Ecolab Inc. (ECL) Q4 2007 Earnings Report, Transcript and Summary

Welcome to the Ecolab Fourth Quarter 2007 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 the turn the call over to Mr. Michael Monahan, Vice President, External Relations. Sir, you may begin.

Thank you. 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 actually results to differ or described in the section of our most recent Form 10-K under Item 1A Risk Factors and in our fourth quarter earnings release. A copy of our earnings release is available on Ecolab's website at ecoloab.com/investor. Starting with some highlights from the quarter, reported fourth quarter 2007 EPS increased 32% reaching $0.45. Excluding special gains and charges and discrete tax benefits, earnings rose 18% to $0.40, hitting the top-end of our forecasted range. We enjoyed continued solid sales trends from our U.S. institutional, Pest, Kay, food and beverage and healthcare businesses. International also showed good sales gains as Latin America and Asia-Pacific rose double-digits, while Europe reported modest growth. We finished the year with EBITDA reaching almost $1 billion. It was a solid year of growth and important business development as we continued to deliver strong results while building for future growth. We expect another good year in 2008, as continued strong sales efforts, productivity and efficiency gains, pricing and cost savings drive growth, while acquisitions accelerate top line and create additional future opportunity. We'll use some of this strength in 2008 to make critical investments in our Europe and Asia-Pacific businesses to build future growth. For the full year, we look for pro forma diluted earnings per share, which excludes special gains and charges and discrete tax items, to be in the $1.84 to $1.88 range. These results will include about $0.02 of dilution from the Microtek and Ecovation acquisitions. Pro forma earnings, excluding that dilution, are expected to rise 12% to 14% to $1.86 to $1.90 per share. For the first quarter, we expect pro forma EPS in that $0.37 to $0.39 range. These results will include about a penny of dilution from acquisitions. Excluding that dilution, earnings per share are expected to increase 9% to 14% to the $0.38 to $0.40 per share range. In summary, we believe our business trends remain solid. We continue to expect yet another superior performance for Ecolab and believe that we are making the right investments to sustain attractive growth for the future. Turning to the details, Ecolab's reported consolidated sales for the fourth quarter rose 13%. Looking at the components, volume and mix were up 5%, pricing was up 2%, currency added 5% and the impact of acquisitions was 1%. Sales for U.S. Cleaning and Sanitizing operations increased 11%. Excluding the Microtek acquisition, sales rose 8%. Institutional sales rose 7%, showing good results. The division compared against a very strong period last year, when sales rose an exceptional 14% as we brought on significant business from a competitor. Fourth quarter 2007 sales growth continued to be healthy into the various end market segments including restaurants, healthcare, lodging and travel, as we effectively leveraged our customer demand for premium results, and energy and cost reduction with our legendary premium service, aggressive sales, new products, and increasing solutions per account to drive growth. We continue to make investments in new products, programs, and the sales force training and technology to help drive better service and increase customer solutions. The Apex rollout continues go as planned adding to growth in our market differentiation as it provides superior results and demonstrable costs savings to customers. The reaction by customers to this award-winning product has been excellent. We believe the fundamental outlook for institutional remains solid. Basic restaurant traffic trends as reported through November are similar to those we have experienced over the past couple of years. Though that may change with the softening economy, we believe our opportunities to grow within our customers' operations continues to be very attractive. Further, hospitality remains solid. In 2008, institutional will leverage its broad customer base, unit expansion by the chains, increased customer needs for solutions at effectively reduced costs and improved results, an aggressive sales efforts, to drive further superior growth and market share gains. We look for continued good growth from institutional once again in 2008. Kay's fourth quarter sales grew 9%. QSR's underlying business remains healthy with good ongoing demand for major, existing, and new fast-food chain accounts. Food retail business also showed good growth. New products and programs like the introduction of solids for QSR along with customer wins continue to bolster Kay's results. We expect these to help drive continued strong gains in the first quarter for Kay. Textile Care sales rose 5%, as sales growth for the division returned to more trend line rates of growth following annualization of last year's significant account wins. Textile Care added new plans from existing customers, continued to drive new product solutions and broaden its markets. We believe these initiatives will enable Textile Care to continue to produce further growth and better customer solutions. Reported fourth quarter sales for the Healthcare division more than doubled reflecting the impact of the Microtek acquisition in November. Excluding the impact of the acquisition, Healthcare sales rose a very strong 16%. Organic sales growth reflected continued solid end market demand for infection control products and expanded penetration within our existing base of group purchasing organizations and healthcare purchasing systems. Our wireless anti-bacterial and non-medicated skincare products showed continued double-digit growth. As previously announced, we completed the acquisition of Microtek Medical in November 2007. The integration is going very well and Microtek sales continue to show strong growth. Further, we have begun our efforts to cross sell our products and leverage Microtek's very strong operating room expertise. Looking ahead, first quarter 2008 Healthcare sales should show continued good sales growth and be bolstered by the addition of Microtek. Food & Beverage delivered a solid fourth quarter performance with sales up 9%, led by strong performances in the meat and poultry, food, beverage, and agri segments. The meat and poultry business enjoyed a robust quarter reflecting significant customer gains. Corporate account wins, better pricing, and new products have contributed to dairy plant sales growth. The Food & Beverage businesses also saw strong growth reflecting new account sales and the strength of our corporate account relationships. We expect continued good sales trends in the first quarter of 2008 as we focus on new account acquisition and continued expansion of our anti-microbial platform. As detailed in our release last week, we acquired Ecovation, a leading provider of affluent water treatment and renewable energy solutions, primarily for the food and beverage manufacturing industry in the U.S., including the diary, beverage, and meat and poultry producers. We're very exited by the potential it offers. Ecovation will help our customers effectively deal with increasingly difficult affluent treatment issues, as well as use our technology to help turn some of that waste back into energy that can be used by the plants in their operations. Ecovation is a rapidly growing company. Further, it will build on our existing expertise in engineering work that we have long performed in developing clean in play systems for our food and beverage plant customers. 2007 sales for Ecovation were approximately $50 million, having grown 10 folds since 2005. 2008 sales are expected to exceed $100 million. U.S food and beverage market alone for these waste solutions is estimated to exceed $4 billion, with fragmented competition providing us lots of opportunity for future growth. We expect this acquisition to be dilutive by up to $0.01 per share in 2008, due in part to profit on projects in process going to the balance sheet, similar to inventory step up in other acquisitions. We look for Ecovation to show a rapid growth and attractive profitability as we further develop its potential over the coming years. Water Care sales declined slightly in the fourth quarter. Gains in cooling water treatment as well as filtration were offset by a lower sugar and waste water application sales. We expect a continued focus on leveraging our circle the customer strategy, particularly within Food & Beverage to deliver sales improvement in the coming year. Vehicle Care sales decreased 1%. Results were impacted by unfavorable weather in November and December, which offset better pricing and sales of our new Rain-X and Solid Power products. Vehicle Care expects new account gains in its existing markets along with new market opportunities and investments in its sales force to yield good sales growth in the first quarter of 2008. Sales for U.S. Other Services increased 10% in the fourth quarter. Pest Elimination sales continued to show good growth, rising 11%. New account activity was driven by good profit account gains while non-contract service growth also contributed to the quarter. We continue to develop our programs to target specific market needs to provide better circle the customer penetration and better growth opportunities. We expect Pest Elimination to show similar good growth in the first quarter. GCS sales increased 8%, showing continuing good sales momentum. Sales to corporate accounts are developing well and the sales pipeline continues to look attractive. The new business systems are fully on line and we are now working through the system stabilization and optimization phase of the implementation. We're already seeing the benefits of the new system through better business transparency, which has helped our business decision making. The new systems give us improved transparency into customer account profitability. As part of the improved analysis, we identified and completed a contract change in the quarter that will improve contract profitability for 2008 and beyond. We incurred a charge to revise that contract. Adjusting for that contract charge and the system stabilization and optimization costs, GCS profitability improved over the third quarter and last year. Productivity is improving on the new systems and we expect significant gains as our people continue to build experience with new productivity tools. We expect continued good sales growth in the first quarter of 2008 and the year with improving profitability as 2008 progresses. Measured in fixed currencies, international sales increased 5%, when measured in dollars, reported international sales increased 16%. Europe, Middle East and Africa sales rose 2% in the fourth quarter at fixed currency rates. Excluding acquisitions and divestures, fixed currency sales rose 3%. When measured in dollars, EMEA sales increased 14%. Europe's institutional sales were flat. Good performances in developing countries in the east as well as the west were offset by slow sales in France and Germany. Flat consumption in catering accounts for manufacturers and declines in janitorial also impacted sales. Institutional launched Wash 'n Walk in the fourth quarter and we expect it to help drive sales in 2008. In addition, we have brought some talent, as well as selling programs from the U.S. Institutional division to Europe to help improve sales execution. These actions along with the fundamental sales training we have underway and our technology improvements are expected to help improve growth as they take hold. Food & Beverage sales showed a strong gain, benefiting from good product growth and equipment sales. Healthcare sales also showed good growth as infection control and cleaning room products both performed well. Textile Care reported moderate gains in the fourth quarter, while the Europe Pest business had lower sales. The decline in Pest in Europe primarily reflects the sale of our UK property services businesses in the third quarter, but also includes the elimination of a couple of larger but low margin contracts in the UK. Looking forward, we are beginning to see improvements in key metrics, including service delivery in the UK and new contract sales growth in France. As an update, on our work to improve Europe's performance, the business information systems development work continue to move ahead and is in the build stage. Multi-phase rollout will begin in summer 2008. We have also began rolling out training, metrics, and technology upgrades for the sales force focused on our key countries. While these improvements will take time to implement, they are critical to the fundamental development we need to make to achieve better growth in Europe. We are also getting our new regional headquarters prepared and expect to make the major staffing relocations this summer, as we build a Pan-European operating structure. While a cost to 2008, 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 first quarter fixed currency sales to show modest growth, but look for better results in the coming quarters and years if the actions we are implementing take hold. Asia-Pacific sales grew 10% in fixed currencies. Excluding acquisitions, sales increased 8% as growth in East Asia, China, Australia, and New Zealand drove results. When reported in U.S. dollars, sales increased 20%. From a divisional perspective, institutional strong sales gains were driven by new products, including the launch of a new warewashing platform in Japan and by growth in the Market Guard program for retail stores. We achieved important account wins in casinos, catering, hotels, and restaurants, as well as the food retail markets. Food & Beverage sales also enjoyed strong growth lead by East Asia, Japan, and New Zealand. Both the beverage and brewing sectors continued to show good growth in Asia. The Food & Beverage division benefited from increased product penetration and account gains. Asia-Pacific expects continued strong sales growth in the first quarter. Fourth quarter sales for Ecolab's Canadian operations were up 6% in fixed currency and rose 21% when measured in U.S. dollars. Institutional sales were strong, benefiting from corporate account gains, accelerated street growth, and new products. Food & Beverage sales also improved, while Healthcare, Pest Elimination, and Vehicle Care each grew double-digits. Latin America has 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 Latin America. Overall, we expect healthy growth trends to continue in Latin America. We expect Latin American sales to show another double-digit gain in the first quarter. Turning to the expense side of the income statement, fourth quarter gross margins decreased 20 basis points to 50.2%. Excluding the impact of Microtek, gross margins would have been slightly favorable. Improved U.S. margins, driven by sales leverage, pricing and cost savings initiatives, were offset by lower margins in the international segment, principally in Europe where pricing gains were more than offset by higher delivered product costs and an unfavorable business mix. SG&A expenses were 38.7% of sales, 30 basis points below last year. The SG&A ratio reflected leverage from our healthy organic sales growth that more than offset investments in business systems and efficiency, R&D and information technology. Turning to the segment profits; operating income for U.S. Cleaning & Sanitizing increased 29%, driven by the higher sales and improved cost efficiencies and a resulting strong operating leverage which more than offset investments in the business. Operating income for U.S. Other Services decreased 5%. Continued profit gains at Pest Elimination were offset by systems deployment and stabilization and optimization costs in GCS, and a charge to exit an unprofitable customer contact. International fixed currency operating income was off slightly declining 1%. Latin America and Canada showed strong increases. Asia-Pacific profits were off due to infrastructure investments in Japan and China. Europe's operating income was down as sales growth was offset by higher delivered product costs and unfavorable product mix. Corporate segment includes special gains and charges which are also reported separately on the income statement. Special gains and charge for the fourth quarter included gains from a previously announced sale of a business in the UK of $5 million and the sale of a minority investment in a U.S. business of $6 million. Special gains and charges also included non-recurring costs related to relocation of the workforce to the new regional headquarters in Zurich. In addition to special gains and charges, the corporate segment included investments in the development of business systems and investments we are making to optimize a business structure as part of our ongoing efforts to improve our efficiency and returns. These investments partially offset the special gains and charges resulting in a $300,000 gain to the corporate segment in the quarter. Ecolab's fourth quarter consolidated tax rates was 29.7%, down from last year's reported 34.9%. Excluding discrete tax benefits from audit settlements of approximately $0.02 per share and the tax impact of the business divestments, the adjusted effective income tax rate for the fourth quarter 2007 was 34.3%. The decrease in the adjusted fourth quarter effective tax rate was due primarily to U.S. tax legislation, international tax rate reductions, and tax planning efforts. The net of this performance is that reported diluted net income per share for the fourth quarter was $0.45, up 32% over the $0.34 earned a year ago. Pro forma earnings were up to 18% to $0.40 when adjusted for the discrete tax benefit and special gains and charges. Turning to the balance sheet, Ecolab's total debt to total capital was 34% at December 31, compared with 39% reported a year ago when we pre-funded some euro debt. Adjusting for that pre-funding, the comparable prior year ratio was 29%. Our net debt at year-end 2007 was 31%. Following last week's acquisition of Ecovation, our total debt to total capital rose to 39% with net debt of 36%. Depreciation and amortization for the quarter was $76 million and capital spending for the quarter was $85 million. As you may have seen last week, we issued $250 million of seven-year notes due in 2015 with a 4.875% coupon to pay down commercial paper and for general corporate purposes. That's a review of the fourth quarter. In summary, Ecolab delivered yet another strong quarter. Our performance was the result of continued strong growth led by our U.S. and Latin America businesses, showing the strength and balance of our global business model. We also continue to use that strength 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 our guidance for 2008, we begin by cautioning these statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include potential impact of additional business acquisitions, divestures, higher than anticipated raw material price increases or other material events that may occur after the day 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 2008, we expect another good year with solid sales growth, continued strong sales efforts, productivity and efficiency increases, pricing and cost savings, while acquisitions accelerate our top line in future opportunity. For the full year, we look for pro forma diluted earnings per share, which excludes special gains and charges and discrete tax items, to be in the $1.84 to $1.88 range. These expected pro forma earnings include approximately $0.02 of dilution from Microtek and Ecovation, putting pro forma earnings excluding dilution up 12% to 14% to $1.86 to $1.90 for the year. Please note these are pro forma numbers, which excludes special gains and charges and discrete tax items that we presently expect to net to a range of 0 to a positive $0.03 per share in 2008. This income statement line will include the sale of a plant in Europe that is expected to close later this year, as well as costs associated with the establishment of our European headquarters and move to Zurich. We think 2008 to be summed up as a year in which we continue to drive strong base business performance, which enables us to undertake the heavy investment underway in Europe to lay the foundation for improved top line growth, to start the new systems rollout and establish a regional headquarter in Zurich, Switzerland. It will also be a year in which we integrate two recently acquired businesses that will create exciting new growth opportunities for Ecolab. In the first quarter, we look for U.S. operations to show continued solid momentum. New products like the ongoing rollout of Apex, our new warewashing platform that provides unparalleled performance and energy and cost savings for our customers, as well as the first solids for QSR. New on-premise laundry products in the U.S. and Europe, and the new floor care line will provide further differentiation and opportunity and will help drive results. We look for international sales to again be led by strong growth from Latin America and Asia-Pacific as they offset moderate gains from Europe. We believe this will result in overall good fixed currency international sales growth. First quarter gross margins should be around 50% and reflect the impact of acquisitions. Selling, general, and administrative expenses are expected to come in around 39% of sales. Net interest expense should be around $16 million, reflecting the additional cost of debt associated with the Microtek and Ecovation acquisitions. We expect the effective tax rate in the quarter will be about 32% to 33%. Overall, currency translation is expected to benefit first quarter earnings. Finally, a reminder that the two recent acquisitions will be about $0.01 per share dilutive in the first quarter. As a result, we expect pro forma diluted earnings per share for the first quarter, excluding special gains and charges, to be in the $0.37 to $0.39 range, compared with $0.35 earned a year ago. Pro forma earnings, excluding the impact of dilution, should increase 9% to 14% to $0.38 to $0.40 per share in the first quarter. Looking to the remaining quarters, we expect sales and operating profit improvement in our U.S. Cleaning and Sanitizing, U.S. Other Services, and the international reporting segments will show progressively better year-on-year improvement through 2008. We expect good organic sales growth from our ongoing U.S. Cleaning and Sanitizing businesses along with profit improvement to more than offset dilution from the Microtek and Ecovation acquisitions. But the impact of that initial acquisition dilution may flow otherwise strong reported U.S. Cleaning and Sanitizing profit growth. US Other Services should show strong gains for the year as GCS improvement benefits the segment. International segment operating income is expected to show modest first-half growth, improving in the second half. Overall, we believe good growth from our operations along with improvement in our tax rate will yield increasingly attractive year-on-year EPS gains, driving yet another successful year at Ecolab. Also, please note the estimated effective tax rate discussed and its effects on reported EPS does not reflect the impact of discrete events that even when they occur are recognized in the appropriate period. And now here is Doug Baker to make a few comments.

Good afternoon. Sorry, we have a microphone challenge here. I just wanted to offer a couple of comments and then we will open for Q&A. First of all, my perspective was '07 was a very good year for us. The business and team performed exceptionally well. We beat all three of our financial objectives and, as Mike just went through, we nailed EPS up over 16%, return on beginning equity was over our 25% target, and we remain an investment grade balance sheet. We also, probably most importantly, leave '07 with a very solid position. Our new business initiatives and our new innovations, particularly Apex, warewashing, dry-ex [ph], lubricants and F&B are perfectly positioned, particularly for the environment that we are dealing with moving into 2008. In a nutshell, the equation here is we can drive and focus on total cost reduction for our costumers and we ask them to give us $0.20 to $0.30 so that they can save a buck half on water and energy, and this is a very appealing pitch right now given the high energy costs and the overall softness. Also, Microtek and Ecovation acquisitions, I believe, are great businesses. We love their positions and we love the fact they are in the healthcare and also on the sustainability markets. These are the right markets to be in. We also have a better handle on our business than we ever had before. I think we have got a great handle on what our strengths are, what our opportunities are, what our weaknesses are, and what our threats are. Now, moving to '08, our assumption all along has been that 2008 would bring tougher market conditions. The bad news is it looks like our assumption was right. The good news is our business is as well positioned as it can be. We've got segment geographic diversification, we've got solid underlying moment, we got the right new product and new businesses, particularly given the time, we've got solid moment in a number of our businesses, and the team is focused on the environment and the challenge ahead. We are also continuing to invest in the long-term. Europe transformation is well under way and we love the end or the pot of gold that we see. Asia management infrastructure bets are in place and are already starting to bear fruit. Additionally, we are heading up on the corporate account sales side because we see great opportunities here, particularly in this market. So, we are confident and I'd also say, appropriately vary of the market. We expect what I'd call an unusual year and we are prepared to meet it. So, as we ahead forward, we've got I believe the right plans, we are moving, we view this is a market, this can to have some potholes that we will navigate around, but just as importantly, there's going to be some unique opportunities that we also want to capitalize on. Given our strength, our team, and our market position, frankly we expect to capitalize and gain share as we move on throughout the year. So, those are my thoughts in '07 and '08 and with that, I'll put it up to questions. Question And Answer

Thank you. [Operator Instructions]. Our first question today comes from Mike Harrison with First Analysis.

Hi, good afternoon, gentlemen.

Hello.

Dough, regarding the Ecovation acquisition, can you talk about how that equipment-oriented business fits into Ecolab's overall more service-oriented business model and may be what changes you are planning to make in the way you go to your food and beverage customers with this new product offering?

Mike, I guess I will characterize it as principally an engineering business backed by really strong intellectual property portfolio. And a little backdrop, a key part of our F&B offering has always been in-plant engineering, it's how we put in cleaning and place systems, and it's been central to us building the position that we have had over the years. Ecovation is principally engineering, albeit it's got also a construction component, but that's been completely outsourced from Ecovation, and we continue to view that as an outsource option as we move forward. So, how are we going to restructure? There is not a great deal of restructure. Ecovation, all the folks have stayed with us, they are very excited about the possibilities. We have got great penetration into the markets. Their offering is best suited for us. So really what we are is on the gas, getting after talking to customers about the opportunities Ecovation technology represents in terms of driving savings for them. It could bring huge water savings, energy... renewable energy savings et cetera for food plant.

Okay. And then can you talk a little bit about your expectations for raw material cost inflation in '08? And obviously Europe is an area of concern when it comes to keeping pace with pricing, but any other geographies or divisions where you are concerned about your ability to keep pace with the higher cost to serve?

Yes, we estimate the raw materials in aggregate are going to increase two to three points. So that's the level of inflation we are going to have. Europe... here is what I would say. Europe is probably the place that is usually going to be under the most pressure. We will catch up over time via pricing and cost savings. So we may not catch up in any one quarter as these things roll through. We have seen this before in Asia, Latin America, in North America, and we are confident of our ability to recover and recapture these cost increases over time.

All right, thanks very much.

Our next question comes from Michele Morin with Merrill Lynch, your line is open.

Hi, good afternoon guys. This is Dan Fazuka [ph] on behalf of Michele.

Hey Dan.

Hello Dan.

Hi, just a couple of questions here. First one on Vehicle Care, could give a little bit more color what happened there? I think if I look back to the last conference call you had expected some decent growth there. So it looks like it was a bit of a disappointment; was that weather-related or there is something else going on there?

Yes, Dan, the business, we continue to increase the percentage of car washes served, and those metrics continue to move in the right direction. I mean, what we attribute it to is bad weather pattern in the 13 weeks. From an operating income and all the rest of it, it's was a very positive quarter for that business.

Okay. And then you've made... obviously been making some efficiency investments over the last few quarters or so. Any traction that you're seeing there, anything you can share with us in terms of anecdotal evidence?

Probably the best evidence is if you look at the underlying business, we continue to expand operating income margin and pro forma, I think, went up another 10 basis points, probably a third or fourth in a row that we have expanded total margin while making really significant investments in the business. So, I guess I pointed the macro picture as the best indicator.

Okay. And then just a follow-up to the earlier question on raw material costs. Did you mention how much that was up year-over-year in the fourth quarter, and for the full year?

It's kind of flat for the quarter.

It had regional differences. It was basically flat for the year, up in Europe on the year, and up in the second half versus first half.

Okay. And then just looking forward, obviously it's going to be tough environment '08 and potentially beyond that. Any thoughts as to your room for cutting... or room or appetite for cutting the R&D budget if you need to reduce cost in that type of environment?

Dan, here is what I would say. I mean, we... that's not where we would go. I think the investments we made in innovation pay out handsomely and we can't put innovation on a yo-yo, up and down. We clearly are going to have an... have already put in place very tight expense controls and the rest, because it's important that we protect our investments in these times. Just as we did when we had raws moving against this dramatically in '05, we continue to invest and deliver, right? We are doing a lot of the same things right now. We are looking at reprioritizing some projects that bring short-term benefit given the changing raw market et cetera. So we are doing all the things that I think you would have expect us to do, which is make sure we are doing the smart things in the short-term, but protecting the long-term investments.

Okay. Thanks very much guys.

Our next question comes from Chris Shaw with UBS.

Yes, hi, good afternoon.

Hi, Chris.

I guess, firstly, the margins in Cleaning and Sanitizing in the fourth quarter were up about 200 basis points; was there anything last year that affected that or is it just really that this strikes you as a good performance?

I think that there was actually a good performance out there. If you remember, last year we were benefiting from the volume gains out of JohnsonDiversey when institutional was up 14%. So we have got good leverage out of the business. I think if you look at the other divisions within Cleaning and Sanitizing, they are also doing better than last year. So, I think it was overall the broader volume and better performance across the board for C&S.

Did you guys say what kind of pricing you got? I missed that.

Yes, we said that consolidated was rounded up to 2%.

Okay. And then asking about Europe, I guess the underlying markets there really aren't... don't seem that much worse than the U.S., and so exactly do you have a feeling as why sales are sort of strong there right now? I known you are taking some actions, it looks like; I mean, do the European just not fall for the hard Ecolab sale and the shiny white coats or do you have any ideas exactly?

Well, think actually white coats originally came from Europe.

Oh, really?

No, I am just... here is what I would say. I think as we... if you go back, what we've talked about Europe is, we do not believe our sales execution has been as sharp in Europe. I will say it's gotten better. We are also making sure that we expand and have adequate, what I'd call, sales fire power in Europe. We had I think the wrong mix of folks focused on service and too few folks focused on bringing in new business. And we have been moving that needle. There was an improvement in '07 organic sales rate in Europe versus '06 and we planned to continue driving that. So, I don't believe the numbers we see out in Europe are not the numbers that we are planning on delivering over the long haul.

Okay, thanks. And then just quickly, when does Ecovation close the deal?

In the last week.

Okay, sorry. Thanks.

Yes.

Our next question comes from John Roberts with Buckingham Research.

Afternoon guys.

Hi, John.

Would you characterize your acquisition pipeline right now? You've closed on two, they look like they are going to be pretty good long-term with some short-term dilution. Do you have other things near-term?

Yes, John, this is always... I guess, if you went back a year ago, after a few lean years of acquisition activity, we said we expected the '07 pipe to bear fruit because we saw a change in the market, particularly in the mid-year. Yes, I mean, I think we are still... we like the opportunities that we have. We are going to continue to be choiceful, make sure that these are opportunities that have significant upside, and we like to price. Pricing is... the market has definitely changed, probably to the benefit of strategics; but it's not like stuff's out there for free.

Okay. And then on GCS, have they completed their customer review with the new systems or is it just the beginning of a process that it's the first one that popped out as they were getting into this?

Yes, I would say, I would characterize, will there be other customer situations? I am not going to say there won't be anything else as we go through the GCS story. I don't expect there is going to be anything of this size.

Okay, thank you.

Our next question comes from Gary Bisbee with Lehman Brothers.

Hey, guys, good afternoon.

How are you, Gary?

Good, thanks. Following up on that last one. Can you tell us what the size of that charge for the customer elimination at GCS was?

Yes, it was $0.5 million.

Okay. And then what... are you willing to share what the loss at GCS business was this quarter? And then are we still on track with your thoughts that you might have sort of a $12 million delta from '07 to '08 as that business continues to scale in terms of profitability?

Yes, the total loss was a little under $6 million for GCS in the quarter. Now, remember, that included, as we said, the charge on the contract as well as the stabilization and optimization costs, but we continue to expect that GCS is going to have improving profitability as we go through the year and as we go forward in the future year's. No, it's not going to be exactly a straight line, but for this year, we are expecting a delta of about $0.03 or so.

Okay. You said early on, Mike, in your remarks critical investments in Europe and Asia-Pacific. And then I think you later mentioned may be technology and sales force training. Is there anything more you are willing to share about what those investments are?

For Europe?

Yes, I think you said Europe and Asia-Pacific.

Well, I think we have been through the Europe investments, which include the sales force training, the technology, we're rolling out laptops and we will be rolling those out this year in Europe. And also metrics have started to rollout in Europe as well. And those things will be very critical to, as Doug said, trying to improve the sales effectiveness. In China and Japan, we have been brining in some headcounts, some ex-pats as well to try and strengthen the management team and marketing side of the business.

Okay.

Did I answer your question, Gary?

Yes, definitely. And then pro forma excluding the dilution from the acquisitions, you are guiding for 12% to 14% earnings growth and in recent quarters and at your Investor Day and what not you sort of talked about 15% being a target. Is the difference there just you are taking into account the fact that the U.S. and probably global economies will be somewhat weaker or is there anything else that really is driving that difference? I guess I am trying to gauge how conservative this may be relative to restaurant sales in the U.S. weakening and other economic factors. Thank a lot.

Well, really it's because we delivered 16 in the last two year's. So we figured we were overdue. Just kidding. I think 15% is absolutely our target and I think we have also said that it's not a governor, there is not a sealing on it and it's not an absolute floor. And so what we are trying to represent with our estimate looking out for the year is; one, we've got some transformation projects, we've got some, I think, very exciting acquisitions, and you've got some unstable markets. So, those are probably the best reasons that it's 12% to 14%.

Okay, thanks for all the color.

Our next question comes from Laurence Alexander with Jefferies. Your line is open. Laurence Alexander - Jefferies & Co.: Good afternoon.

Hi Laurence. Laurence Alexander - Jefferies & Co.: I guess, first of all, I just wanted to make sure I heard that right. It sounds as if you're pricing outpaced raw materials for the year by about 2%. Is that about right?

Not far off. Laurence Alexander - Jefferies & Co.: Okay. And then I guess just looking at --

And Laurence, that was 2007, right? Laurence Alexander - Jefferies & Co.: Yes.

Yes.

Yes. Laurence Alexander - Jefferies & Co.: And then for... digging into on the Kay side, what are you seeing in terms of QSR demand in January and February? And what's the outlook for... what are sort of the trend in terms of account win in that market?

Yes, I'll go on the back half. Here is what I'd say. We expect to have a very strong year in our QSR business in 2008, and it's principally driven, which is what you got to do in the business in total, is driven by account wins. And we've got softer markets like this. We go on share campaigns because we can't control absolutely how many people walk into a restaurant, how many people check into a hotel. What we can control is how many restaurants and hotels buy from us. And Kay has been on very aggressive new business campaigns and very successful ones, and we expect to have a very good year this year. Laurence Alexander - Jefferies & Co.: And then when you look at the Ecovation acquisition, how much of the expected growth is coming out of dairy versus related end markets? I know that the prior management team was targeting sort of the ethanol industry as the next leg for their technology.

Yes, and Laurence, we see 60% of the growth coming out of the dairy market, whereas you know, it fits well and it's got... we've got high penetration. Laurence Alexander - Jefferies & Co.: And can any of that technology then be applied eventually to your traditional lodging or... lodging or restaurant market?

We don't have a definitive answer there. We are obviously looking at it. There is a whole separate product line that really isn't as capital-intensive and more designed for smaller applications. And so we are looking at just that. But clearly, it's going to lead us to an understanding on how to improve the sustainability offering we have in food service ultimately as well. Laurence Alexander - Jefferies & Co.: Okay. And then one last quick one if I may is can you give the outlook over the next couple of years, say two-three years for whether there is any surges in CapEx, IT, or sales force training that might be sort of a little bit lumpy over the next two-three years?

Nothing we can think of, Laurence.

I think the history of our capital spend is probably a good guide. Laurence Alexander - Jefferies & Co.: Okay, thank you.

Thank you.

Our next question comes from P.J. Juvekar with Citi. Your line is open.

Good afternoon.

Hi, P.J.

I have a question on healthcare. Do you guys need to make more acquisitions to round out your portfolio, and what do you need to become the national provider in healthcare?

Was that do we, was that a question or did you say we need to?

What do you need to do? I mean, do you need more acquisitions?

P.J., what I would say is we are looking for additional acquisitions, but we don't need them to succeed. I think if an acquisition presents itself that's going to accelerate our ability to realize our vision, we will capitalize on it. But now given... we believe we've got the scale and also the offering we need to go push and drive this.

At your Analyst Day, Doug, you talked about having a suite of products where you can go in and sanitize an operating room. Do you feel that you have that suite of products today?

We've got much more of it in hand than not in hand, and we have a couple of products that we would like to add. We have the technology and we'll work on the registrations. And if an acquisition presents itself to accelerate that we would go that route too. But I don't think it would be fair to say that without an acquisition we can't get there.

Okay. And what are your sales in healthcare today and where do you see them going, let's say, by 2010?

Well, in the U.S. they are around 300 following the acquisition. And it's about 175-200 in Europe.

So, where do you see them in a year? Is that... you talked about billon dollar... making a billion dollar business, but near-term, three years, what do you see?

Well, we expect to be growing these businesses double-digit organically, right? And we also expect that we will end up adding some acquisitions down the road.

Okay.

The double-digit organic growth does not depend on buying more businesses.

Okay. And one more sort of question on strategic issues. This Ecovation acquisition, that's mostly in food and beverage for water treatment; do you have any ambition to get into broader water treatment area outside of just F&B?

We have a small water treatment business now. Our focus in this area is F&B and really a subset of what I think the traditional market calls the middle market.

Okay.

We are not interested in chasing power plants.

Okay, all right. Thank you.

Our next question comes from Bruce Simpson with William Blair & Company, your line is open. Bruce Simpson - William Blair & Company, LLC: Hi, guys

Hi, Bruce. Bruce Simpson - William Blair & Company, LLC: Just another involved here, Mike, can you give us the full year or quarterly operating cash flow and CapEx number again please?

Yes, the cash from ops was 254, depreciation was 76, and CapEx was 85. Bruce Simpson - William Blair & Company, LLC: Okay. And then focusing on GCS for a minute, I think you said the operating loss in the quarter was about $6 million.

Just under. Bruce Simpson - William Blair & Company, LLC: What does that make it for the full year?

I would put it at $18 million, $19 million. Bruce Simpson - William Blair & Company, LLC: So you talked about delta of perhaps $0.03 in earnings for 2008 over 2007, which I guess is kind of on the order of $12 million or something. So would it be safe to say that you are thinking the GCS still losses money on the operating profit line in'08, but at a rate of 0.5 or less than what it lost in '07.

Well, I mean 18 minus 12 would be 6 and is about the numbers we are talking about, and importantly would be the run rate in the second half. Bruce Simpson - William Blair & Company, LLC: Okay. And so as you exist the year here, I mean, how did that division live up to your expectation? Did you expect to still be putting this much into it and having it kind of exit the year with the largest quarterly loss of the year or is it a heavier IT investment that you had anticipated and where do you see kind of development of that business relative to one year ago?

I mean, Bruce, I mean, we were planning nor pleased with how we ended up performing in GCS for the year. If you breakout the quarter, certainly there were incremental one-time impacts moving from the four systems to the one. The one is up and running, and starting to provide us the transparency we hoped form, but it was a more expensive and a bit more painful than we have hoped for. So, no, we are not pleased with how GCS performed last year. They were off the plan and they were also off our expectations. Bruce Simpson - William Blair & Company, LLC: Okay. Given all that kind of lack of visibility in the business, what gives you confidence that you are going to be able to cut its loss in two-thirds here in the upcoming year? Is it because you've got the four to one system in the rearview mirror now or is it... are beginning to show a little bit better sales growth rate so that you expect a little bit more leverage or other cost savings?

Here is what I would say. We clearly have turned the top line on GCS, which ultimately is the key to driving this business to profitability. And even during the second half when we were going through the heavy systems integration, we continued to see tech productivity move the right way. We now have transparency in to the business, right? The system is up and running. And to make it clear, you can see where the rocks are much clearer. And so, when you look at this delta next year, one of the important things is obviously the cost of system integration are behind us, right? And they are not going to be foreseen in 2008. So with that said, we are going to have to keep driving the core metrics. We have customer satisfaction of 96% and we measure it after every call, the highest we have in the company. We have got growing top line, improved productivity, and now we got to get after some of the potholes that we have seen more clearly as a result of the system. Bruce Simpson - William Blair & Company, LLC: Okay. My last thing is you have got a very aggressive growth rate bundled into Ecovation; how is it going to go from $50 million to $100 million in sales? And what's the longer term opportunity, how big of a business can that be for you?

Bruce, I think we said in the release it chases an opportunity we equate to $4 billion. So, this is a sizable opportunity in front of us. And we have got tremendous penetration in the most attractive market, right? Existing relationships, we have got a lot of know-how of the operation, can probably best dimensionalize for them what kind of savings this technology can represent for the customer. It's a fairly long selling pipeline. So, you got transparency into what's on the books, but not yet installed. So, it's a lot easier for us I think to predict in some cases than other businesses.

It's also a big ticket item, Bruce; I mean, the typical plan is somewhere in the $3 million range. So, it adds up quick. Bruce Simpson - William Blair & Company, LLC: Okay. Is there some economic sensitivities there that you could have in jeopardy as the year goes on if we have a slowdown?

You can't say no to any economic jeopardy in any business. We've looked at this, the principal market, the food and beverage customers, typically have a fairly steady flow of capital expenditures. They aren't hit economically like some of the other industries or nearly as cyclical, plus what I would say is this has got a very attractive return profile, and given the increased energy costs and the pressure on water, I think that's going to more than offset the economic uncertainty.

And one thing I would add, Bruce, is as we mentioned, it's a $4 billion market, we are still very early in this. So, you've got a lot of room within the market at this point too. Bruce Simpson - William Blair & Company, LLC: Okay, thanks.

Our next question comes from Jeff Zekauskas with J.P. Morgan.

Hi, good afternoon.

Hi, Jeff.

You spoke of your Asian spending being something or the increased nation's spending which necked the international margins. Is that to develop an infrastructure in China in advance of the Olympics, and how much more of your spending... or how much did you spend this quarter than you did in the previous year quarter?

Jeff, as we said earlier, it's primarily revolved around additional people in terms of management and marketing people, some ex-pats that we brought over the strength of the management teams in both Japan and China. We are also doing some infrastructure stuff, but it's not related necessarily to the Olympics as much as it is to set ourselves for the next stage of growth for China. We've grown rapidly over the last five to ten years there, and it's time for us to build a better infrastructure for growth going forward.

In general, how much are you spending in Asia than you were in the previous year. How much more do you plan to spend next year?

I don't have the number in front of me, Jeff. It's several million dollars though, in additional costs just for the headcount. We've also got some... the infrastructure projects, but I just don't have the number in front of me on that.

Jeff, I'd say we look... we are bullish on China and Asia in general over the long haul as an emerging market, and we want to make sure that we continue to have the management team in place to see our way to leadership share. So, I think it's a smart investment in total for the corporation; it's not a sizeable investment, but certainly it will impact the business a size of China and Asia in total.

Secondly, in your international operations, is Europe more than half of international or less than half of international now?

Yes, Europe represents a third of our total sales, it's about two-thirds of our international sales.

Two-thirds of international. So, if Europe is two-thirds of... okay, that's fine. Europe is two-thirds of international. In terms of the headquarters, you are building I think in Switzerland, do you get any tax benefits from that in headquartering in Switzerland or is that where you are already?

We really haven't previously had what I would call a headquarter in Europe. We are establishing one in Zurich. And the reasons for this are a couple. What we are doing in Europe is basically building the model that we execute elsewhere, which is we want our business teams focused on sales growth, innovation, and taking care of customers. And we will run across the region major functions like product supply, R&D, finance and the like. This is exactly how we are setup in North America, and also set up in sub regions in the other parts of the world. So that's what we're establishing. The reason we're doing it is, it's a better business model and we know that it promotes growth. Secondarily, we're establishing it where there are other benefits and we do expect there will be tax benefits down the road, likely too.

So all this controversy now about whether the U.S. is in recession or not in recession, if you look at so many different markets, how does the economy seem to you? Does it seems to be in recession or not and are you seeing any signs of softness in your business or how is your business now different than what its was, say three months ago?

Jeff, there is not... these things don't move in real jagged steps so, our observation probably isn't that much different than anybody else. Clearly, the U.S. has got probably the early depression like conditions in housing, right, in housing-related products, some other markets are probably being affected. You can read the consumer spending and everything else. We rarely see one-to-one correlation, never have in the past in our business; we frankly don't expect too going forward.

I guess lastly, is South America bigger than Asia for you or is Asia bigger than South America?

Asia is bigger.

Asia is bigger.

About twice as big.

Twice as big, okay. Thank you very much.

Our next question comes from Dmitry Silversteyn with Longbow Research.

Good morning or good afternoon, I should say. A couple of questions; first of all, as you look at what's likely to happen in the U.S., whether we get into a recession or not, I think consumer spending probably will be down a little bit. I think we talked in the past about the fact that you don't really see a drop off necessarily in number of times people are dining out, but they do tend to move down market in tougher times. To the extent that your QSR business, your Kay business is a little bit lower volume, lower margin I should say than the institutional business. Do you expect to see a negative mix component; if in fact we do see tougher economic conditions and people tend to go to McDonald's more than Applebees?

We have been through this previously. The Kay business is a very profitable business on an operating income level. There are different structures under these businesses. As people trade and they don't need on a plate in order to rather have everybody eat on a plate that needs to be washed obviously. But I guess, back to your original point, here is what we're driving towards. The best way to offset these times, what we did in the past is to be on major offensive in term of getting new customers, which is exactly what we are doing. Well, there was a question earlier about QSR looks softer, QSR is going to be strong, all we know is we are going to drive in every one of these segments to increase our share of restaurant, hotel, hospitals and nursing homes. It's the only sure way to offset what might happen, which might be a slowdown.

Okay, thanks. And then the second question on GCS, going back to the $6 million loss that's shown in the quarter, which was a little bit hard, not a little bit, significantly higher than perhaps we were expecting before the quarter. And it sounds like you only expect to get about $12 million delta next year, so you are still going to end the year at loss. Are you still on target to get to breakeven by the fourth quarter and is it just that the loss is between now and the fourth quarter are going to be steeper or do you expect to come out of 2008, still what is being a money losing operation?

Yes. When we are talking about our plan numbers, which right, we intend to hit and by and large, we're successful hitting them. So with that said, if we hit those numbers; that would indicate that you'd be leaving the year to roughly a breakeven position.

Okay, so that's still your intention is to basically enter 2009 with this being a profitable business and getting more profitable?

Yes.

Okay. And then the follow-up question on that, you've made all these investments, you've put in new systems and you're trying to find national accounts so it should be going better now and you should see significant improvement. How long is your patience so to speak, or is there a timetable for this business to start surprising on the positive side rather than a negative side? Or are you at the point right now where you're pretty sure that this is a keeper and just a matter of tweaking the business model may be a little bit further to get it to perform solidly as the rest of your businesses?

Yes, I will give you two sentences, I guess. We believe in this business. It chases a big market in our sweet spot. And with that said, we're also business people and we don't have patience that runs on into infinity. So, if there is a time as we've said before where we do not believe in the long-term profitability of this business, like all others we won't keep it.

Okay Doug. And then final question on Ecovation. As you go from $50 million to $100 million this year in revenues and hopefully, sustain double-digit growth in that business going forward, what should we see on the margin impact then, where are the margins now roughly and at what time period do you expect them to get to the corporate averages, assuming that they are below corporate average currently?

Well, the margins when we bought the business were pretty comparable to get intangible amortizations, et cetera, drops it down, but we think within next the next 3 or 4 years we'll see them as Ecolab levels.

Okay. And in three or four years this would be presumably $150 million to $200 million, it's not going to be an insignificant improvement then?

Exactly.

Okay. Thank you very much guys.

Our next question comes from John McNulty with Credit Suisse.

Yes, good afternoon. Just a few quick questions. On the Microtek business, were the sales up roughly the same as what your overall business was, were they better, were they worse?

Microtek sales continued to grow in the upper single-digits for the period that we have had them, which is only 45 days. So it's been pretty much in line with our history. We think that obviously we are going to get better growth from that as we are able to develop cross-selling and other things with them.

Okay. You had also said earlier, I guess to one of the other questions; the healthcare business was roughly 300 U.S. and 150 to 200 in Europe. Does that include all the hospital Ecolab type healthcare applications or is it strictly infection control?

John, if I said 300, I was mistaken, 200 in the U.S. and about 175 or so in Europe. If we look at total Ecolab sale to the healthcare market, it's obviously much bigger, it's around 15% of the sale, but as you know that includes Pest Elimination, ware washing et cetera.

Okay, great. And then with regard to Europe and the work that you are putting in there, at what point do you think we should be seeing the typical Ecolab type revenue growth out of that area? Is it something we can start to look to upper single-digit in 2009 or is this an even longer fix than that?

Yes John, we take North America and we break it apart into different divisions. If you went to Europe, there we are running six divisions here; we've got divisions which are producing Ecolab like results right now. We've got regions that are double-digit. Really, what Europe boils down to, is we've got to get Germany and France particularly in institutional moving in the right direction. If you take those out, the business is growing, 6% plus for the year.

Okay. When do you think... maybe a better question then is when do you think those countries can be at more Ecolab type growth rates?

Yes. It will take a couple of years to get those guys up. But I think importantly, the rest of the business has responded in the last couple of years. We were growing 6% outside of those countries. So we are pushing those things. We expect and we're very confident we're going to see sales continue to tick up in Europe over the next two to three years.

Okay. And then just one quick question on the tax rate. It looks like you're looking for 100 to 200 basis point improvement on the tax rate. What's driving that and what should we think about in term of the tax rate going forward, is this kind of as low as to gets, should you kind of keep creeping lower or how should we think about that?

Well, we are getting benefits from the tax planning efforts that we've done, generally regarding our company in terms of structures and the way we organize the business. Number two is, we are also getting benefits currently from lower rates internationally, and specially for example, the German U.S. Treaty. And then third, as we go forward, we expect to get additional benefits, among them from the move to Zurich, as well as additional efforts will take in our tax planning areas.

Okay, great. Thanks a lot.

Thank you.

Our next question comes from Jonathon Grassi with Longbow Research.

All of my questions have been asked. Thank you.

Thank you. And our final question comes from Rosemarie Morbelli with Ingalls & Snyder Rosemarie Morbelli - Ingalls & Snyder: Good afternoon and thank you for taking my call. Back on the Ecovation, you talked about getting the profitability to Ecolab level over the next two or three years. Given the fact that you have a lot of construction which you are going to outsource, are we to expect gross margin to lower your overall gross margin, but then you make it at the operating income level.

Yes, Rosemarie, Doug. Absolutely, I mean the business and this is how this business has been run to-date. So this isn't a change in our business model, but absolutely and generally the way we compare businesses is at operating income margin level because there is such different structures in the P&L.

And Rosemarie, that's true for Microtek as well; that same situation where the gross margins are lower, but the operating margin potential is certainly as good as Ecolab. Rosemarie Morbelli - Ingalls & Snyder: So when you look at the first quarter gross margin of 49% to 50%, we don't really have the full impact of those two acquisitions in the first quarter, I mean we should, but it's not that much slower than what you had in the fourth quarter?

That's a gross margin question, correct? Rosemarie Morbelli - Ingalls & Snyder: Yes, Correct.

You've got the full impact of Microtek, and you've got two months of Ecovation. Rosemarie Morbelli - Ingalls & Snyder: Okay. So going forward for the balance of the year, your gross margin actually most likely will decline versus that of the first quarter. And then your SG&A will decline as well in order to show some operating margin improvement, am I looking at this properly?

Well, you've got some step-up going on within Microtek, which is temporarily impacting gross profit during the period, which goes away. And in Ecovation, the equivalent step-up falls into SG&A, so that officially inflates SG&A during the first quarter period and that too abates over time.

Well, it also goes back Rosemarie, as we've said before why we focus on operating income because as we enter into businesses, which have different models that can produce a light, you may have differences in what the gross margins and SG&A will have. So as we bring these businesses, which traditionally have had lower gross... lower SG&A, but good operating margins, you will have an impact on the gross margins, SG&A of Ecolab going forward. Rosemarie Morbelli - Ingalls & Snyder: Okay. Any particular competition on the Ecovation side, what are you dealing with mainly existing municipality, I mean treating the influential or can you give us a better feel as to the environment in which you are operating?

It's pretty fragmented Rosemarie, I mean there is one sole competitor that competes with... it's privately held I believe, that competes with Ecovation. Otherwise, you are looking at these big pools that they use, aerobic pools, so it's a pretty fragmented competition. Rosemarie Morbelli - Ingalls & Snyder: Okay. And if I understood probably you are going in there and you are going to build your own cesspool so to speak and they will benefit from a lower cost of operating it and savings in energy by reusing the spent water? Where is the energy savings?

Well, Rosemarie, it is an awful term, we wouldn't call it a cesspool. We call it an affluent treatment facility. Rosemarie Morbelli - Ingalls & Snyder: Yes, that's nicer.

Yes, it is, and it's a contained facility on the site in which the wastewater enters and through a series of pipes and filtration, the wastewater is cleaned and the waste itself is separated and that waste can be turned into energy such that a plant can actually reduce its energy usage by 30% by using that actual waste that comes off of the site. So I think that cesspool is not anywhere near an accurate statement, it is much more sophisticated than that and the cost savings benefits are much more attractive. Rosemarie Morbelli - Ingalls & Snyder: Okay, that is helpful. And on the Microtek side, are you making progress in dealing with insurances and other entities, I mean helping them look at hospital acquired infection? Is that something that, if my understanding is correct, you were expecting major issues coming from this which would help your selling those products by eliminating them? This is not very clear but...

Yeah, there are two things. One, I guess our expectation was the reimbursement process in the States, as well as in Europe would continue to evolve to the point where hospitals are reimbursed by procedure, versus for stays they get a fixed amount, that's in fact what is occurring and we figure that's going to be one of the keys long-term, because if you end up contracting an infection on premises, the hospital is going to bear the cost of the additional days in the hospital, which gives them a direct economic incentive to get after this, that is a direction that the market is moving in. From a Microtek standpoint, we are actually in our health infection standpoint, we are in trial with several large and very well known hospital groups, developing our thesis, if you will, at the our clinical data so that we can go out more broadly. Rosemarie Morbelli - Ingalls & Snyder: And how long do you think it will take for you to have enough data that you can go to every hospital in the country, and really push those product lines through.

One I would say we are already pushing. We are growing this business at double-digit and we are pushing it quite aggressively, and we plan to continue to do that. We aren't precluded from pushing it right now. The data frankly is just important, so that the hospital actually adopts the whole portfolio as opposed to selective pieces. So what we're trying to do is make sure that we do the homework so that we can go after this in a very aggressive way. Rosemarie Morbelli - Ingalls & Snyder: So you don't think that after you have done the homework and demonstrated that well, they are not getting reimbursed for this infection and that infection in turn you would suddenly in one particular year see an enormous trend?

Unfortunately that's not the way our business works. I mean lot of people consider double-digit enormous, I guess it depends on your industry. We need to keep driving this all, we would expect to be building this over several year period. We wouldn't expect 30% of the hospitals in any one year to flip to us. Rosemarie Morbelli - Ingalls & Snyder: Okay. And then lastly, if I may, could you give us more details on the changing mix in Europe, it seems as though it has deteriorated?

Pardon me. Rosemarie could you explain... you said the mix of -- Rosemarie Morbelli - Ingalls & Snyder: You said that one of the reason why is the margin declined in Europe, had to do with a negative mix and I was wondering what you were feeling less off which had higher margins then the rest?

Rosemarie, the mix comment on Europe was really related to equipment, sales on behalf of F&B. It is usually a good sign, because you are putting equipment in new accounts, and generally equipments goes in before they starts flowing. Rosemarie Morbelli - Ingalls & Snyder: Okay. Thanks for it. Thank you.

There are no additional questions at this time.

Well, thank you everyone for you attendance today and we wish you all take a good care.

Thank you for joining today's conference. That does conclude the call at this time. You may disconnect.