藝康 (ECL) 2015 Q3 法說會逐字稿

Welcome to the Ecolab third-quarter 2015 earnings release conference call. (Operator Instructions). This call is being recorded. (Operator Instructions). Now I would like to turn the call over to Mr. Michael Monahan, Senior Vice President External Relations. Sir, you may begin.

Thank you. Hello, everyone, and welcome to Ecolab's third-quarter conference call. With me today are Doug Baker, Ecolab's Chairman and CEO, and Dan Schmechel, our Chief Financial Officer.

A discussion of our results along with the earnings release and the slides referencing the quarter's results and our outlook are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements on these materials stating that this teleconference, the discussion 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 and 10-Q under Item 1A, Risk Factors, and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release.

Starting with a brief overview of the quarter, strong new account gains and new product introductions drove solid mid-single-digit fixed currency sales growth in our Global Institutional, Industrial and Other segments back during the third quarter, more than offsetting lower Global Energy sales.

We leveraged that growth along with delivered product savings and our ongoing synergy and cost efficiency work to expand our adjusted operating margins more than offsetting the impact of softening economies, weaker oil prices and increased currency headwinds. These along with a lower tax rate and fewer shares outstanding drove a solid 6% adjusted earnings per share increased.

Looking ahead, we expect our Global Institutional, Industrial and Other segment to show continued superior fixed currency growth outpacing their markets in softer international economies as they leverage the internal work they have undertaken to further improve their sales and service effectiveness and profitability.

We expect them to continue to more than offset lower results from our Energy business and produce the strongest quarter for fixed currency profit growth from our businesses this year.

However, the fourth quarter will also face stronger external headwinds than previously forecast, including more unfavorable currency impacts and the effect on our operations from devaluing our Venezuelan Bolivar business. As a result we now look for the fourth quarter to show lower growth than previously expected as the headwinds, including pension, impact earnings growth by 13 percentage points.

For the full year 2015 we continue to expect strong fixed currency profit growth in the mid-teens before the impact of unfavorable currency, including the Venezuela devaluation and pension. We expect these will penalize growth by approximately 10 percentage points and yield a full year adjusted earnings per share gain of 4% to 6%.

Now on to a few highlights from the third quarter. Reported earnings per share were $0.86. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, third-quarter 2015 adjusted earnings per share increased 6% to a record $1.28 despite an $0.11 or 9 percentage point headwind from currencies and pension.

The adjusted earnings per share growth was driven by fixed currency sales gains, delivered product and other cost savings, synergies, new products and a lower tax rate and share count. Our fixed currency acquisition adjusted sales were flat as good mid-single-digit growth from our Global Institutional, Industrial and Other segment was offset by lower Global Energy sales.

Regionally we saw good growth in Latin America and Europe rose 4%. Adjusted fixed currency operating margins expanded 90 basis points.

In this year's tough environment we have focused on driving new business gains and lower cost. We are using our industry-leading product innovation and service strengths to help customers achieve better results and lower operating [cost] and through these aggressively drive new account gains across all of our segments.

Further, raw material cost savings along with synergies and our cost efficiency work are helping to offset these headwinds. Importantly, we also continue to make key investments in our future growth drivers.

We are delivering a strong fundamental business performance in 2015. As shown on slide 4, we have grown profits in the mid-teens this year before externally driven factors. The fourth quarter, shown at the midpoint of our revised range, should represent the year's best performance on this basis growing nearly 20% despite the recent deterioration in the energy market.

However, as noted earlier, the business environment has become more challenging in recent months as several key foreign currencies and the energy market have continued to weaken. These and other recent impacts on our outlook are summarized in the waterfall chart on slide 5.

Starting with the consensus forecast of $4.51 that has followed our second-quarter earnings release the recent deterioration in the energy markets has resulted in an impact of about $0.04 per share, which should be nearly offset by the aggressive actions we have taken in driving deliberate product cost savings, cost efficiencies and synergies along with other actions to offset the impact.

However, increasingly unfavorable currency trends, the impact on our adjusted earnings from devaluing our Venezuelan bolivar business, initial dilution from acquisitions and a product recall will represent approximately $0.10 per share of increased headwind to the full year.

As a result, while earnings from the fundamental business should rise in the upper teens, we expect fourth-quarter adjusted earnings per share to increase 0% to 8% to the $1.20 to $1.30 range with currency including the Venezuela devaluation and pension representing a drag of approximately 13 percentage points to earnings per share growth.

Full-year adjusted earnings are expected to rise 4% to 6% to the $4.35 to $4.45 per share range with the same impacts representing a 10 percentage point drag to results.

In summary, our underlying business continues to perform in line with our high expectations. 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 and setting up for stronger growth in 2016. And now here is a Doug Baker with some comments.

Thanks, Mike. Good afternoon, everybody. So the story for the year remains quite consistent, strong currency headwinds mute very good underlying performance. So working through FX and pension we forecast 15% EPS adjusted for the year and 18% for Q4 which we expect to be our strongest quarter.

Unfortunately Q4 has the stiffest currency headwinds too, totaling 11% including Venezuela which is stronger than we had previously forecast. Energy markets were and are a huge factor for us this year, but they are not the central driver in our results.

Low energy prices have caused value and price erosion in our WellChem business in particular and energy services broadly, but that has largely been made up via lower raw materials across our platform. This is still the fact. FX is the main issue.

The good news is when you book beyond FX the business is quite healthy. The Institutional, Industrial and Other segments combined are growing over 100 basis points faster than last year, the expanded fixed currency margin as well by 200 basis points in Q3 and a projected 130 basis points for the year.

The energy markets are worse than we or anyone else foresaw at the beginning of this year and our business results are softer than planned as a result. But with that said, the energy businesses held up well in the face of a very difficult market.

Our OFC and downstream businesses combined, which are now 90% of the business, are forecast to be up modestly on the top line for the year and better on the bottom line reflecting synergies. WellChem is where we've seen the majority of our pain. They will be down some 40% for the year reflecting the dramatic decline in

NA drilling activity. Going into the year they're expected to be about 18% of the business, they now represent under 10%.

Now we previously forecasted an improvement in Q4 versus Q3 in Energy. And we still do, albeit not as large an improvement but still an improvement. So in total for the year [ES] will down high-single-digits on the top line and modestly more on the bottom, though adjusting for Venezuela margins will only be off 10 to 30 basis points for the year, so we have held there quite well.

Lastly, let me make a few comments on our forward view. So, consistent with our past practice, we will be sharing our 2016 forecast in February during our Q4 release call.

With that said, our early view is we believe our strong underlying business performance in our Institutional, Industrial and Other segments will continue through next year and start to show through particularly in the second half of 2016.

Our Energy business should show improvement as the year progresses too and will likely show flat to modest growth in total. Still the energy market and currency including Venezuela will be a comparison challenge that tapers as the year progresses.

So, Q1 should have similar -- could have similar headwinds as Q4, but they should ease as the year goes on. Net we believe our reported and adjusted results will improve in total as well.

And with that as an opening let me open it now up to Q&A for Mike, Dan and myself.

(Operator Instructions). Mike Ritzenthaler.

(Technical difficulty) reflect the new business wins, particularly within Industrial and Institutional, I think they are well reflected in the fixed currency growth numbers. But my question is, does 3Q and the outlook for 4Q I guess have embedded in it the right run rates of overhead that can be further leveraged into 2016 or is there more to add there?

Mike, I apologize, but we didn't hear the first part of your question. I don't know if you were still muted by the operator or what. So could you repeat it again? I apologize.

Oh, sure, no problem. It was just a question about the corporate account efforts and some of the enterprise selling. I think the results, they speak for themselves. I think they are well reflected in the fixed currency growth numbers.

And the question was around the overhead in 3Q. Are we -- or is that staffed according to how you have envisioned that in order to leverage into 2016 in those businesses?

Yes, I see it is more reflective than not. I would say the only place where we continue to see I would say lower expense levels is Energy. And part of the story of 4Q on the bottom line is we will see and realize full cost savings benefits from the actions that have been taken this year in Q4. So that will then move forward into 2016.

On balance, I think the cost structure you see in the rest of the business is fairly indicative of what you will see next year.

Okay, fair enough. And then my one follow-up for me is maybe for Dan since we have him on the call. Is it fair to assume that the full-year impact of the bolivar is $0.12, something like that, if we just annualize the 4Q impact?

The number that we are coming up with is about $0.13. So, yes, it is almost close to a direct annualization. That would be the impact of annualizing the devaluation, okay.

Okay. All right, thanks.

Nate Brochmann, William Blair.

Wanted to [attack] Doug a little bit. Obviously you guys have always delivered the consistency and delivered what you say you will. With Energy continuing to kind of be a little bit of a drag in terms of thinking that it would be a third-quarter/fourth-quarter bottom and it feels again like we are getting close to that.

But where does your level of confidence lie in the other businesses as maybe the global economy gets a little bit weaker that they can continue to offset that if that were to get pushed out a little bit further in terms of where the real bottom ends up being?

Well, I would say a couple of things. One I think our Institutional, Industrial and Other businesses are doing quite well. Many of our large businesses are accelerating second-half versus first half, have had great success in terms of new business productivity.

I don't think -- third-quarter was not a great quarter from a GDP standpoint as far as I can tell anywhere. So I don't think we are currently performing in a good environment heading for a bad environment. I feel like we have been performing well in a lousy environment which is likely to continue.

So emerging markets [turtled] early this year if not late last year, US economy has not been in a great shape. So I think the only positive surprise we could point to economically in the world would be Europe. And our Europe business is reflecting that it was up 4% in the third quarter and we expect continued strong growth in Europe.

So, I would say I am confident that those businesses continue to perform well moving forward because I don't think they have gotten any tailwind from the economy.

In terms of energy bottoming, it seems like it is zero and 100 for anybody predicting the bottom of this energy market. I would say we are seeing kind of sequentially the same business albeit a little stronger in Q4 versus Q3. What we are confident in is that the comps get easier second half of next year than they have been.

We are going against double-digit comps in the second half right now [over] last year in the energy business. And so, this eases and frankly makes it a bit easier as you move forward to show growth.

Okay and then just one quick follow in terms of the raw material offset. Obviously that continues to flow through. Can you talk a little bit about the runway there in terms of what is still on the board in terms of the flow-through and rates of renegotiations?

Yes, I mean a lot of that is going to depend on what your view is of oil. But I think this natural offset that we talked about at the beginning of last year has come through.

So, what I will say is if our view is oil stays exactly here for the next 14 months, you are going to have that you are going to have pressure from the energy business and a comparison standpoint early in the year offset by favorable comparisons on raw materials and then both axes cross and come together. If oil degrades further raw materials will get lower and we will have the same formula that we have had so far this year.

So I will just tell you, I just don't think that is going to be the major driver of the results, it wasn't this year. I know it creates a lot of noise even here where we have had somewhat we are on the lower end of our outlook that we talked about even in [9], [10] meeting, our investor meeting. We have seen improvement in raw material pricing that partially offsets that. So this equation is in place, it will likely continue.

Okay, great. Thanks.

David Begleiter, Deutsche Bank.

Good afternoon; this is actually Jermaine Brown filling in for David. Is double-digit or even low teens EPS growth possible for 2016? And if so, what are the different puts and takes to get to that?

We are not here to give a forecast. I think what we indicated is net as we look I guess as far as we are going to go is we would expect reported results and adjusted results to be better than this year. But our commitment to 20% ROIC, 20% margin and 15% going EPS over a period of time remains intact. We think very real and deliverable.

Understood. And one more if I can. Which, if any, of your expectations, excluding Energy, have changed since your September Investor Day?

Well, all the change that impacted the forecast -- I mean to be honest -- look, Energy was stronger, not weaker, but Energy is not the reason we are lowering our forecast because it was yearly offset by other issues. The issue was really FX including Venezuela and that is the piece of the forecast that changed dramatically. And it changed post Investor Day. So, right?

Understood. Thank you very much.

Gary Bisbee, RBC Capital Markets.

I guess just following up, Doug and Mike, both of you said you thought you were setting up for a stronger 2016, and I realize you are not giving guidance. But can you go through any of the major reasons you believe that?

I mean I guess like Energy comps get better by -- get a lot easier particularly in the second half of the year. The FX based on where we are now becomes less of a headwind. Is it those two factors that lead you to make that comment or is there anything else that we should think of?

Yes, I would say it is several things including those. So, we are quite confident we are going to continue to perform well on our Industrial, Institutional and Other segments. The Energy business will be improved next year versus this. You can argue with us is it going to be modest growth, modest decline? It is not going to be -- it is going to be better than this year for a variety of reasons.

And then FX headwinds are more likely than not to be less year than they are this year. And I think that is fairly safe. Sooner or later they are going to drive the economy down in the US and that will fix FX.

Okay. And then the M&A dilution, I assume that is Swisher. Can you give us an update on how much -- how long do you think you'll have that? How much do you expect the dilution to be?

And maybe just from a high level, do you think you keep most of that client base and this actually becomes nicely accretive in a year or so? Or is your expectation that a bunch of that bleeds off because they want to stick with the lower priced option as opposed to upgrade to your offerings? Thank you.

I think in our model we don't anticipate that everybody is going to stay, which would be our standard model. So I think there is some expected attrition, we are not going to get into how much. But I would say the vast majority of the business sticks.

We think, consider it -- look, I have seen a model that says it is minorly. I would say it is probably going to be neither accretive or dilutive next year. It will be modestly dilutive early and then starting to get offset as we round a midpoint of next year.

Long-term it is hard to put a model together -- does it make that deal look like a great deal for us simply because the price for buying it for. And so, I'm quite confident it will ultimately prove to be a very, very good deal for shareholders even if it has short-term pain.

And the pain really is driven by the fact that this business, as has been well advertised, is losing money. And you can't turn it from a money loser into a money winner in a day. So, you are going to take on some of the lost run rate and then we've got to go fix this business. But we have got to go do it in a way that doesn't erode the customer base anymore than might happen naturally.

Okay, thank you.

Our next question -- give me just a moment. Give me just a moment for your next question.

Operator, we can't hear a question being asked. David? Hello? Operator, we are not hearing anything on our end.

David Ridley-Lane, Bank of America.

Within your modest revenue growth expectations for Energy in 2016, can you give some color on the expectations around the three components of WellChem, production and downstream?

For 2016?

Yes.

Yes, well, WellChem what we would say is we are probably more likely to see very modest growth, but it is going to be starting at quite a low base. And so, WellChem in the fourth quarter is about 10% of the business, as I mentioned in my opening remarks, started out with an expectation of being about 18%.

Part of the business has been de-risked just by the fact that we have gone through the decline on a major piece of the business. And so, call that flat to modestly up, downstream will be up we expect again next year.

And then OFC will gather steam throughout the year, it will start with some pressure simply because of the fundamentals in the market. But we would expect to be flat to modestly up too.

Got it. And then not to make too much of this because I recognize there is rounding there. But on the pricing, just to check, the pricing in the non-Energy business remains sort of in the 1% to 2% range and what is dragging it down to -- around to zero is some of the contracts that are tied to oil price, is that right?

Yes, the non-Energy businesses have pricing just north of 1% and the -- and then we are flat in total. So I guess you can figure out that Energy being 30% what energy is.

Okay, thank you very much.

John Quealy, Canaccord.

Just following up on the Energy price question. Can you talk about how much was competitive in terms of trying to get new accounts or new business within accounts rather than the peg to oil?

Well, getting new accounts typically wouldn't count against your pricing necessarily because the net new business for you as you go out. It would be either protecting business, trading price for volume and/or cost plus businesses. We haven't gone through and done a pure accounting of what percentage each of those things.

And I would say the biggest pressure is obviously in the North American portion of our Energy business is where we have the most price pressure. And we obviously have sizable business outside of the US where it has not been acute early. Typically though that is a follower.

And we expect we will continue to have modest price pressure moving forward as we go on. WellChem has been the single hardest hit component of that business, but all three segments of the business have been hit by price.

Okay, thanks. And as a follow-up, just to be clear on the M&A expectations moving forward, you gave guidelines in September on total dollars. But in terms of accretion dilution is it going to vary by property, vary by segment in what you go after? Or how should we think about accretion dilution for most deals moving forward? Thank you, folks.

Yes, I would say deals are very rarely dilutive. In fact we had a deal that we were very interested in and had a high level of confidence we were going to close. It ended up being bought by somebody else. The reason we didn't match the price, we actually had a chance to buy it at a lower price, was there was going to be a terrible return even though it was going to be quite accretive.

And with low interest rates right now it is that hard to have an accretive deal. I think what we are trying to be as also very careful about what types of returns these businesses are going to generate over the medium- and long-term.

And we are going to be disciplined there, we were in the 2006-2007 run up period. We never regretted that, we are going to try to be disciplined through this period as well. So, typically I would say deals will be accretive, not dilutive and we're going to make sure they are good returns.

Thank you.

Manav Patnaik, Barclays.

So I just wanted -- you mentioned early obviously that almost everyone is being (inaudible) hundred in forecasting Energy and this year we have seen your sort of guidance around Energy coming down step-by-step every quarter.

So I was just wondering going into 2016 as you guys sit down doing your budgeting and coming out with a forecast, like what are some of the lessons learned this year in terms of do you come out next year with sort of a much more conservative view and hope things just look better? Or do you just continue the step-by-step and work with the Energy market?

Well, I would say this, you are right. I mean on Energy -- we brought down our expectations on Energy probably every call. With that said, I would like to remind we have not brought down our expectations for our overall business performance underneath FX.

And so, whatever decline we have had in Energy has been continually offset through material savings and other work that we have done across the Company. And so, I just don't -- this isn't an Energy business, it is a business made up of several elements. And in total those elements have performed very well: 15% for the year and, as we talked about, 18% in Q4.

So, I think that has got to be the overall understanding. Now with that said in Energy, look, I mean we are in a long line of people who haven't forecasted the energy fall. And part of it is we rely on published data like everybody else. And I would agree with you, it has not been a great forecaster.

I think our lesson learned going forward is we are going to continue to look at this very closely, we are going to continue to understand we have a natural hedge here which is the energy market softens our raw materials go down too.

We're going to continue to make sure that we have got additional plans to make sure that our underlying business performance remains quite healthy, well invested and well-positioned for the long-term, which I think we get good marks on all of those.

I think our -- the big miss that we have got is on FX. And to be honest, I don't [bias] for our FX trading and/or forecasting capability. We have never broadcast that we are going to be good at it. What we have been historically good at is forecasting underlying business performance. And I think that still stands.

Okay, fair enough. And just to follow up on the other segments. I think to the earlier question and remarks around do you expect the other segments to show I think it was continued superior fixed currency growth outpacing the market despite the softening international economies.

Is that still -- should we still think of that comment as being in the 4% to 6% range? Or does that imply acceleration from there? Or just some guidelines or how to think of those comments you guys had.

I think safely I would stay in about the range we are performing at right now. I think you are going to have some businesses accelerate, some remain under pressure. In total I think it is going to be more of the same on the top line through next year just given where the general economy is.

Got it. Thanks a lot, guys.

Laurence Alexander, Jefferies.

Two quick ones. On the healthcare business the packaging recall, any sort of significant changes to procedures or is this more of a one product blip?

And secondly on Institutional was the initiatives to globalize and standardized competencies. Can you give us a sense for how far along that cultural shift is? And are there any regions which have proven more difficult than expected?

Yes, so healthcare, yes, I mean we are obviously changing procedures on the specific product where we had the recall. I would, I guess, point out we haven't had a lot of conversation about this, it was a voluntary recall. We went out and did this through an abundance of caution and I think we did exactly the right thing.

If you want to be trusted you have to act in a trustworthy manner. And I think the teams [manage this]. We don't expect long-term volume issues from this or anything else, it was really a packaging related issue, not a product related issue. But stand up related. So, this isn't systemic, it was an issue on this product.

In terms of Institutional cultural harmonization, I think this is going to be -- one, it is not going to be identical in all elements of the world because the world is not identical all over and we are going to have to have the culture that works in a given market. But with that said there is going to be a lot of consistency across markets and across the business.

So, look, we continue to make progress. Institutional is really the last of our businesses to globalize. It has made I think great strides in many ways and it has still a lot of room to go.

I think one of the reasons that we remain bullish is there is so much darn upside in our businesses as we globalize and expand our best practices around the world. And Institutional would be a good case in point.

They have got the US business where we have very good share, growing at 7%, we are accelerating in other markets. But we have to lower share, significant opportunity, significant opportunity, improved practice and culture. And as those things come on I think you are going to see continued improvement in those markets both on a top line and bottom line as well.

So, I don't know if I'd call out one market over another. I think the challenges are different by market. Europe we're making headway. Europe has had its challenges, but I also can plainly see that we are making progress there.

Thank you.

Andy Wittmann, Baird.

I just want to talk a little bit about the offsets that you were able to achieve in the third quarter, the $0.03 offset to the headwinds. And it sounds, Doug, from your comments that it is largely raw materials led. You have stressed the fact that that is offsetting the top-line trends.

I guess the questions are: was there anything one-time in nature or are those cost saving sustainable? And how many times can you keep pressing on the raw material button before the supply chain is unable to give you any more?

Well, I mean supply -- I don't want to minimize the hard work supply chain has done on raw materials because it has been considerable. But the reason the raw material button keeps getting pushed is because the energy market keeps weakening and it is the main driver ultimately of the raw material pricing. So that is very correlated there.

In terms of the other things, I would say if we were going to go do a refresh on this we are going to end up with [440] today but for a different reason. And you would probably have more in the other bucket from raw materials than we have right now. But the other things in there, some of them are renegotiating and lowering cost of things like fleet and we also have share repurchase in there and some other things.

So these have legs, but they are not all exactly directly related -- I mean I think the fleet is because it is a cost, but shares are to operating performance per se as you go through on it. I would say we knew we had these opportunities moving in and had planned to take advantage of them in the year and so they are not big surprises. But they are a mix of results.

Got it. And then my follow-up I guess is for Dan. Dan, the tax rate was down 25.8%, you guided 27%. Should we as investors and analysts be thinking of that as the new base rate recognizing that you are looking for R&D credit in the fourth quarter? But is that the way we should be thinking about 2016 is something closer to 26% rather than 27%?

Yes, I do think that is right. So in our guidance of course is the assumption that the R&D tax credit is renewed which we are quite hopeful of and expect, frankly. And then I would be thinking of a 2016 tax rate in the 26% range.

Thank you.

Dmitry Silversteyn, Longbow Research.

A couple of things. First of all, can you talk -- you talked about sort of the growth you are getting in North America and the fact that your European businesses outside of Energy are picking up, versus sort of the target that we have out there of about a 10 point improvement in Europe available and you are certainly along that.

Can you update us where you are on that pathway and sort of how you are thinking about the timing of getting the rest of that margin opportunity accessed in Europe?

Yes, Europe, we will end up roughly 200 basis points combined Q3/Q4 we're on average. For the year we are going to be right around 100 basis points. We may be a little south but it is going to be fairly modest if we're south. And a lot of that is just FX costs and some other things that we have come in that business, which we will deal with over time.

I think we are up over cumulative 500 basis points at this point in time. So we are going to end up the year at about [7.5], started off south of [2.5] when we started this initiative. So we have made significant progress.

We talked then that we expected to get this business into double-digits, I would say that is still our view. A key driver we said had to become volume and I think you are seeing that this year as we've started to see some top-line growth as well.

And we talked early in the year that we would expect around 3% in that business for the year and we still say that is what we expect to see, which is stronger than it has been in the past years. So I would say we remain bullish on our ability to get to double-digit OI margins in Europe and we've made great progress.

In terms of timing when you can get that, is that -- I mean obviously the world is changing. But as you sit and you look at it today and you provided some outlook on 2016. Is this a 2017-2018 event or is this sort of a still indeterminate future?

I would say same pathway, 100 basis points a year. So 2.5 years.

Okay. And then second, my second follow-up question on the Venezuelan devaluation and the impact it is having on your guidance and especially the fourth quarter. Can you sort of size this business for us and why it was such an impactful hit?

I mean, I understand the currency sold off significantly. But I just never thought it was that big a portion of your Latin American business, number one. And number two, if currencies stay at these levels how much of a headwind are you looking in the first half of 2016 before you are anniversary it? Is it a similar kind of $0.02 to $0.03 a quarter?

This is Dan. So we will start with sizing the business, okay. In 2014, based on a [6.30] exchange rate, sales for the Venezuela business were just south of $200 million. And by piece, this is a business that is about 70% energy and roughly 10% each for the water, paper and SMB business. So it is not an enormous business in the context of Ecolab's business overall, but it is nonetheless sizable.

And so, here is what is going on is Venezuela if you are not following this. It is a country obviously in some chaos, crisis, even. And it is hyperinflationary, okay. And so, the official exchange rate is and has remained 6.30 bolivar per US dollar. However, for most importation, including for us, these rates have been moving towards 200 bolivar per dollar. So enormous change in the currency regimes that we are putting under.

We have through the year taken first our water and paper business then food and beverage and institutional and now finally the energy business from reporting at this 6.30 rate to a 200 bolivars per dollar rate. We do it because we think that that is the -- yes, 6.3 bolivars per dollar, thank you.

We do it because we think that we want to make sure that we are giving the best perspective on how this business is performing. If you continue to report the business at 6.3 bolivars per dollar, as you get pricing or as you get cost inflation it is highly distortional to the P&L.

So what we decided to do effective for the fourth quarter is to begin to report the sizable portion of the Energy business at a bolivar to dollar exchange rate of 200 to 1. And that is having the impact in our -- really the impact to our prior forecast that you are seeing here. So, fully $0.02 of the change forecast to forecast is being driven by this Venezuela bolivar impact across the Energy business.

John Roberts, UBS.

Maybe I will ask another question on Energy since no one has asked one yet. The $0.04 adjustment for the full-year 2015 earnings, was much of that recognized in the third quarter or is it mostly a fourth-quarter $0.04?

The majority of it is in fourth quarter, some of it was in the third.

Okay. So really the slip here is in October that you have seen so far?

I think it was a view, honestly, that fourth quarter in particular is going to be weaker and the past patterns aren't going to hold true, particularly in North America. And so, there was a takedown of some expectations as a consequence of that.

Okay. And even with the healthcare 1% sales adjustment from the recall, growth rate there still isn't much above the paper segment. When does that accelerate?

It was a quarter. It had been performing better than that in the first half, but I would say we expect healthcare to continue to perform better than it is right now. Let me just say a recall is sort of all hands on deck. You've got your sales people walking into every account taking product out or making sure that we get these shipments flipped, so it's quite distracting.

Since you had said the effect was more than a percent. The direct effect was a percent and then it was a meaningful indirect effect?

Well, let me say recalls aren't positive for sales typically. And so, certainly, yes there was a direct effect in a -- let's just say a lot of time spent on something that is not net growing your business.

Jason Anderson, Stifel.

I am in for Shlomo today. Just a quick question. Appreciate the color on the slide on the progression from 2Q and your change from the midpoint on the guidance.

But I was just wondering, the top line comes down about $0.15, so there is I guess by quick math maybe a few pennies to $0.05 off the top line that maybe you don't speak to. And I'm wondering is that -- should we chalk that up to Energy or is there anything else going on there that you could elaborate on?

The top line comes off -- I am sorry, I didn't quite --?

I'm sorry, the upper end -- I'm sorry, the upper end of guidance coming down about $0.15 and you kind of attribute maybe $0.10 or $0.10-$0.11 to the issues lined out in slide 5. But I'm just wondering maybe the top line coming down a bit more than that. Are there other things we should be thinking about? Should we chalk it up to Energy or --?

I would say that guidance was basically left in place 7-28, and then carried forward I think -- signal, typically there is a narrowing of guidance as you go through the year. I think we will focus more on midpoint to midpoint in our guidance if anything. And that is what we have been referring to.

I don't -- I think in the middle of the year if you have got a large range and you have got more top side it can be FX can go favorable instead of reverse. The economies can get better, which they were forecast to do, not get worse, etc. I mean there was a host of things. But, no, I wouldn't pinpoint it on Energy.

Great, thanks for that.

Mike Harrison, Seaport Global Securities.

Doug, I was wondering if you could talk about the water business a little bit, maybe provide some details on how the integration is going of the Jianghai business and maybe what kind of synergies you are seeing from that on both the top and bottom line.

Yes, I would say early results of Jianghai, and we are calling them early because we are only a couple of quarters into it, have been quite favorable. Our expectation is we will be ahead of plan on that business in terms of contribution. And that is mostly driven by business performance. So I would say so far so good.

Integration we have got a good team on it. I just met on this late last week and I think we are progressing against all the things that we want to do.

Importantly this, like our other integrations, we expect to learn as much from Jianghai as we are going to impart to them. And so, a lot of this is making sure we understand business model, structure -- they had a sales model that was not that dissimilar to the sales models we set up in other parts of the world in water.

And how do we then orient ours more like that for the Chinese market. So I think there is a lot of things that we plan to get out of this acquisition other than just growth as a consequence of buying another company.

All right, and then with regard to the Energy segment and just the cost savings and synergy expectations. I believe you had said last quarter that you were expecting to get about $15 million of incremental cost reductions in Q4 versus Q3. Can you update that number and maybe give us a sense of what kind of incremental cost savings would be in 2016 versus 2015?

Yes, we may have to -- I mean, here is what -- we clearly are continuing to lower our cost structure in Energy. And Q4 is going to be roughly $10 million lower than Q3 in terms of cost structure. So you annualize that you are going to get [$30 million] out of it next year in one, two and three as you go through.

So, there is work to be done there, but we are going to get to a point, and we are close to it now, where we feel we have done the right thing on lowering our costs. What we don't want to do is cut too deeply into muscle because ultimately this business does turn. As we have always said, we think the turn in the market is post 2016. That has been a consistent view and it remains our view. But we have taken steps to lower the cost.

Thanks very much.

Bob Koort, Goldman Sachs.

Doug, I am curious, you guys bought Champion when the energy markets were certainly showing some positive momentum. Do you get any increased excitement maybe to pick up some companies on sale as we go through this downturn?

Yes, I would say in our M&A list are some energy properties, for the lack of a better term, companies that we hope we're able to buy. It could be a combination of things, it could be technology that we think is leveraged. But certainly this is a good time to be looking for certain things in the Energy business.

I think as I have also said, these are not going to be huge deals, Champion-esque in size at all they are probably going to be smaller deals, more because that is what is out there. But that should be the expectation.

And I'm curious, in that portfolio what more do you need to be more competitive? And it seems like you've got some pretty sizable competitors out there. So are there technologies you are missing, are there geographies you are missing? What do you need to supplement your portfolio with?

Well, I don't think this is a case of we have got a technical hole that inhibits our competitiveness. Instead I would say there are some technologies we see that may create adjacencies or additional opportunities in our customer base. That if it doesn't happen we remain quite competitive, quite viable. We don't think we have a scale disadvantage at all at our business.

While we go against competitors who are larger in total, they aren't larger in the chemistry that we sell. And in fact we have got scale advantage versus them in fact in that -- in what we are delivering. So I would say it is more on periphery or areas that we think we can capitalize on, create annuity type models like we have in other parts of the business. So it would be more that is where we are fishing.

And lastly if I could sneak it in. You responded to a question about healthcare and a quarter doesn't make a trend. But you have seen some deceleration. Do you feel you are losing share there? Is the competitive base different than in your traditional cleaning business? Why isn't that end market as robust as it would seem to be?

Well, I would say, look, the Europe business is growing well. We have got a contamination control business that is growing quite well. And we have portions of our portfolio, particularly in the US, which aren't doing very well masking what I would call decent core growth.

And so, our focus is to continue to focus on what we think is going to drive us long-term and sort of pull through that way. And we will continue to get after HAIs in hospital, [an care] is still very viable in that business.

And we also have a good contamination control business which gives us inroads into a very attractive market which we are going to follow as well. We feel good overall about our healthcare opportunities, we don't feel great about the results in the third quarter.

Scott Schneeberger, Oppenheimer.

Industrial production seems to have come down from the first half of the year in the third quarter. And your industrial -- I know it is not directly correlated, but your industrial segment seems to have accelerated a little bit in growth if you do constant currency and take out the acquisitions. Doug, what is behind that? What is giving that slight bit of acceleration and do you anticipate that persisting?

Well we have continued to gain share in those businesses. And so, I mean the main thing that is driving all of our businesses is our ability to gain share. Most of the -- the majority of our markets are flat to modestly up. But they are not -- that is not the driver, it has been share gain. Energy being of course the exception where obviously you have got just market destruction right now as a consequence of the drop in oil price.

If you look within our Industrial segment you will see pressure in the heavy industry part of that portfolio be it mining, steel in some respects, China in particular you will see real pressure in mining, steel and also paper because of draw-down and lack of production overall.

But with that said, we have been able to offset it. Water is doing quite well and accelerating in light water. Our core water business is healthier and getting better. It is 100 to 150 basis point faster growing in the second half versus the first. And I like what they are doing, so we expect that business to continue to accelerate. I think we found our sea legs there. So, I would expect our Industrial business to continue to perform even with some pressure on some segments.

Great, thanks. I will leave it there.

Thank you so much. And now I would like to turn the call back over to Mr. Monahan for some closing comments.

Thank you. That wraps up our third-quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation today and best wishes for the rest of the day. Thank you.

Thank you, and that concludes today's conference call. Thank you all for participating. You may now disconnect.