is helping you there?

Yes, I would say Bob that the fuel cost benefit are kind of lost in the wash of all the other input costs. We've got pluses and minuses. They are certainly incorporated in our outlook for the balance of the year.

In terms of Latin America, we have got -- it's hard to paint us as a single industry. And I have friends that are running other companies and they are having obviously if you are in the capital business a very difficult time in some of the markets down there.

That's not exactly the business we are in. We continue to do well on most businesses down there. Our food and beverage and our institutional businesses are positioned decently.

We have a lot of upside in share. We have done a good job I think in F&B in particular aligning ourselves with some very important customers and we are growing as a result.

In terms of water I think there has been additional talent put in the water team over the last year and a half, which has proven to be a wise move and that team is performing well and continues to gain steam. And the energy business is doing well down there. I would say the outlook in that market particularly with changes in Mexico over the long haul remain quite positive.

Okay. Great. Thanks for the help.

PJ Juvekar, Citi.

Hi, Doug. This is Eric Petrie on for PJ. Based on your experience with past health epidemics like bird flu and SARS, how do you think Ebola may impact your businesses?

What we saw in the past with SARS and bird flu was we certainly -- and you see an uptick most notably in hand care. And that impacts a bunch of divisions.

I don't think it's going to be an impact that's going to shine through the total number but it will be an uplift for maybe some of our business segments if it becomes a more broadly distributed disease. It is fairly limited.

I think it is fairly easy for them to diagnose potential folks who have been impacted. And if we are smart we will continue to do the right types of quarantine when people are actually infected and that kind of work. I don't know that this is going to have a huge boon to our top line.

Okay. And then my second question is, you noted of your energy portfolio less than 25% is impacted from lower prices below $80 per barrel. Is there a difference in profitability of your stimulation and enhanced oil recovery versus reduction?

No, I don't think I would go make that case. It's a kind of across the portfolio.

It is less than 25%, which is to say even if that impacted fairly significantly, even on the overall energy business, it is still going to allow pretty healthy growth. I think energy would probably take a lot of steps to even mute the impact you would see on their specific P&L and as I talked about there would be other, if you will, benefits from lower oil that would impact out other businesses, P&L through lower raws and potentially more consumer spend in the more consumer-facing businesses like institutional.

Thank you.

Richard O'Reilly, Revere Associates.

Thank you. Thank you, guys. Two quick questions. The first, did you by any of your common shares back this quarter?

No.

The first time you haven't done that in some time, am I right?

Yes. I think that's right.

Okay. Second, question reverse of the raw material cost deflation. In your slide you said the institutional segment had higher delivery costs and no comment on any of the other segments on that, what went up in the institutional cost wise?

Yes, that would be more a comment about freight rate, which in spite of I would say lower diesel have been under pressure across a lot of industries. In some markets like US short of drivers, etc., so there is just pressure broadly on freight rates.

Okay, broader than just fuel costs for diesel costs, okay, all right. Do you see that reversing in the near term, or is that more secular?

I don't know if it is secular. We don't see it reversing in the near term.

Okay, fine. Okay, good. Thanks a lot now.

We have no further questions. I would like to turn the call back over to Mr. Monahan for closing comments.

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

Thanks for your time and participation today and our best wishes for the rest of the day to you. Take care.

This concludes today's conference. Please disconnect at this time.