Ecolab Inc. (ECL) Q3 2007 Earnings Report, Transcript and Summary

Welcome to the Ecolab Third Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. [Operator Instructions]. This call is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to Mr. Michael Monahan, Vice President, External Relations. Sir you may begin.

Hello everyone and thanks for joining us. This webcast teleconference includes estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Some of the 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 and in our third quarter earnings release. A copy of our earnings release is available on Ecolab's website at ecolab.com/investor. Starting with some highlights from the quarter. Reported third quarter 2007 EPS increased 7% reaching $0.46. Excluding a discrete tax benefit and a special charge for the previously announced arbitration award, earnings rose 14% to $0.49, hitting the top-end of our forecasted range. We enjoyed continued solid... solid trends... solid sales trends from our U.S. institutional pest and food and beverage businesses, and recorded double digit sales growth at GCS, Kay, Healthcare and Textile Care. International also showed good sales gains. Latin America again rose double digits. Asia Pacific showed a better sales increase and Europe reported steady growth. Consolidated operating margins reflected the business investments we are making, as well as the special charge for Pest Elimination's arbitration award. Operating margins excluding them rose 40 basis points. Our outlook for the fourth quarter and full year remained strong. We expect EPS to show continued strong double digit growth in both periods. We raised the low end of the estimate range by $0.01 and now look for earnings excluding special gains and charges and discrete tax benefits to be in a $1.65 to $1.66 range indicating a 15% to 16% increase. In summary, we believe our business trends remain solid, and we continue to expect yet another terrific year for Ecolab and believe we're making the right investments to sustain attractive growth for the future. Turning to the details, Ecolab's reported consolidated sales for the third quarter rose 11%. Looking at the components, volume and mix were up 5%, pricing was up 2%, currency added 3% and the impact of acquisitions was negligible. Sales for U.S. Cleaning & Sanitizing operations increased 8%. Institutional sales rose 7% comparing against a very strong period last year when sales rose an exceptional 13%, as we brought on major business from a competitor. Third quarter 2007 sales growth continued to be healthy into the various end market segments including restaurant, healthcare, lodging and travel. Third quarter growth was in the more normal institutional trend line range of 7% to 9%. We believe most of the business gained from that competitor has been rolled out, and we're annualizing against the pipeline filling last year. We continue to make investments in new products and programs and sales force training and technology. The launch of the Apex warewashing platform and sales force training related to the new product and technology was undertaken in the third quarter and the rollout to new accounts is progressing very well. We believe the fundamental outlook for institutional remains very attractive, and we expect institutional to show continued superior growth in the fourth quarter 2008. Kay's third quarter sales growth was 11%. QSR's underlying business remains healthy with good ongoing demand from major existing and new fast food chain accounts. The Food retail business also grew. New products and programs continue to bolster Kay's results. We expect continued strong gains in the fourth quarter and full year for Kay. Textile Care sales rose 10% reporting yet another double-digit growth quarter. Significant new account gains once again drove the increase as new products and solutions that helped reduce customers' water and energy consumption provided key differentiation and enabled the division to outpace its market. Textile Care continues to benefit from the fundamental business improvements it has undertaken as well as the differentiated products and value solutions it delivers for its customers. However, we look for more modest growth in the fourth quarter as the division laps some significant account length. Third quarter sales for the Healthcare division increased 14%. Sales reflected continued solid end market demand for infection control products and expanded penetration within our existing base of group purchasing organizations and health systems. Our wireless and anti-bacterial skin care products showed continued double-digit growth. Looking ahead, fourth quarter 2007 Healthcare sales should show continued good sales growth in the upper single digits. As an update on the announced Microtek acquisition, the proxy has been sent to Microtek shareholders and the shareholder vote is scheduled for November 9. If we receive a favorable vote, the acquisition is expected to close very soon thereafter. We've been working on integration planning and are ready to go when the deal is closed. We remain very excited about the prospects for Microtek and the potential our combined operations offer us and our customers. Food & Beverage delivered a solid third quarter performance with sales up 8% led by strong performances in the meat and poultry, food and beverage segments. Excluding last year's acquisition of DuChem, sales rose 7%. The meat and poultry market was strong, reflecting significant customer gains. Corporate account wins, better pricing and new products have contributed to dairy plant sales growth. The Food & Beverage business also saw strong growth reflecting new account sales and the strength of our corporate account relationships. We expect continued good sales trends into the fourth quarter of 2007 as we focus on new account acquisition and continued expansion of our anti-microbial platform. Water Care sales were flat in the third quarter. Gains in boiler and cooling treatment as well as filtration were offset by lower waste water application sales. The EcoCare sales grew 8%. New products sales using advanced technologies like Rain-X and solar power combined with increased pricing to lead results. The EcoCare expects new account gains in its existing markets along with new market opportunities and investments in the sales force to yield further good sales growth in the fourth quarter 2007. Sales for U.S. Other Services increased 10% in the third quarter. Pest Elimination sales continued to show good growth rising 9%. New account activity was driven by good corporate account gains while non-contract service growth also increased in the quarter. We also continue to develop new programs targeted at specific market needs that provide better circle the customer penetration and better growth opportunities for Pest Elimination. We expect Pest Elimination to show similar growth in the fourth quarter. GCS sales increased 12% showing strong growth and continued improvement in the sales momentum. For perspective, sales growth was 1% in the fourth quarter 2006; 5% in the first quarter 2007 and 7% in the second quarter. Sales to corporate accounts are trending well and the sales pipeline looks attractive. The new business systems were brought on line in the quarter. We're incurring some extra start-up costs due to training and gearing-up productivity on the new system and expect these costs to diminish over the next several quarters, as our people gain experience with the new productivity tools. We expect continued double-digit sales growth in the fourth quarter 2007 and into 2008 with improving profitability. Measured in fixed currencies, international sales increased 6%. When measured in dollars, reported International sales increased 13%. Europe, Middle East and African sales rose 5% in the third quarter at fixed currency rates. When measured in dollars, EMEA sales increased 12%. Europe's Institutional sales showed a modest gain. Good performances in developing countries in the East as well as the West were offset by slow results in France and Germany and weak floor care sales. Sales benefited from new account gains and growth in housekeeping. These are partially offset by flat consumption in catering accounts for manufacturers and declines in janitorial. Food & Beverage sales showed a good gain with growth in all F&B segments. Healthcare sales showed good growth, infection control and clean room products performed well. Textile Care sales continued to show good growth with good customer gains and sales of water and energy conserving technology driving the higher sales. The Europe pest business saw flat sales in the quarter. Third quarter sales in part reflected the elimination of a couple of larger but low margin contracts. We continue to work on improving the sales teams, new contract growth and account profitability. In addition, service quality measures have continued to show improvement. As an update on our work to improve Europe's performance, the business information systems development work is making good progress and is in the build stage. Multiphase rollout will begin in summer 2008. We've begun rolling out the sales force training metrics and technology efforts. While these will take time to implement, they are critical to the fundamental improvement we need to make to achieve better growth in Europe. We remain confident these actions as they are implemented will lead to higher sales and profit growth and a more effective business model. We look for Europe's fourth quarter fixed currency sales to show modest growth but look for better results in the coming quarters and years as the actions we are implementing take hold. Asia Pacific sales grew 9% in fixed currencies. Excluding acquisitions, sales increased 7% as growth in East Asia, Australia and New Zealand drove results. When reported in U.S. dollars, sales increased 16%. From a divisional perspective, Institutional's good sales gains were driven by new products including the launch of a new warewashing platform in Japan and by growth in the MarketGuard program for retail stores. We achieved important account wins in casinos, catering, hotels and restaurants as well as food retail markets. Food & Beverage sales grew due to strength in East Asia and New Zealand. Both the beverage and brewing sectors continue to show good growth in Asia. The Food & Beverage division overall has benefited from increased product penetration and account gains. Asia Pacific expects continued good sales gains in the fourth quarter. Third quarter sales for Ecolab's Canadian operations were up 4% in fixed currency and rose 11% measured in U.S. dollars. Institutional sales were solid, benefiting from corporate account gains, accelerated street growth and new products. Food & Beverage sales also improved while Pest Elimination and Vehicle Care grew double digits. Latin America reported an outstanding performance with sales rising a very strong 13% at fixed exchange rates. When measured in U.S. dollars, sales rose 19%. Sales were excellent throughout the region as all divisions rose double digits. Institutional growth was driven by new account gains, increased product penetration through the 360 degrees of protection program as well as continued success with global and regional accounts. Food & Beverage sales reflected strong demand in the beverage and brewing markets as well as the benefits of new accounts. Pest Elimination continued its outstanding performance throughout the Latin America recording yet another double-digit gain for the quarter. Further to bolster our opportunities in Latin America we expect to add to our portfolio of effective customers solutions in the coming quarters. Overall, we expect healthy growth trends to continue in Latin America, though the fourth quarter will face a tough comparison to last year's very strong 20% sales gain. We currently expect Latin America sales to show a more moderate comparison in this year's fourth quarter. Turning to the expense side of the income statement. Third quarter gross margins increased 10 basis points to 51.2%. Strong improvement in the U.S, driven by pricing and cost savings initiatives was partially offset by slightly lower margins in the International segment, principally in Europe, where higher delivered product costs and unfavorable business mix not fully offset by pricing actions hurt results. SG&A expenses, excluding special charges, were 37.1% of sales, up 20 basis points from last year. The SG&A ratio reflected leverage from our healthy organic sales growth that was more than offset by investments in business efficiency, R&D, information technology and our new product line. Turning to the segment profits, Ecolab U.S Cleaning & Sanitizing segment operating income increased 13%, driven by better pricing, higher sales and improved cost efficiencies which were partially offset by investments in the business, including the costs associated with our new warewashing product line. Operating income with U.S Other Services increased 4%. Continued profit gains at Pest Elimination were partially offset as expected by extra start-up costs at GCS, due to training and gearing up on the new systems. We believe GCS will see sequentially lower operating losses beginning in the fourth quarter and in the 2008, as costs associated with the systems implementation decline and the business benefits from strong growth. International fixed currency operating income rose 9%. Latin American and Canada showed a strong increase. Europe's operating income was flat as sales growth was offset by higher delivered product costs and unfavorable business mix. Corporate operating expense includes special charges for the previously disclosed arbitration settlement, other non-recurring investments and corporate investments to optimize our business structure as part of our ongoing efforts to improve our efficiency and returns. We believe this category assists in better understanding and comparability of our fundamental business progress as we complete the work in Europe and when we record non-recurring events. Ecolab's third quarter consolidated tax rate was 28.2%, down from last year's reported 35.1%. Excluding an approximate $0.03 per share benefit from legislated corporate tax rate reductions in the United Kingdom and Germany, which reduced our net deferred tax liability and the tax rate impact from the arbitration charge, the adjusted effective income tax rate for the third quarter 2007 was 34.4%. We repurchased 0.5 million shares during the third quarter under our share repurchase program, as we worked toward better leverage on our balance sheet. Year-to-date we have repurchased 8.2 million shares and invested $365 million while doing so. When combined with our 2006 investments in share repurchase, we have invested more than $640 million in share buybacks and at prices below the current market. The net of this performance is that diluted net income per share for the third quarter was $0.46, up 7% over the $0.43 earned a year ago, and up 14% to $0.49 when adjusted for the discrete tax benefit and special arbitration charge. Turning to the balance sheet, Ecolab's total debt to total capital was 33% at September 30, compared with 29% reported a year ago. The net debt was 30% compared with 27% last year. Depreciation and amortization for the quarter was $73 million and capital spending for the quarter was $95 million. Looking ahead, we expect to fund the planned Microtek acquisition using commercial paper. Upon completion of the transaction, our total debt to capital will increase to approximately 38%. Longer term, we'll look at permanent funding options. That's a review of the third quarter. In summary, Ecolab delivered yet another strong quarter. Our performance was a result of continued solid sales growth led by our U.S., Asia Pacific and Latin America businesses, showing the strength and balance of our global business model. Our U.S. and International segment operating margins both rose once again in the quarter. We also continue to make ongoing investments in our sales and service force and double-digit investments in our R&D, information technology and other key areas to sustain our future growth. Looking ahead to the fourth quarter of 2007, we begin by cautioning that these statements are based on the current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of business acquisitions, divestitures, higher than anticipated raw material price increases, or other material events that may occur after the date of this webcast. This business outlook section should be considered in conjunction with the information on risk factors in our press release and our Form 10-K which lists risk factors that may cause results to differ. In the fourth quarter, we look for our U.S. operations to show continued solid momentum. In addition, new products like the rollout of Apex, our new warewashing platform that provides unparalleled performance and energy and cost savings for customers, as well as new on-premise laundry products in the U.S. and Europe and a new floor care line will provide further differentiation and opportunity will help drive future results. We look for our International sales to again be led by Latin America and Asia Pacific growth. We believe this will result in overall good fixed currency International sales growth. Gross margins should be around 50% to 51%. Selling, general and administrative expenses are expected to come in around 39% of sales. We look for improved margins in both U.S. business segments to more than offset a decline in the international margins and yield the consolidated operating margin increase. Net interest expense should be around $15 million, reflecting the additional cost of debt associated with the expected Microtek acquisition. We expect the effective tax rate in the quarter will be approximately 34% to 35%. Overall, currency translation is expected to benefit fourth quarter earnings. Also, as previously announced, we expect to record a $0.02 per share gain in the fourth quarter on the sell of a business in the U.K. As a result, we expect diluted earnings per share for the fourth excluding special gains and charges to show a 15% to 18% gain and be in a $0.39 to $0.40 range. For the full year we look for EPS, excluding the special gains and charges to increase 15% to 16% to a $1.65 to $1.66. As previously disclosed, Ecolab expects the special arbitration charge will be effectively offset by discrete tax benefits, recognized in the year and by the gain on the previously disclosed sale of a business. Also please note that the estimated tax rate discussed does not reflect the impact of discrete events that if and when they occur are recognized in the appropriate period. That concludes our remarks. This conference call will be available for replay at our website through November the 2nd. Operator, please begin the question and answer period. Question And Answer

Thank you. We will now begin the question and session. [Operator Instructions] The first question comes from the line of Laurence Alexander of Jefferies you may ask your question Laurence Alexander - Jefferies & Company: I guess the first question is on the recent... the JV with Site Controls. Can you talk a little bit about your longer term strategy in terms of energy and maintenance savings and whether there should be an extra platform for GCS?

Sure. As you know, one of the key factors for our customers, one of the key concerns they've got is energy savings as they go forward. Also as you know, of the total cost of cleaning, our products represent the smallest portion, labor and energy represent the larger portion. So as we are able to deliver better cost efficiencies for our customers, we are able to add more value to them. The energy prices have risen; that's became a greater concern to them. So through products such as Apex and the systems we have with them that help our customers focus on their energy and cost savings, we are able to bring more value through them. We think that Site Controls offers additional potential force over the long term to help further reduce energy costs for our customers. Laurence Alexander - Jefferies & Company: Just to drill into that a little bit more, you've mentioned in the past that you might eventually be moving into HVAC or air quality. And that is something that they have targeted as well. Is this sort of the... should we look for more work on the quality side of your business.

Well in the HVAC, we were referring to GCS on the repair side and in air quality, we are developing solutions on... for institutional and some other divisions and how they would deal with their quality issues on the interior. Site Controls would be different. They would be looking at the energy consumption of those. So that's something that we'll be developing with Site Controls, as we go forward. Laurence Alexander - Jefferies & Company: Okay. And separately, can you address the arbitration in pest and whether that is settled or if there is anything still pending and how that affects morale in the segment?

Well, in terms of where we're at, we have filed an appeal to vacate the judgment on the arbitration award. In terms of morale, I don't think it's had a negative impact on the morale of our folks in the field. Laurence Alexander - Jefferies & Company: Thank you.

Thank you, Laurence.

Next question P.J. Juvekar with Citigroup.

Hi Mike. This is Eric Katzman [ph] for P.J. I was wondering if you could talk a little more detail on how SAP implementation is progressing in Europe and when do you expect to see a material improvement in margin?

Well, as I mentioned, they have moved to the build stage for SAP. So we have not started implementation. That won't start until summer of 2008 and then we'll be rolling that out over a phase period which I think is about 18 months as we roll it out to those various countries.

And on Healthcare, how much top-line growth are you forecasting for 2008 and how much growth is weighted for the Microtek Medical?

We haven't done our plan yet for 2008. So, we don't have a formal forecast. But I think as we look to Healthcare, our objective is to have that business growing double-digits, going forward and obviously Microtek will be a part of that growth.

Thank you.

Next question John Roberts, Buckingham Research.

Hi Mike.

Hi John. How are you doing?

It seems like your stock came under some pressure when Henkel announced their acquisition of National Starch. Did you have any discussions with them during the past quarter about the disposition of their ownership?

Yes, we really have nothing to report there. I mean we talk to Henkel all the time but there is really nothing to report. They haven't stated what they are going to do with the shares and I think they will do it in a public way. So until then, we're just kind of waiting and seeing.

And then secondly, you mentioned that the wastewater market kind of weighed on the water treatment business. I know it's not big but I didn't think that wastewater is being a big part of your water treatment business.

Well to begin, our water treatment business is a small business for us. And the wastewater is a portion of what we do there. It's primarily in the F&B customers and if you lose a few accounts there in a small business, it has an impact.

Okay. Thank you.

Question, Gary Bisbee, Lehman Brothers.

Hi Mike. Couple of questions. You mentioned last few quarters, finished goods cost in Europe, in particular has been an issue, and I guess I wanted to dig into that a little bit. Is that just a product of the de-centralized structure you've had and you are changing there in efficiencies with that or is there some reason you're having a harder time getting pricing in Europe and in other areas?

Well I think it's kind of all those things. I mean first of all, we have said before that we don't view ourselves as having a highly efficient supply chain in Europe. The systems there have been set up on a country-by-country basis. So we don't feel that we have got the efficiencies of a highly integrated system throughout Europe and that's part of what we are working for with the ERP system that we are developing in Europe. Secondly, we've had raw material price increases as has others, throughout our raw material prices. That has affected us. And lastly, regarding pricing, that's one of the things that we're focusing on, the sales force training, is to enable our people to get them the right tools and training, to be able to be more aggressive on pricing and get the type of pricing that we need. So I think in answer, Gary, it's all... really all the three things that you touched on. And I think we've got effective programs in place for all three of those going forward. It's just that they are going to take time, and with the sales force training takes time, the ERP takes time, the logistics chains take time to happen.

Okay. Andany updates on the management transition you had there and how that's progressing. Is there... are there any issues within certain countries, now that you are trying to manage the whole thing from one place or is that going pretty much as expected as planned?

No, I think it's pretty much as expected. I mean we've said that we are going to our move to our regional headquarters in Zurich. That involves a limited number of people that will be involved in the move. In terms of the management changes, that's already been announced. Jim White was put in place. There was a couple of divisional shifts around there but nothing more than that. So, I think that right now we've got a good team in Europe and they have got a good plan and it's just implementing that plan and getting the time to have those results show up.

And then just one last housekeeping one. What... do you know approximately today, what the interest rate is on your commercial paper program, the rate you're paying?

No, 5%, 6%.

Okay.

Something like that. I can follow up on that one Gary when I check.

Thank you.

Next question Dmitry Silversteyn, Longbow Research.

Good morning Michael, a couple of questions. A number of that have already been answered but looking at your working capital, it's gone up in the quarter which was somewhat unusual looking back at what happened in the previous years. So I am just wondering if there is anything beyond that if you're building inventory anywhere or have any problems collecting accounts receivables.

No I think it's primarily the euro.

Okay, so just an impact of a foreign currency.

Yes. A: Dmitry Silverstein: Okay.:

Yes. Foreign currencies in general, euro in specific.

Got you. And then second quick question on GCS, can you give us an idea of what was the loss rate for the business in the fourth quarter... on the third quarter? And I know you talked about it being somewhat less so in the first quarter... in the fourth quarter. At which point in 2008 can we look for the business to start trending above breakeven?

Well, we said second half of '08 is when we expected to break in the profitability.

Okay and the first part of the question, what was the losses on the third quarter compared to the previous couple of quarters?

Loss in the quarter is about $5.7 million.

That's quite a bit, I guess it's going back over to beginning of the year in terms of losses. I thought they were supposed to trend down over the year. C: Michael J. Monahan: Well all we said is the third quarter would be the last quarter in which we saw a large loss. We've said in the fourth quarter... beginning in the fourth quarter we expect to sequentially improve profitability. And the reason of the third quarter was that size is we had extra costs as we completed the ERP system for GCS, number one. Number two is you are running two systems basically in 2007 versus 2006, you get the old system with the new system. And then third, you had additional people onsite at GCS because... basically trying to catch anything that fell out as you went through that implementation process. So we look for the fourth quarter profitability to improve over the third quarter. So to us, it was pretty much as expected to have things running this way.

Okay. Can I have a final...

And again that points to the top line improvement, which I think is the exciting part of GCS. As I said, we have seen a sequential improvement from one to five to seven, now to 12% top line growth, and we expect that to continue and as that top line continues, obviously you are going to see that impact profitability as well.

Fair enough. And then the last question on the balance sheet, obviously build up some cash there and turn down your debt, you are going to reverse that with the pending acquisition of Microtek. Are there other thoughts for using the balance sheet beyond just to offsetting dilutions with the share repurchases and kind of steady as you go, dividend increases? Your balance sheet now is getting to be somewhat under leveraged I would say. Is that something that you guys are thinking about?

Well first of all our target is 35% to 40% so especially when we get the Microtek acquisition in a few weeks, we expect to be at 38%, so great to be at the heart of that. And we have improved our total debt to total capital from around 30% I think, about year or year and a half ago up to 38% now. Then the last piece is as mentioned before, we're still waiting to see what Henkel does. So I think, we're in a pretty good shape. I think we are appropriately levered at this point and we still have enough room for acquisitions and other events going forward to, let us take advantage of those opportunities.

Did I read you correctly that if Henkel does decide to sell their shares that you will be standing ready to participate in the purchasing some way?

We haven't said what we're going to do. We want to see what Henkel puts on the table first and then we'll be able to make our judgment after that. What we've consistently said though is that whatever happens in this situation, we will do what we think is in best interest of the shareholders and we'd do a very shareholder friendly action.

Fair enough. Thank you, Michael.

Thank you. Hey Gary, an answer your question on the commercial paper, it's 4.75%. That's a little high.

Next question, Ed Yang, CIBC World Markets.

Hi, Mike.

Hi, Ed. How are you doing?

Great. On the a commercial paper funding for Microtek, is that something that you typically do with acquisitions or are you unsatisfied with some of the rates that are available for longer term funding?

No, it's just typical short terms funding for some time.

Okay.

Yes, and as we said... as we see things develop here we'll look at permanent funding options later.

Okay. On the... in other news, on the staph infections have been in the news lately particularly with schools. Can you mind us what products you sell for the education sector currently? And whether that mix will change going forward as you gain more infection control expertise?

Did you say specifically to the educational sector?

Yes, or in... I guess are there opportunities to leverage some of your new found expertise in healthcare to other areas where you do business?

Well I think education is purely one market, but healthcare is the one that's far bigger, as we've talked about before and you saw at our investor day HAI as healthcare acquired infections, is a huge issue in the U.S. It's killing over 100,000 people per year, cost of system over... well over $30 billion a year, and MRSAs are a significant part of that healthcare acquired infection problem. So for us, as we go forward, we'll be marketing not only our products but also training programs etcetera for healthcare schools, other places that have those problems, trying to address those solutions with our products and programs. We've got some products now. We want to develop more as we go forward to deal with the evolving issues in these markets.

And Mike as you integrate Microtek, are you going to be able to ramp penetration of some of Microtek's products into your other sectors as well? Are there any sort of transferability of those products?

Well Microtek's primary product is draping for equipments and patients. So I am not sure if there is much application outside of the healthcare area.

Okay thank you.

Thank you.

Next question Rob Koort, Goldman Sachs.

Thanks good afternoon Mike.

Hey Robert.

Question really around what's going on in Europe and how much of what you are seeing is the external environment? Or do you think it's possible some of it may be company specific and how have things changed do you think since your competitor pulled out of the U.S. and got more aggressive in Europe?

Well I don't think there has been much change in the competitive situation in Europe since JohnsonDiversey pulled out of the U.S. I think it's pretty much as before. In terms of what's going on in Europe, I think we are seeing where there... a forecast of the slowdown in the general economy but more specific to us, I think that we've said before that while our business in Europe has been doing okay, at 4% to 5% growth we don't think that's good enough. So no matter what the situation, we think that we want to get much stronger growth out of Europe. And that has been our focus and that's why we're doing investments that we're doing across the board in the top line on expenses to drive the bottom line, funding the training for the sales force, the tools for the sales force etcetera, such that we can get much stronger results.

Okay, thanks.

Thank you.

Next question Bruce Simpson, William Blair. Bruce Simpson - William Blair & Company, LLC: Hi Mike. Can you talk a little bit about raw material pricing, where that is, either this quarter or year-to-date versus year ago and then... but the balances between that incremental cost pressure and the incremental revenue you got from price hikes, how those have been trending against one another this year?

Well raws are relatively flat to 2006. They have come in, sort of as we have expected them to. In terms of pricing, our pricing has allowed us, as you can see in the gross margin to improve upon that raw material cost and expand our margins. Bruce Simpson - William Blair & Company, LLC: So, it sounds like the incremental revenue from higher prices has more than offset whatever additional costs you have from raws?

Exactly. Bruce Simpson - William Blair & Company, LLC: Okay that's all I have got this time, Mike. Thanks.

Thank you.

Question, Rosemarie Morbelli, Ingalls & Snyder. Rosemarie Morbelli - Ingalls & Snyder LLC: Good afternoon, Michael.

Hello, Rosemarie. How are you? Rosemarie Morbelli - Ingalls & Snyder LLC: I am fine. Thanks. Regarding the international business, one of your comments earlier was that you expected that at some point Europe would have or could reach 14% margin and it would be higher for Latin America and Asia Pacific. Where do we stand today? Since Europe is much larger than the other two. Does it have at this moment, a higher margin and the others are catching up and going to be above, or are they already above the European margin?

No, Europe margins are in the 9% range and Latin America, Asia Pacific are in the low double-digits. So they are already... Latin America and Asia Pacific are higher. And as far as improvement in Europe, what we've said is we are undertaking a number of efforts to improve those but those are going to take time to show up. We still think that there is a potential to get European margins into the 13% to 14% range, as you mentioned but that's going to depend on us getting the ERP systems in place in terms of us getting the sales force well trained, well equipped to go out and sell more aggressively etcetera. And all those things are at work but they take time to develop. We've just started the rollout to the sales and service force, the ERP doesn't get implemented until starting in the summer of next year. So it's going to take a little time to get those margins but we are confident that we are going to get there. Rosemarie Morbelli - Ingalls & Snyder LLC: Okay. Are those the only changes or are there other things you are doing in Europe that we should kind of, keep track of?

Well, we have talked about the major things that are going on in Europe, the major initiatives, we have got. So I think those are things that we are key. Rosemarie Morbelli - Ingalls & Snyder LLC: Okay. And then if we look at North America, since the end of the second quarter, have you seen in some of the markets you served the beginning of an impact from the economic slowdown?

If you look at lodging for example. Lodging is actually expected to improve in to 2008, if you look at rooms sold. If you look at restaurant trends, it's maybe down a 0.5% this year in terms of traffic but the last few months, we've actually seen improvement in it. So, overall we'd say it's a good, not great environment for restaurants and lodging. Rosemarie Morbelli - Ingalls & Snyder LLC: And when you look at food and beverage, this is probably where it would be affected more in terms of the breweries and those kind of areas.

Yes. We haven't seen any real fundamental changes in those markets. Rosemarie Morbelli - Ingalls & Snyder LLC: In the corporate expense of $6.8 million this quarter is higher than trend and I understand that you are investing more. But were there some things special, a higher expense, a higher level of investment in this quarter versus what is coming our way or is that close to $7 million the new booking number?

Well, corporate expense excluding the special charges was around 6... Rosemarie Morbelli - Ingalls & Snyder LLC: 6.8 you cited.

And we think that that's roughly what it's going to be for the foreseeable future. Rosemarie Morbelli - Ingalls & Snyder LLC: Okay, it was closer to 7 Michael, if I take out the one time tranche. So that brings us closure to $7 million and that is a good number to look forward to.

That will be... it will be around of 6, 6.5 range yes, might be a little bit less next year. Rosemarie Morbelli - Ingalls & Snyder LLC: Okay and then lastly if I may in the margin decline on the other services. Is it because of the higher expenses on GCS or has pest somehow lost a little bit of its margin?

No, it's GCS. Rosemarie Morbelli - Ingalls & Snyder LLC: Totally. Rosemarie Morbelli - Ingalls & Snyder LLC: Yes. Rosemarie Morbelli - Ingalls & Snyder LLC: And then, and so did margins there... pest for margin improved or was it flat?

Pest margins were similar to last year. Rosemarie Morbelli - Ingalls & Snyder LLC: Okay. All right, thanks a lot.

Thank you.

Question Chris Shaw, UBS.

Hey Mike, how you doing?

Good Chris. How are you?

Good. Just curiously on... in Europe you talked about mix. I just want to figure out maybe if I can figure it out in the future but what shifted in the mix exactly and what was driving that shift?

There is a little more equipment than chemical.

It's simply that?

Yes, in the F&B and the professional products area.

Okay. And then also... what's the... have you guys been adding sales force? Then sort of where is that standing right now because I know you guys often give a stat to that.

Well we expect for the full year to be up about 4% to 5%.

That doesn't change.

Yes. Really no change there. Pretty much across the board.

That's all I have. Thanks Mike.

Thank you.

[Operator Instructions]. Next question Mark Gulley, Soleil Securities.

Hey Michael. I have three questions. When I go back to the investor day, I think one of the strategies in Europe might have been to try to gain some market share at the expense of competitors, either JohnsonDiversey or smaller ones. Are you able to do that now with all the changes going on or is that on hold?

No, I mean we're still targeting to take share from the competitor, I mean. What we're trying to do is layer on improve training for the sales force to make them better than they are today. That's all. So, we continue to be aggressive. We continue to focus on taking share from competition. We continue to focus on delivering better service solutions to our customers. Just as we always have. We've got a new renewed focus on new products. So, what we hope to do is layer on top of the sales force, more effective tools and their arsenal to approach customers to be more effective in selling, better penetration, through customers, more products and solutions to customers.

Okay. Second question was can we expect to see more healthcare-related acquisitions given your emphasis on that... conference?

Absolutely.

And then can you provide any color there? What does the pipeline look like... what does the prices and deals look like? That sort of thing.

Well, I mean healthcare acquisitions are going to be more costly than the non-healthcare acquisitions, simply because of the growth and profitability of those businesses. In terms of the pipeline, we've got a number of deals we're looking at, but there's not much more I can say because as you know a deal isn't final until you've got to sign the deal.

Last question is... when you move people from Dusseldorf to Zurich, will it be a non-recurring charge you'll take for that relocation and will the smaller corporate staff in Zurich have a meaningful impact on European margins?

Yes there will be a charge. It's in the special charge, so that's viewed as a non-recurring factor for the relocation, for the people, the incentives to moves etcetera.

That was part of that in the third quarter, did I miss it or it's more like comp?

Just a tiny bit in the third quarter, there is more that will be shown in the future quarters but again that will show up in special charges.

Right, again will that have an impact on overall European margins when that's all taken care of, those costs are out or is it pretty de minimis?

Yes, it's a little too early to talk about that part of it. Again the move costs are special charges that will be specifically identified, since you will be able to see those.

Yes, thanks Mike.

Thanks. I mean ultimately Mark, as you know the reason for all this stuff is to improve European margins. We believe that the regionalization will allow us to grow faster and operate more efficiently in Europe and that's the goal of these activities that we're doing.

Thank you.

Thanks.

Next question, Robert Felice, Gabelli & Company. Robert Felice - Gabelli & Company: Hi Mike. Most of my questions have been answered; just have one or two more. You mentioned that GCS lost $5.7 million during the quarter, what's the year-to-date loss?

I've got to take a look here, about $13 million. Robert Felice - Gabelli & Company: Okay and then by how much do you expect to narrow that in the fourth quarter, off of the $5.7 million this quarter?

We haven't forecasted operating margins or profits by division, but we think will be improving over the fourth quarter. Robert Felice - Gabelli & Company: Okay but still, operating at a fairly large loss?

Well it will be a smaller loss than the third quarter, and we expect the loss to sequentially decrease through the second half of 2008 when we expect it to turn profitable. Robert Felice - Gabelli & Company: Okay I guess, what I am trying to pin down is as you look to '08, by how much of a tailwind do you expect GCS to be. So it looks like it will probably be somewhere around $16 million or $17 million loss for the full year. How much do you expect to narrow that gap in '08?

I think you probably are looking at $10 million to $12 million swing. Robert Felice - Gabelli & Company: Okay so probably $0.03 to $0.05 benefit?

Yes. Robert Felice - Gabelli & Company: Okay. Thanks for helping me with that.

Thank you.

Our last question comes from Jeff Zekauskas, J.P. Morgan.

Hi. Good afternoon, Mike.

Hi, Jeff.

At the beginning of your call, did you break out volumes, price, acquisition and currency for the company as a whole?

Yes, we did.

Could you remind me what those numbers were? Forgive me.

Sure. Volume and mix was 5%, pricing was 2%, currency was 3% and acquisitions were negligible.

And with oil prices having stepped up sharply over the past few weeks, does that make a difference to your raw material profile or does it not?

Yes, it does. But remember that one of the bigger issues is the capacity situation.

I am sorry, the capacity situation?

Well that, while oil prices are a significant factor in our raw material costs, probably the greater factor is that there is not an access to supply. And therefore as the dollars weaken, we have seen greater exports of product. There's now lot of excess capacity to allow our pricing to decline.

Just lastly, do you have longer term gross margin targets?

We do. I mean the target is basically higher. What we have said is, we would like to have them exceed the 2004 level but beyond that we don't have a specific numerical target because the way we view it is we want to continue to grow our gross margin. The second thing is as our model develops if we get more service businesses, that will have an impact on the gross margins because you know they tend to have lower gross but also lower SG&A and therefore you can have comparable, if not better, operating margins. What we focus on at the end of the day is the operating margins and that's where we are going to continue to focus our efforts to improve our results.

Do you have longer term operating margin targets?

We do. I mean our objective is to grow at about 50 basis points per year.

Thanks very much.

Thank you.

I would like to turn the meeting back over to Mr. Michael Monahan for closing remarks.

Well everyone thanks for your time today. We appreciate your attention and have a great week. Thank you.

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