藝康 (ECL) 2015 Q1 法說會逐字稿

Welcome to the Ecolab first-quarter 2015 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.

Thank you. Hello everyone and welcome to Ecolab's first-quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO. A copy of our earnings release and the Company's slides referenced in this teleconference are available on Ecolab's website at Ecolab.com/investor.

Please take a moment to read the cautionary statements on slide two stating that this teleconference and the slides include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent Form 10-K under Item 1A, risk factors, in our first-quarter earnings release and on slide two. We also refer you to the supplemental diluted earnings per share information in the release.

Starting with an overview on slide three, strong new account growth and new product introductions drove a solid fixed currency sales increase in the first quarter. We leveraged that growth along with pricing, delivered product cost savings in our ongoing synergy and cost efficiency work to more than offset headwinds and increase our adjusted operating margins. These along with a lower tax rate and fewer shares outstanding drove an attractive adjusted earnings per share increase.

Looking ahead, we expect 2015 to be another year of superior growth despite mixed macroeconomic and market trends as well as substantially unfavorable currency exchange and pension costs. We are seeing better sales growth in our Institutional, Other and Industrial segments primarily resulting from internal work we have undertaken to improve our effectiveness.

In addition, North America restaurant trends are showing gradual improvement. Lower oil prices have yielded lower delivered product cost while also slowing our energy segment. Net, we continue to look for strong profit growth in the mid- to high teens before currency and pension effects.

The dollar has strengthened since the last call and we now expect currency exchange will be an unfavorable $0.30 per share. With pension an unfavorable $0.09 per share, currency and pension will represent a combined unfavorable impact of nearly $0.40 per share in 2015 or 9% of our EPS and 10 percentage points of EPS growth.

We have adjusted our 2015 forecast to reflect the increased headwind from currency exchange and energy markets and now look for 6% to 10% EPS growth for the full year to the $4.45 to $4.60 per share range as continued good fixed currencies sales growth, appropriate pricing, delivered product cost savings, innovation and synergies more than offset 2015's increased challenges. We expect to show 2% to 8% adjusted earnings gain in the second quarter as currency alone represents an estimated $0.08 per share which is $0.04 more than the first-quarter impact.

Moving to some highlights from the first quarter and as discussed in our press release, reported first-quarter earnings per share were $0.77. On an adjusted basis excluding special gains and charges and discrete tax items from both years, first-quarter 2015 earnings per share increased 8% to a record $0.80 despite a $0.06 headwind from the currencies and pension.

The adjusted earnings per share growth was driven by volume, appropriate pricing, synergies, new products and a lower tax rate and share count. Our fixed currency acquisition adjusted sales growth was solid, rising 4% and was led by our Global Institutional, Other and Industrial segments as each improved over its fourth quarter and 2014 growth rates.

Latin America and Middle East led the regional growth while Europe growth also improved. Adjusted fixed currency operating income grew 7% and we expanded our operating margins by 30 basis points. We also continue to make key investments in the drivers for our future growth. We remain on plan to achieve our Nalco and Champion synergy targets and our Europe margins are on track for further strong expansion this year.

In addition, we are underway with our $1 billion share repurchase and bought nearly 3 million shares in the first quarter.

Looking ahead, energy markets and some regional economies will present challenges in 2015 and the headwinds from currency exchange have only increased since we reported the last quarter. However, we also expect favorable tailwinds from lower oil costs to benefit our more consumer facing customers and we are realizing raw material savings that should improve in subsequent quarters.

In this mixed environment, we will drive new business gains and lower costs as we maximize the benefits and minimize the challenges in 2015. We will once again use our product innovation and service strength to help customers get better results and lower operating costs and through these, drive new account gains across all of our segments.

We expect the second quarter 2015 to show further solid fixed currency sales growth and margin improvement from our Institutional, Other and Industrial segments as they more than offset lower Energy results. Second-quarter adjusted EPS is expected to increase 2% to 8% to the $1.05 to $1.11 range as the unfavorable currency impact increases by approximately $0.04 in the quarter and we compare against last year's very strong second quarter when adjusted EPS grew 20% and was $1.03 per share. We look for the second half to show better gains as our Institutional, Industrial and Other segment sales continue to lead topline growth.

Delivered product cost savings should nearly double versus the first half and along with synergies and cost efficiencies lead to further margin expansion and yield the better EPS gains.

We adjusted our forecast for the full year 2015 to reflect the increased headwinds from currency exchange and energy markets. We now look for 6% to 10% EPS growth to the $4.45 to $4.60 per share range with that wider than normal range reflecting dynamic currency and commodity markets.

In summary, we believe our first quarter performed very well despite very challenging conditions. We continue to expect 2015 to show a strong operating performance for the Company despite the challenges in energy and to more than offset the increased drag on EPS growth from currencies and pension.

We remain confident in our business, our markets and our people as well as our capacities to meet our aggressive growth objectives over the coming years while also delivering attractive returns in 2015.

Slide four shows our first-quarter results, both as reported and with adjustments for special gains and charges while slide five shows our sales growth detail. Ecolab's consolidated fixed currency sales for the first quarter increased 4%. Acquisition adjusted fixed currency sales also rose 4%. Looking at the growth components, volume and mix increase 3% and pricing rose 1%. Currency was a negative 5% and acquisitions and divestitures were not significant.

Reported fixed currency sales for the Global Industrial segment rose 5%; adjusted for acquisitions and divestitures, sales increased 3%. First-quarter fixed currency global food and beverage sales increased 6%. Adjusted for acquisitions, fixed currency sales improved 4%. Food and beverage growth was primarily driven by share gains and we used them to more than offset generally weak volumes.

We enjoyed good growth in agri and food and beverage and modest sales gains in dairy and food. Regionally we saw solid gains in Latin America, Middle East/Africa, Europe and Asia-Pacific with modest growth in North America.

Food and beverage continues to drive sales growth using its total plan assurance approach to customers in which we combine our industry-leading Cleaning and Sanitizing, Water Treatment and Pest Elimination capabilities to deliver improved food safety results, lower operating costs and better product quality assurance for our customers. This has enabled us to win business with key global customers and offset difficult conditions in our North America and Europe markets where lower volume have continued to impact sales.

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

Fixed currency water sales grew 5%; adjusted for acquisitions, water sales grew 3%. Fixed currency acquisition adjusted water sales excluding mining grew 4% as good gains in the power light industries were partially offset by weak steel industry demand. Acquisition adjusted fixed currency mining sales were flat.

Regionally we saw strong growth in Latin America and Middle East/Africa. Modest growth in Europe and North America and a modest decline in Asia-Pacific sales.

The introduction of 3D TRASAR for hotel and other institutional cooling systems utilizing solid chemistry in advanced dispensing is going well. We also continued 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 improving growth through 2015 as market share gains drive our heavy and light businesses to outperform soft end markets.

First-quarter fixed currency paper sales grew 2%. Latin America recorded strong growth. Elsewhere we saw overall modest gains with slight improvement in North America and lower sales in Europe and Asia-Pacific resulting from continued low customer plant utilization and extended customer shutdowns and slowdowns. We expect paper to show modest growth in 2015 as we drive new business and technology penetration to augment stabilizing paper market conditions.

Fixed currency sales for Global Institutional segment rose 6%. Adjusted for divestitures, sales grew 7%.

Turning to the businesses that make up the segment, fixed currency sales growth for the Institutional business rose 6%. Adjusted for a small divestiture in Europe, sales grew a strong 7%. We saw further good growth in Global Lodging demand but also positive signs in North America food service foot traffic. Other regional food service foot traffic trends remained steady.

Looking at our regional sales, we continue to outperform our markets. We recorded strong sales growth in North America, Latin America, Asia Pacific and Middle East/Africa. Europe also improved reporting a moderate sales gain.

Sales initiatives targeting new customers along with effective product and service programs and appropriate pricing drove our results. We continue to globalize our leading technologies as we roll out our next generation laundry platform in Europe this year. Our work to standardize global competencies and initiatives is going well and they are helping to drive our sales improvements.

We are also focused on strengthening our execution and delivering increased customer value with solutions that reduce their water, energy and labor costs. With the work on our business fundamentals yielding good results and with end markets steady to improving, we look for further solid sales growth in the second quarter and for the full year.

First-quarter sales for Specialty grew 8% in fixed currencies. Quick service sales were solid as new accounts, increased service coverage and additional solutions leveraged the generally modest industry trends to drive growth. Regionally Europe quick service sales grew double digits benefiting from new accounts and additional customer solutions while Asia-Pacific also showed strong gains building on good quick service foot traffic growth. North America sales rose modestly.

The food retail business posted solid double-digit sales growth benefiting from international customer additions, new products and increased penetration in North America. We look for good sales growth again in the second quarter as Specialty works to deliver another solid performance in 2015.

Fixed currency global healthcare sales increased 5%. Sales gains were driven by new account growth, better penetration and new product introductions. We continued our work to strengthen our corporate accounts approach and our integrated value proposition as well as better focus on product portfolio. We believe we are on the right track and look for our core global healthcare sales to show moderate growth in the second quarter and the full year.

First-quarter fixed currency energy segment sales rose 1%. Looking at the components, our upstream business rose modestly as a decline in North America results was offset by very strong international performance. The downstream business saw good growth also led by strong international sales and share gains in North America.

First-quarter results reflected North American drilling and well completion activity that fell much faster than was widely expected while production gains were steady. Downstream growth stayed solid worldwide.

Looking ahead, we now expect Energy segment sales for the full year 2015 to show a low single-digit decline primarily reflecting the faster than expected reduction in North American drilling activity and customer spending reductions. We expect the second quarter and second half Energy segment sales to decline in the mid single-digit range as good international growth, ongoing share gains and solid downstream sales were more than offset by a lower North American upstream activity and price decreases.

We expect a very challenging year particularly in the North American upstream industry. We have a very experienced team in place. They remain aggressive using our industry-leading product innovations and our outstanding sales and service team to drive sales and share growth and we will use this period to strengthen our position. We continue to remain confident in our Energy segment and its long-term growth prospects.

Sales for our Other segment increased 6%. Fixed currency global pest sales increased 7% in the first quarter. Adjusted for acquisitions, fixed currency sales grew 6%. Sales to food and beverage customers and restaurants once again led the growth. We enjoyed solid gains in all regions. We continue to drive market penetration using innovative service offerings and technologies. We also showed further progress in globalizing our market focus capabilities and field technologies. We expect global pest sales to show further good growth in the second quarter, led by gains in all markets.

Equipment Care sales grew 7% in the first quarter. New customer additions continued a solid pace and productivity improvements from our technology investments and strengthened execution work continue to pay off. The solid underlying business growth trends expected to continue, we look for Equipment Care to show upper single-digit growth in the second quarter and expect a strong second half.

Slide six of our presentation shows selected income statement items. First-quarter gross margins were 46.5%. When adjusted for special charges, first-quarter 2015 gross margins were also 46.5% and rose 80 basis points above last year. The improvement resulted from volume in pricing gains, lower raw material costs, merger synergies and cost efficiencies.

SG&A expenses represented 34.5% of first-quarter sales. The SG&A ratio increased 40 basis points versus last year. The increase primarily reflected the impact of higher pension expense and investments in the business.

Consolidated operating income margins were 11.8%. Adjusted for special charges, fixed currency operating income margins were 12% rising 30 basis points over last year's comparable margin. Sales volume, appropriate pricing, delivered product cost savings and efficiency improvements as well as merger synergies more than offset higher pension costs and investments in the field sales force and the business.

Fixed currency operating income for Global Industrial increased 5%. Acquisition adjusted operating income grew 4% and margins rose 10 basis points. Pricing, volume gains, lower delivered product costs and cost efficiencies more than offset paper business mix changes.

Fixed currency operating income for Global Institutional increased 12% and margins expanded 80 basis points. Results benefited from volume gains, pricing and cost efficiencies which more than offset business investments. Fixed currency Global Energy operating income increased 1% and margins were steady. Flattish volume, lower pricing and business investments were offset by lower delivered product costs, synergies and cost savings.

Fixed currency operating income for the other segment increased 9% and margins expanded 40 basis points. Improved operating results more than offset business investments and higher costs.

The corporate segment and tax rate are discussed in the press release. We repurchased approximately 2.9 million shares during the first quarter. The net of this performance is that Ecolab reported first-quarter diluted earnings per share of $0.77 compared with $0.62 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 8% to $0.80 when compared with $0.74 earned a year ago.

Turning to slide seven and looking at Ecolab's balance sheet, net debt to total capital was 50% with net debt to adjusted EBITDA at 2.4 times. The slight increase in the net debt to adjusted EBITDA ratio from year-end 2014 primarily reflects the first-quarter share repurchase. First-quarter cash flow from operations reflects the normal seasonal pattern of our business wherein we typically see lower income and smaller cash flow in the first half with both of them stronger in the second half.

Looking ahead and as outlined on slide eight, we will take aggressive actions in 2015 to drive both our top and bottom lines. We will work to leverage benefits and offset the challenges of lower oil prices as we capture lower raw material costs, leverage the expected consumer spending tailwind and gain share in the energy markets. We will also continue to drive organic growth to further corporate account wins, stepped up innovation work and improved field productivity. We still expect a very strong operating performance in 2015 showing our business balance that more than offset substantial headwinds from currency and pensions.

We expect our second quarter to show good fixed currency sales growth with currency negatively impacting reported sales by about 6 percentage points. We look for second-quarter earnings to increase 2% to 8% to $1.05 to $1.11 range as currency becomes increasingly unfavorable with currency and pension combining for a negative impact of $0.10 per share or approximately 10% of second-quarter earnings growth.

Further, the second quarter will also compare against a very strong period last year when adjusted earnings per share rose 20% to $1.03.

As mentioned earlier, we adjusted our full-year outlook. While we continue to expect high teens earnings growth before currency and pension, we now look for 6% to 10% EPS growth for the full year in the $4.45 to $4.60 per share range as continued good fixed currency sales growth, appropriate pricing, delivered product cost savings, innovation and synergies more than offset the increased headwinds from currencies, pension and energy.

In summary, once again we delivered on our forecast for the first quarter with solid fixed currency sales gain and continued margin improvement while offsetting market and currency challenges and investing in our future. We have our work cut out for us in 2015 but we are well-positioned and well-prepared to outperform once again and deliver another superior performance for shareholders this year and for the years ahead.

Now here is Doug Baker with some comments.

Thanks, Mike, and hello to everybody. So my headline for the quarter and the year would be our underlying business performance was very good and it is getting better. So all segments are growing share, all segments are executing very well. We had record new business in the quarter and that follows a huge year last year. We've got excellent innovation programming in almost every business. All segments have strengthened their teams and are doing the things they need to do to build the culture and all segments are accelerating from Q1 versus Q4 with the exception of Energy.

So what is the new in the forecast? I guess I would point out three things. Number one, the energy markets are clearly more challenging than previously anticipated. Rigs have declined further and faster, rig counts in North America in particular. So we now expect Energy to show a modest decrease on the top line and a flat to modest increase on the bottom line for the year.

Offsetting the Energy news, and I would say equally or more important is the fact that the balance of our business will do better than originally forecasted. We are capturing the raw materials savings driven by lower oil, we are benefiting from improved institutional markets driven by cheaper gasoline. Beyond on the plus side of the oil impact, we are also seeing as previously mentioned, business acceleration, our emerging markets are up double digits, Europe topline accelerated, it was up 5%, 3% without energy. There is a lot of good news in our businesses around the globe.

Net, our EPS delivery from our businesses at fixed rates remains at 15% which is exactly what our forecast was last call.

The major optic impact, the third if you will piece of news is really FX. So this certainly colors the results but I don't believe this is a strategic issue for our business because most of our costs are incurred in the selling currency so this does not dictate our competitiveness when we compete around the world. I also believe based on history, it is almost certainly going to reverse itself someday. We will probably all enjoy that.

So some perspective. We now forecast FX as a $0.30 hit for the year or 7%. That is $0.04 worse than the last call. For perspective around $0.30, this is 40 times worse than our 10-year average move. So this is truly outsized. It is 3X worse than our next highest impact over the last 10 years. I think it is hard to wrap minds around this. We have been dealing with this for a while and it certainly has a big impact on how results look. The important thing is that we want to continue to focus on what we need to do to drive our business, drive value and drive returns. And as our FX forecast implies, I think the team is doing a lot of good things.

At constant FX, our new forecast is 14% to 17% adjusted EPS. That compares to the last forecast of 14% to 19%. Net, we trimmed the top. That really reflects the belief that we are not going to see any material improvement in our markets in time to impact this year. So we do anticipate mid- to upper teen performance ex-FX.

Clearly I think the team is doing the right stuff. They are focused on the things that drive value and returns. They are all over new business, they are all over new innovation and we know these are the two drivers of organic sales acceleration and that is a primary driver of improved returns.

They are doing a great job on team and talent building; we are continuing to invest in both. We continue to make sizable investments in process and system improvements which we know are key to our long-term health. So we continue to be well-positioned, we continue to build market position. I feel great about our ability to deliver another strong year while improving the ability of the business to perform over the long haul.

With that I am going to turn it back to Mike and then we will go to Q&A.

Thanks, Doug. A final note before we start Q&A. We plan to hold our annual tour of our booth at the National Restaurant Association Show in Chicago on May 18. Looking further ahead, we also plan to hold our 2015 Investor Day in St. Paul on September 10. If you have any questions, please contact my office.

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

(Operator Instructions). Mike Ritzenthaler, Piper Jaffray.

Yes, thanks. Doug, just wanted to drill a little bit more into the new business wins on the sustained good growth within Institutional. Is there a way to parse out the things like new product launches and account wins versus end market health? From your prepared comments it seems like 2015 is setting up for a healthy pace of account wins after a very productive 2014.

Yes, our Institutional business in the segment there are other businesses besides Institutional, grew 7% in the quarter and clearly I would say -- I think look, a point of the acceleration is probably just market improvement as a consequence of lower gasoline particularly in the US where it is fully reflected because currency hasn't eroded simultaneously.

And I would say though the other acceleration and you have seen steady acceleration quarter by quarter for the last five plus quarters is really a consequence of continually driving new business performance. Last year I think we talked about when we looked at net new business gains when you look at them on an annualized contribution, we were up 45% versus the prior year. We blew it out of the water.

Institutional is one of the real leaders in that whole area. We were up another 10% cumulatively in the first quarter versus last. That is netting out losses. So we have really I think done a very good job there. But clearly we are gaining share. I think it would be hard to argue that the food service and hospitality businesses are growing at 7%. So we are I think outperforming. Europe grew in Institutional roughly 3% when you control for divestitures so almost in every market we see real strength.

Okay, that is helpful. And then on Energy, if the business slowed faster than expected, would that not also mean that potentially a recovery in growth to mid single-digit growth ought to happen faster as well as we kind of look at the potential for that business into 2016 all obviously with the caveat that we've got a stable energy price environment?

Yes, I guess you would certainly argue that the first quarter base is a little easier than we had forecasted previously. So yes, I think I would stick to -- if you think oil is going to stay in the same range as it is now through 2016, which is what our assumption is, then we think energy next year recovers in this mid to -- it is probably mid single-digit growth and that is going to be accelerating throughout the year.

Fair enough. Thank you.

Nate Brochmann, William Blair.

Hello, everyone. Just like a follow-up on and just a little bit more specifically on the last question. In terms of the new business wins and obviously again great performance there but you guys have always been great at going after business wins in the new product introductions, etc. and obviously Europe is doing really well on that front as well.

Is there any tweaks or any differences in terms of what is going on today versus what you have done in terms of great performance over the last X number of years in terms of why this could be a permanent inflection point or why this is accelerating as such the rate? Is it either a change in customer behavior? Is it a better understanding of the value proposition or is it internal tweaks that you have made in the selling approach?

I think it is a couple of things, a lot of them you touched on. But I guess I would highlight one. One of the things that we said we wanted to drive when we bought the WPS business was really leveraging Ecolab's know-how on enterprise selling in that market. That business and team did a lot of really solid things. We have obviously stolen a lot of their processes and applied them to other businesses but one of the things that we wanted to transfer if you will to WPS was the enterprise selling view, skills and focus that we had in F&B, Institutional, Kay, et al. And I think we are doing a very good job at doing that.

We have taken a number of their top salespeople, we are taking them through the same skill development that we have taken Ecolab folks through over the years so we have a broader base. So that is one and I would say we have gotten better on training and better on fundamentals.

Second is innovation. And so a lot of the things that we have been working on over the last five to seven years that are now bearing fruit are really getting innovation with a very sharp point and that point is we will give you world-class results but we are going to do it at a reduced energy and water footprint. That resonates I would say in good and bad times. I would say every business has got pretty aggressive sustainability goals. We can help meet those while delivering cost savings and continue to meet their food safety and/or efficacy performance objectives. And that has become I think even more relevant particularly even in these types of environments where we have got water scarcity, energy concerns and the like around the world.

And just would that mean that like with California going through all the drought issues, has that been an extra area of growth for you to reinforce that point?

Yes, without a doubt. We've got a team of over 1000 California focused right now on delivering our world-class water technology solutions throughout the industries that we serve so I don't care if it is light industries like hospitality or light manufacturing all the way to heavy industries, we are all over the situation there.

The edict from Gov. Brown was a 25% savings. It is really focused on 25% of the water users because so far agri has been sort of off on the sidelines. But that 25% is at the heart of what we do and so we are all over trying to help them one, at least meet that target. The truth is we are there probably going to have to do better than that long-term to make sure that they can get the water that they need to operate.

Okay, that is helpful. And then just the other follow-up on energy too just to be a little more specific. But I mean we are all quote unquote assuming stable from here and obviously one of the hallmarks of Ecolab is just overall predictability and things obviously slipped here a little bit faster in the first quarter from where we started out from.

What gives you the level of confidence at this point -- and don't get me wrong if you had perfect confidence you would probably be doing something else even. But what gives us the level of confidence at this point that we are stabilizing in terms of your customers and then the ultimate end market demand in terms of whether it is rig count or the new projects etc.? And clearly production seems to have stabilized but like in terms of some of that new business where you get that higher margin from?

I guess I would say one, let me answer from a little bigger perspective. Like our operating model I think has proven its resilient. So our forecasted delivery if you will from our combined Institutional, Industrial, Energy and Other segments hasn't changed one iota. So while Energy softened, the other businesses strengthened. Some of it is exact mirror reflection of the same issue.

And so we basically said while we have a bias towards higher oil prices, it is not a huge bias and we will perform well in a low oil environment or a high oil environment. So this year we anticipate operating delivery EPS to be around 15% which is exactly what we forecast in the last call.

I don't know if there is any question about the resilience. I think we are seeing it come through. If you look at Energy in particular, I think the team is on exactly what you would want them to be on. Energy is more cyclical. If our cyclicality means basically flat sales in OI at the bottom of the trough, I don't know how you call that cyclical. If you draw it on a graph, it is a flat piece of the graph before you start going up again. And that is exactly what we anticipated. That is what we talked about that we saw when we did the analysis of the last trough in 2008, 2009. It is basically what we are forecasting right now.

And the team is on new technology, we've got some great new launches, we've got stuff that is going to make fracs much more efficacious while reducing water substantially and this is exactly what this industry needs. I think we are going to be positioned with more sail out when the wind starts blowing in our direction and that is what the team is focused on.

I don't know, I think the model is doing pretty well. You've got to get under the covers of this darn FX news and look at the underlying business. And I guess I would only offer this, if FX was a $0.30 help, I think you guys would be looking deeply to say how in the heck is the core business performing? And I think those are the fundamental questions to long-term value that have got to be asked and I think when they are asked and addressed here, they look pretty good.

I think all good points. Thanks for that, Doug.

Gary Bisbee, RBC Capital Markets.

[Garden] supplies and I guess my, you said you expect the second have to look better from an earnings growth perspective than the first and I understand that the raw material cost benefit increases. Is that the primary driver of that statement or are you expecting the revenue growth acceleration you have seen in the last quarter or two on a constant currency basis in non-energy to continue into the back half of the year?

Yes, I think you got it, Gary. It is continued strong sales performance from the non-energy segments, the Energy as we already forecasted and you are right, the raw materials savings grow as the year goes simply because it takes a while for it to work through inventory. And so we anticipate that we will have significantly more benefit in Q2, Q3 and Q4 than we had in Q1.

Okay. Then as a follow-up, I guess I would like to ask about the record bookings again. I think it is the third straight quarter you have talked about that, but you have a pretty sticky business. And my guess is that much more of the revenue base comes from people using, hopefully more, but the same customers using similar volume.

So how much really does record bookings, if you have it for two or three or four quarters, impact growth in any given year? Is it right to think that it is fairly modest improvement, but if you do it year after year, that is what really drives revenue?

Clearly, it will add a point or two of growth. It is not going to add 8 points of growth, but it is a very important metric because basically we are going head to head versus competition, who is winning. So we look at this metric and then work very hard to understand how we are doing in each of our businesses and versus key competitors.

Because at the end of the day the health of the business is going to be dictated by how successful we are securing new business and obviously keeping our existing customers. So for us, it is one of the leading indicator metrics that we look at, really to get to the health of the innovation portfolio, the health of the team, and also just the strength of our overall message to customers; is it resonating or not.

But ultimately, yes, it is a growth driver but it is not an outsized. But a point or two every year comes from this.

Is a big part of this just having had time to effect improvement at the Nalco and Champion businesses, or is it really very broad-based across all of the businesses? Thank you.

It is broad-based, and I would say we re-energized the focus here. I think we also supplemented it with stronger training and development, focus for our corporate account professionals who are the ones that lead this charge. And I think it is a combination of those plus, as I mentioned earlier, innovation. Really at the end of the day, what is new, what are you talking to the customer about, what is the benefit of moving to us. That has got to, obviously, be pretty darn strong or you are not going to see new business results like this.

David Begleiter, Deutsche Bank.

Thank you. Doug, just back on energy, you mentioned pricing pressure, where are you seeing the pricing pressure and how do you think that reverses or how do you think it reverses going forward?

We are seeing pricing pressure -- I mean it is fairly broad. It was anticipated because it is not that dissimilar from pricing pressure that has been realized by that business in other downturns. Right now I would say the pricing pressure which we would love to have none is close to forecast. And so the closer you are to the well head the higher the pressure in the business simply because that is where it is more acutely felt in that industry but there is pressure throughout.

And energy going forward post the realization synergies if you do achieve 5%, 6% topline growth, what should OI grow operating profit, at what rate on that type of sales growth?

I think 5%, 6% will get you into double digits.

Thank you.

David Ridley-Lane, Bank of America.

So paper margins were a bit of a drag in the quarter even though you did have some topline growth. Is this more about shifting regional demand and would you expect paper margins to be flattish for the full year?

Yes, in the quarter was more a mix issue in paper. I think the good news is we saw paper sales rebound. Obviously it was a negative for the majority of last year and so we saw about 2.5% growth in this quarter. For the year our anticipated margins in paper are going to be we think they will be up.

Okay, great. And then heard you alluded to some of the investments you are making in the energy segment. Maybe a few examples of that. And also would the proposed fracking regulations on federal land be a potential positive catalyst for your business? Thanks.

We don't see any capital impact in our business or any material change versus what we talked about going forward. And in terms of investments in Energy, we talked about investments in the first quarter, some of those were investments made last year as we lapped first quarter but we aren't adding headcount obviously in the Energy business this year. So we are going to have material investments in terms of SG&A. We are continuing to invest in innovation because we believe that is core to our advantage in that market so you will continue to see investments there.

Manav Patnaik, Barclays.

Thank you. Good afternoon, gentlemen. So firstly, just wanted to clarify your sort of renewed assumptions that you made on Energy. I think last quarter you told us on the rig count side you had assumed it was down 30% plus some share gain. So I was wondering if you could just help us understand what you are thinking in these new forecasts?

Yes, I think before we thought they would be down 30 to 40 for the year. They are already down at that rate right now and now they are forecast out there at 50% to 60% declines particularly in North America. I mean we are going to present ourselves as the lead forecasters of either rig count and/or certainly oil price as soon as we go forward. But certainly I think you can't read a player in the energy industry world that hasn't commented that the decline of rigs has surprised them in terms of depth and speed. And we would add ourselves to that room which I would say is full of people.

I guess what I'm trying to get at is do you see any room for further downside just outside of the FX headwind here?

You know, I guess I would see room for upside too. Right now the forecast that we have is our best estimation of 50-50. And I would say in total from an operating standpoint, as I mentioned earlier, our forecast in total hasn't changed. So the elements have changed. Energy got worse and the other businesses got better. Net it is about a wash and all I know is next time we are talking we will have some changes in our forecast but I don't believe our forecast on operating performance for the year in total is highly at risk.

Okay. And then on the FX side, obviously every company out there is getting hit and it seems like it probably gets worse too. But at some point does the pressure from FX force you to make any operational changes in the different regions or is it just purely translational and when it goes down you get the hit and when it goes up you will start seeing a benefit?

Yes, by and large most of it is optics, i.e., it is translation of locally generated operating profit translated back into dollars. Now with that said, there are certainly some items that we manufacture in one currency and sell in another. We are looking at all of those items but you've got to be very careful not to chase currency. And so if we can see that we can save money under any currency scenario, we will make the moves. If it is a move that is dependent on a strong dollar, you've got to be very careful because by the time you finish executing the dollar can reverse on you and you are now unhappy for a different reason.

So we have been through this. I have seen 1.40 euro, I have seen 0.88 euro. We have seen it both over our extended period of time operating these businesses and all I know is it is going to change again. I just can't tell you when.

So we want to operate in a smart way and not chase currency but certainly there are some situations that will require us addressing that will make sense in today's environment and even in tomorrow's.

Okay, fair enough. Thank you so much, Doug.

Laurence Alexander, Jefferies.

This is Dan (inaudible) in for Laurence. Will you guys be buying shares at the current rate or if (inaudible) become more attractive, would that accelerate?

We will continue to be buying shares over the balance of the year.

But the target that we set originally for the year is the same.

Okay. One other question, so you are seeing a tailwind from raw material costs but I think you said that you also were increasing prices for certain segments. Would you expect any pushback against that just given that your input costs are going down at all? Is that how it works?

Look, you always get pushed back on pricing, that is sort of a given. But yes, we are seeing one to two pricing in the balance of the segments ex-Energy which is what we expected.

Thank you.

John Quealy, Canaccord Genuity.

Good afternoon. First question, can we go back to revisit lower oil throughout cost of sales. Can you comment by segment? Have you been capturing those savings yet and when should we expect to see the full benefit of the oil in the cost side? And then I have a follow-up.

Well, you know, here is what I would say. We gave our forecast on raw material benefit for the year remains the same as it was last call. And when we gave the chart last time, I think we dictated how it is going to show up first quarter and second half and obviously it was remaining of the year weighted as I discussed in a previous question. We have not broken it out if you will, by segment nor do we plan to do that.

So in the first quarter it was roughly a nickel. We anticipate it to be $0.32 for the balance of the year, so $0.37 in total.

Okay, thanks for that. Second follow-up, more of a macro question, so Pemex after many months is finally getting a little closer, May and July, of detailing out service contracts as well as oilfield auctions. How does that impact your business? Is there an additional opportunity for Pemex? I know you folks do a lot with some sovereign producers. If you could just comment on Mexico. Thank you.

Yes, we believe that the move in Mexico is favorable and will be positive for our Energy business.

Mike Harrison, Global Hunter Securities.

Good afternoon. In the healthcare business, you noted new accounts but also improved penetration and showed some of the best growth that you have seen there in quite a while. You do have a fairly broad suite of products there. What do you usually lead with in healthcare? What is the ware-washing equivalent and how much bigger does the overall opportunity get as the penetration increases toward the full range of offerings?

The big wins that we highlighted late last year and are clearly the driver for the growth acceleration were around the environmental hygiene offering or the program that we have developed to reduce infections contracted in-hospital by patients. Importantly we think that is a program that we want to continue to focus on and drive and leverage because it is our anchor program much like if you will, dish machine or ware-washing would be an anchor program and institutional, or CIP and F&P, etc.

So the fact that we are seeing success there I think bodes well because that is basically what you will build off of to drive further penetration as you move forward. So I think healthcare showed improvement here and showed improvement in the fourth quarter which was consistent with the timing we talked about last year during this call that we wanted to work on our fundamentals in 2014. I think the team did a good job. They started showing benefits at the end of the year and you saw that was a 5% topline growth in this quarter in healthcare which is certainly better than we saw last year.

On the Energy side, it sounds like the International side was quite a bit better and when I think International I think more offshore and obviously new CapEx has been an important driver particularly in the offshore business for you guys. Can you talk about what you are seeing in terms of offshore CapEx projects going forward? Are they being delayed, are they being delayed indefinitely or just pushed out a few quarters?

Yes, some have been pushed out and delayed. I would say we are having still significant success securing new CapEx projects which you are right, has been a core part of the strategy, a successful part. We aren't walking away from that. The team has secured a lot of business this year. That business won't come on until in many cases even 2018 and 2019. That is the type of pipeline that we have here but we feel good about what they are doing.

A lot of the CapEx that was if you will initiated several years ago that we had secured, some has been delayed, some of it is coming on. Obviously offshore continues to move on and progress. You've built a big piece of CapEx, you are going to go deploy it, the money is already sunk and so that continues to move forward.

What we are seeing mostly is a huge decline in unconventional onshore and that is where you have a lot of the pressure. It is the part of the industry that can move with the market and does move with the market probably the most rapidly. But that is where the most acute pressure is.

And then last one for me, do you expect any impact from bird flu on the F&B business in the rest of the year?

You know, I think it is certainly going to have an impact on a number of important customers of ours. Typically when you end up with shortage of one protein, consumers adjust and start buying more of another protein and our exposure across protein sources is pretty wide. So I don't anticipate it is going to make a call.

All right, thank you very much.

John McNulty, Credit Suisse.

Good afternoon. Thanks for taking my question. So Doug, I think you had said earlier if energy prices kind of level off here, you are kind of looking at for next year mid single-digit growth in Energy and it kind of accelerates throughout that period. I guess how do you get to that? When you think about the major buckets that will drive that growth, what are they in kind of a flat $60 oil, $55, $60 oil range?

I think what you start doing is annualizing against the very significant reaction and decline in activity. I think you've got a couple of other things happening, you've got some 4000 wells that are temporarily capped. People are going to have to deal with this because they have about 12 months under current law to get after these and deal with it which means Q4, Q1 activity. Our guess is the majority of those are going to probably be brought online. The pricing pressure that we are feeling now will annualize against and that is -- and you are going to have constant to minorly increased production next year versus this year but you won't have the price pressure that we have going on this year. So you will see better sales from that.

And ultimately we even think in downstream, you had some minor impacts in Q1 this year from the refinery strikes which are over and we will again annualize against next year.

Okay. When you think about pricing, kind of in the core or legacy Ecolab businesses, it seemed like pricing was always pretty much either stable or up modestly and it looks like you are seeing some negative pricing pressures in the energy markets at a minimum in kind of a new parts of Ecolab.

How do you think about being able to get that pricing back? It always seems like giving up price easy maybe isn't the right word but it happens. Getting it back tends to be tougher so I guess how do you think about working with your customers and making sure you can get the pricing back?

The majority of this impact is coming from cost-plus contracts that we have with major energy suppliers. So when energy prices go down and oil and raw material inputs go down as a result, that ends up reflecting in the formula. And on the converse, when energy and raw materials go up, it is going to be reflected in the pricing because that is the arrangement we have with those customers.

So it is not like we negotiated a price decrease or going to have to renegotiate a price increase in most of these cases, most of it is formulary.

Okay, so it is really just price pass-throughs then or cost pass-through, it is not a true give back on price, is that right?

A significant portion of it. There are some that would be a give back on price but the vast majority is contractual.

Okay, great. Thanks very much for the color.

John Roberts, UBS.

Good afternoon. Doug, I think in last quarter's release you were optimistic about acquisitions for the coming year. Could you give us an update on the environment out there?

Yes, I remain optimistic. There is a number of things and a number of opportunities that we are chasing, some of them were quite a ways along in the process. So I still remain bullish on being successful in this environment and making some key acquisitions.

And then back to the food and beverage segments since it is the highest growth Industrial segment for you, there were a couple of high-profile dairy contaminations over the past quarter. Are there any trends there or are there just greater levels of detection going on that are going to cause customers to have to clean more intensely or anything else we might translate more across the overall segment rather than just a couple of isolated events?

Yes, what I would say, food safety in general is -- food producers are always constantly on high alert and nature has its ways. It is a difficult game and the producers by and large do an amazing job if you look at the number of meals served. Just take it in this country and the number of incidents, it is an amazingly low number given the number of meals consumed. With that said, I don't think this is a big trend I don't think vigilance waned. I don't think it is going to turn in the United States up because I think it is at a high level. I do think in the emerging markets you are going to continue to see heightened awareness, heightened scrutiny and heightened consumption but that is mostly where you are going to see it.

Thank you.

Dmitry Silversteyn, Longbow Research.

Good afternoon, guys. Thanks for taking my call. A couple of questions. First of all, can you differentiate in the performance if there was any between your international and your domestic Pest Elimination business?

About the same really on the top line, both very good. North America, which I think we talked about a couple of years ago was disappointing has really done a good job rebuilding their sales acceleration. They've made a lot of I think very smart investments with the team. There is a lot of improvements in that business. I am very bullish on what that pest team has done and the outlook and particularly on North America. We didn't have the same fuel turndown internationally. That business has remained consistently strong.

Sure, okay. On the food and beverage question as the previous callers pointed out, this business has done well for you at least in this quarter and it is a result of many years of work and getting traction in some of these products and programs. In sort of combining food and beverage and healthcare if you will, I don't think you guys do a lot currently in sort of Cleaning-in-Place of pharmaceutical production facilities. Am I correct first of all, this is not an important market for you yet and is there an opportunity given your ability to Cleaning-in-Place and given your bioscience and antimicrobial capabilities in healthcare to perhaps go after this market a little bit more aggressively?

Yes, I would say CIP opportunities beyond food and beverage exist and certainly pharmaceuticals would be a good example. There are others as well and that is exactly how we look at extensions. So either try to sell more to the existing markets or you try to follow your technology to its natural ends and so certainly that would be an example of an area that you could push CIP into.

One final question, in terms of your traditional cleaning and sanitizing businesses in Europe versus North America, where do you stand in terms of rolling out the more complete product lineup if you will in Europe to match better with what you have in the US? Are you pretty much there? Is it ahead or behind schedule? And have there been any sort of early indications of success of getting growth accelerated given a fuller toolbox for your salespeople to go out to market with?

Yes, I think we mentioned or I did that Europe sales were up 5% or 3% ex-Energy for the quarter which is substantially higher than we have announced in quite a while in Europe. Yes, I think it reflects exactly what you talked about. We were behind in innovation in Europe as a consequence of our EBS/SAP program. We've got to freeze the product line for a couple of years while you are putting that system in place. That has unfrozen. We have been launching our technology over there for the last couple of years. It is starting to make headway in particular in both F&B and Institutional. And so that is one of the reasons that you see sales acceleration in Europe.

We expect sales to be positive for the year in Europe and it is really as a result of the new business which is driven in part by innovation.

All right, thank you very much.

Bob Koort, Goldman Sachs.

Thanks, I appreciate the over time here. Doug, could you talk a little bit -- I guess I envision your Energy business you had characterized it at some point having a similar business model approach to the traditional business of having feet on the street or folks out in the customers' facilities. I am just curious how quickly can you dial down those costs if you need to? In other words, if you are typically having several employees out at these wellheads on the exploration production side and now you have seen this big drop off in North America and unconventional, can you dial down those expenses just as quickly as you move them up or do you have to absorb that until you see some recovery in those markets?

The real pressure in that business really is in the production phase. It is closer to the wellheads, it is in our WellChem business. The WellChem business isn't an as people intensive business as a production or OFC business or our downstream business. There are certainly costs that we continue to take out. They are as much a part of the synergy program that was put in place with Champion as they are anything else. We certainly are accelerating some of those moves as a consequence of the market. But really it is still in line with what we anticipated creating once we got through the synergy moves with Champion.

So G&A, rightsizing that and doing all those things we are looking at how do you accelerate it but in line with anticipated ultimate goals that we saw once we put Champion and Nalco Energy together.

So are there opportunities in the field? Yes, they are small. We tend not to go -- we don't want to create an overreaction in that business too. I think I would remind you we expect sales to be roughly in line with last year. There is not this monstrous degradation in activity in our business like there are in other businesses. So I would call this not a decline but sort of a pause in the growth and we anticipate regrowing next year and that is how we are managing the business.

Got it. My last question if I might, can you just help us characterize Energy business in total, maybe geographic spread or upstream/downstream refining, just some shares of the business scale of the business?

Off the top of my head.

I can follow up with Mike if you want.

I'm trying to get it. It is lot of model question. North America is about 60% of our business in total and then when you look at the balance, you've got fairly -- a little more in Latin America, Middle East/Africa would be next and then AP as you balance out the other regions. Europe is really North Sea type production.

If you want to look at the rest of the business, roughly WellChem was 17% last year. It is probably going to drop to about 15% this year and then you really split the rest, you've got about 60% production phase and then the balance is downstream. That is how (multiple speakers)

Terrific. Thank you.

Shlomo Rosenbaum, Stifel.

Thank you for squeezing me in at the end. I just have a few kind of housekeeping questions and how it relates to the business. There is a little bit of move up in receivables and more of a move up in inventory. Can you talk a little bit on the receivables side how much of that might be related to Energy and your confidence in trying to (inaudible) recovering those? And then just on the inventory side, is that a -- investment in growth and where exactly was the buildup? Thank you.

I would say it this way, working capital wasn't our highlight in the quarter and it is something that we are all over as a team. So there's three buckets. One, you pointed out was receivables. That was really just a handful of large customers and it was a timing issue. All of those have been resolved. That is not a systemic issue at all.

There was a couple of Energy but a couple of other customers, it wasn't exclusively Energy but those payments came in, it was really just timing at the end of the quarter.

You have also got inventory. I would say you've got two things going on in inventory. One, Energy inventory built because we weren't able to turn production off as quickly as the business declined and as we previously mentioned, the business declined quicker than we anticipated so call that $30 million in inventory. That will get out of this system but that is going to take a couple of turns to do as we go through.

Then you've got payables and payables was higher, i.e., it sucked up more of our working capital. It is probably easiest to say that was an internal in execution that we don't plan on repeating. That would be the quickest way to get to that.

So you know, working capital for the year I think will be moving in the right direction and we also have I think very good plans to have very favorable cash flow for the year.

Do you have kind of a range you are targeting for the year from a free cash flow number?

About 90%.

Of net income?

Yes.

Thank you very much.

Rosemarie Morbelli, Gabelli & Co.

Good afternoon and thank you. Most of my questions have been answered but I was just wondering on the Energy side, Doug, let's assume that oil stays where it is today and you have some kind of a normal growth rate next year, can you make it all up in 2016 or will you need to go through 2017 before you catch up on whatever you missed in 2015?

I take it you are talking about topline or OI growth?

Both.

I don't think you're going to make up the complete (inaudible). I guess if we assume the business is going to grow double-digit topline and expand margins and have 15 bottom-line forever you can never make it up but that was never our forecast. We always knew when we bought this business we knew it was going to be overall a faster growth business, top and bottom, but it was also going to go through some oil cycles where like 2008, 2000 we thought we were going to see a pause in sales and OI growth.

So I guess next year as I mentioned earlier, mid single-digit top, double-digit bottom. If oil stayed in the $60 plus or minus range for another year after that, I would expect we would be accelerating growth in 2017, even with that kind of oil forecast. Most conventional guesses is oil will probably rise over time. I don't think we are going to be completely dependent upon it but if it does I think it is going to be a benefit for the business.

Thanks. And then quickly on Europe, other companies are seeing some improvement on the demand side. I know you grew 5% or 3% excluding Energy but do you see that as a result of what you are doing in health or are you also getting some help from the market itself or at least expecting more help in the second half?

As I mentioned earlier in Europe, the change as you know it is like down one, up one. It is not the most dynamic economy right now. It is hard for us to feel exactly the effects of those small moves. I would say we think it is more on our back and I think we have stated before when we were flat it was more focus on margins, trying to hold sales so we can get the P&L right for the future so that when we grow we will get leverage. And right now I would say it is more of our efforts than the market.

Okay and if I can squeeze one more, on the Equipment Care, revenues up 7% in constant currency, that is quite high. Do you anticipate that kind of growth rate for the balance of the year and do you see margins continuing to improve after you have done all of the restructuring and reshuffling of your business model?

Yes and yes. Equipment Care is on a good path.

Okay, thank you.

(Operator Instructions). Andy Wittmann, Baird.

Doug, last quarter I think you talked about your ability to manage the business and how after a couple of years of a pretty good performance that you were worried -- I don't know if you used the word complacency but you talked about the fact that there might be opportunities that you could go to if you needed to. With Energy taking a slight step down here, have you gone to any of those other -- I don't know, contingencies or are you contemplating them today? Is the business at a level where you need to go to some of those?

Well, you know, you always wish you had these huge file drawers full of money ideas. We have several. I wish we had more like every CEO in the land.

I would say we are pushing. I think the team is doing a great job. I used the analogy last time that if it is a plane ride we are going to land in the right city on time but it is going to be a turbulent ride and I think the team is managing through a lot of turbulence. Making sure that you capture all of these raw materials and they show up in the P&L is not like a layup. We add purchasing on, suppliers early, securing the business. We had to make sure the R&D that it is showing up in the mix properly and that we understood the impacts. Supply chain has been all over this, our team has been all over it. It has been a lot of incremental effort.

Meanwhile, we continue to drive new business and innovation. So I think the team has managed this very successfully and I think if does -- if anything I think we are showing the robustness of the model. You've got to look through the damn clouds of FX but if you do it, you will see it.

There are still huge margin opportunities so we will talk synergies for one more year. We are then going to flip and no longer use the word synergy and start talking cost savings. But the cost savings that are out there is a consequence of both a Nalco merger and the Champion deal, there will remain -- they are still significant because you really -- it takes a long time to get after the supply chain savings, takes a long time to get after some of the regional savings because you've got to implement systems.

So whether you are running two systems and have two legal entities that precludes capturing some of the savings that you would normally get after, and doing that in a sensible way just takes time and we didn't see any reason to create undue risk that could create havoc with our customers so we have done this over I think a very thoughtful period.

But you are going to see those benefits show up in the business which is why we talk our model, 6 to 8 organic; 2 to 3 additional points from acquisition and call it 50 to 75 basis points a year in leverage, that is how you continue to drive. And other things are flipping in our favor so we like our position. I think we are executing quite well. I think we will do well not only this year but in the coming years.

Scott Schneeberger, Oppenheimer.

I guess on the Industrial business, Global Industrial, could you discuss a little bit about how you anticipate margins will build over the balance of the year, maybe some of the drivers and some of the headwinds facing them? Thanks.

The Industrial margins we anticipate continuing to strengthen. Some is just a consequence of seasonality where we always have better margins in the out years. But you are also going to see some raw material benefit as we discussed in the other business flow through on these businesses as well. So I think innovation, raw material flow through and volume, you will see margin increase for the year.

I would now like to turn the call back over to Mr. Monahan for closing comments.

Thanks everyone for your time today. We appreciate this and have a great day. Thank you.

Thank you for your participation in today's conference. Please disconnect at this time.