Ecolab Inc. (ECL) Q1 2008 Earnings Report, Transcript and Summary

Welcome to the Ecolab First Quarter 2008 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 Mr. Michael Monahan, Vice President, External Relations. Sir you may begin.

Thank you. Hello, everyone and thanks for joining us. This web cast teleconference includes estimates and 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 1-A risks factors and in our first quarter earnings release. A copy of earnings release is available on Ecolab's website at eqolab.com/investor. Starting with some highlights from the quarter, reported first quarter 2008 EPS increased 17% reaching $0.41. Pro forma earnings per share, which excludes special gains and charges and discreet tax benefits, rose 11% to $0.39, hitting the top end of our forecasted range. We also note that, as projected, dilution from the Microtek and Ecovation acquisitions was approximately $0.01 per share in the first quarter. We enjoyed strong organic earnings growth. Pro forma EPS from operations increased $0.06 in the quarter. The benefits from favorable foreign exchange and the lower tax rate shares and interest were fully offset by a higher delivered product cost. Further, the strong earnings also funded our Europe investments and acquisition cost. We enjoyed continued solid sales trends from our U.S. institutional, pest, food and beverage and healthcare businesses. International also showed good sales gain, as Latin America rose double-digits, Asia-Pacific enjoyed strong gains and Europe reported modest growth. We know that certain end markets in the U.S. have softened showing some headwinds from the overall economic slowdown. In response, we continue to focus on strong sales efforts, emphasizing products that provide customers with labor, energy and water savings as well as productivity and efficiency improvements and our pricing in cost savings to continue to drive our top line and bottom line growth. In addition, acquisitions are helping to accelerate our top line and create additional future opportunity. We continue to be optimistic regarding the full year outlook. We look for pro forma diluted earnings per share, which excludes special gains and charges and discreet 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 a $1.86 to $1.90 per share. For the second quarter, we expect pro forma EPS in the $0.45 to $0.47 range. These results will include between $0.01 to $0.02 of dilution from acquisitions. In summary, we continue to expect yet another superior performance for Ecolab in 2008, as we leverage our markets with aggressive sales and cost efficiency actions to deliver very attractive growth and show the returns while continuing to build for future growth. Turning to the details, Ecolab's reported consolidated sales for the first quarter rose 16%. Looking at the components, volume and mix were up 4%, pricing was up 2%, currency at 5% and the impact of acquisitions was also 5%. Sales for U.S. Cleaning & Sanitizing operations increased 15%. Excluding the Microtek and Ecovation acquisitions, sales rose 5%. Institutional sales rose 6%, once again outpacing the end market growth. We continue to see strong customer demand for energy and cost saving solutions. Products like our new Apex solids warewashing line are seeing success in new accounts, as well as with existing customers. When matched with our legendary premium service, the new warewashing program provides highly differentiated offering that helps customers offset rising energy and water cost, as well as meet increasing customer concerns for more sustainable products with improved environmental impact. We continue to invest in new products, programs sales force training and technology to help drive better service and increase customer solutions. We believe the fundamental outlook for institutional remains solid. We had anticipated that markets might soften in 2008, and while basic restaurant traffic trends, as those reported through February are similar to those that we experienced over the past year or so, with some shifting between concept categories or recently we have seen some signs of softening in those trends and in restaurant owner expectations. Though these trends may be further affected by a weakening economy, we remain confident that our fundamental opportunities to increase market share and grow our sales within our customers operations continue to be very attractive. Further, our lodging business and underlying trends, as reflected in the November room sold, remains steady. In 2008, we expect institutional to once again leverage its broad customer base, unit expansion by the chains, increase customer needs for solutions that effectively reduce cost and improve results and aggressive sales efforts to drive further superior growth and market share gains. We look for continued growth from institutional once again in the second quarter and throughout 2008. Kay's first quarter sales grew 2%, primarily reflecting the timing of distributor shipments and comparising it against the strong first quarter last year. The underlying business trend in quick service restaurants remains healthy, with strong ongoing demand from major existing and new fast food chain accounts. The food retail business continued to show strong growth with a double-digit gain. New products and programs like the introduction of solids for QSR, along with customers wins continue to bolster Kay's results. We expect these initiatives to help drive double-digit gains in Kay's second quarter. Textile care sales fell 2%. Textile care added new plans from existing customers, continue to drive new product solutions and broaden its markets. However, these gains were off set by lower volumes from existing accounts. We expect modest growth in the second quarter as textile care brings on new business and uses new technology to drive growth. Reported first quarter sales for the healthcare division nearly quadrupled, reflecting the impact of the Microtek acquisition. Excluding the impact of the acquisition, healthcare sales rose up very strong 17%. Organic sales growth reflected continued solid end market demand for infection controlled products and expanded penetration within our existing base of group purchasing organizations and healthcare purchasing systems. Our line of skin care products showed continued double-digit growth. Microtek sales were strong, rising double digits. The integration is going very well, as sales reps from our legacy healthcare and Microtek businesses are working together at the IDN and GPO levels and within specific healthcare departments, such as the operating room. We are working to develop additional opportunities to leverage relationships and achieve further sales synergies. Looking ahead, second quarter organic healthcare sales should show continued good sales growth and be bolstered by the addition of Microtek. Beginning in the first quarter 2008, and following the acquisition of Ecovation, we have combined our water care operations with those of the U.S. Food & Beverage division. Food & beverage customers are the primary targets for our water care sales efforts and there are synergies available between water care and Ecovation. We expect improved sales potential and efficiency, due to this consolidation of our industrial water activities within the same division. Food & beverage delivered a strong first quarter performance, with sales up 28%. Adjusted for the Ecovation acquisition, sales rose 8%. The quarter was led by strong performances in the Dairy, Meat and Poultry, Beverage and Agri segments. Looking at the segments; corporate account wins, better pricing and new products contributed to Dairy plant sales growth. The Meat and Poultry business enjoyed a robust quarter, reflecting significant customer gains. The beverage and agri segments also saw a strong growth, reflecting new account sales, the strength of our corporate account relationships and favorable agro market conditions. Water care sales were off slightly in the quarter, as new account gains were offset by lower sugar and wastewater chemistry sales. Ecovation, the leading provider of affluent water treatment and renewable energy solutions that we acquired during the first quarter continues to do well, more than tripling its sales and remains on track for substantial growth in 2008. We expect continued good sales trends for the food and beverage business in the second quarter of 2008. as we focus on new account acquisition, pricing and continued expansion of our antimicrobial and water management platforms. Vehicle care sales decreased 8%. Results were primarily impacted by the softening economy, higher gas prices and weather related market softness. All of which, more than offset new products including the car wash industry's first comprehensive sustainability program as well as better pricing. Vehicle care expects new account gains in its existing markets, investments in its sales force and new market opportunities to yield improved sales trends in the second of 2008. Sales for U.S. other services increased 8% in the first quarter. Pest Elimination sales continue to show good growth, rising 9%. New account activity was driven by corporate account gains, while new account service growth also contributed to the quarter. We continue to develop our programs to target specific market needs that provide better circle of customer penetration and better customer growth opportunities. We expect Pest Elimination to show strong growth in the second quarter. GCS sales increased 6%, showing continuing good momentum in service sales, offset by soft parts volume. Sales pipeline continue to look attractive. The new business systems are fully online and we are now working through the system stabilization and optimization phase of the implementation. We are seeing the benefits of the new system through the better business transparency, which has helped our business decision making. Productivity is continuing to improve on the new systems and we expect significant gains as our people build experience with new productivity tool. We expect continued sales growth in the second quarter and the year with improving profitability in the second half. Measured and fixed currencies, international sales increased 8%. Excluding acquisitions, fixed currency sales increased 7%. When measured in dollars, reported international sales increased 19%. Europe, Middle East and Africa sales rose 4% in the first quarter at fixed currency rates. Excluding acquisitions and divestitures, fixed currency sales increased 6%. When measured in dollars, EMEA sales increased 15%. Europe's institutional sales were strong and steady but modest product sales growth benefited from significant floor machine sales and distributor orders. Product sales grew across the regions. New products like the introduction of Wash 'n Walk and the Max floor care line, combined with continued gains from housekeeping to help drive sales. We expect second quarter institutional sales to rise modestly, in part due to the impact of the first quarter distributor orders. Sales force training programs we are implementing to improve sales execution in our Europe institutional businesses are underway. And we believe beginning to gain traction with the sales force. While, still too really to see material results, we continue to expect these efforts to improve top line growth as they take hold later this year and into 2009. Food & Beverage sales showed a good gain, benefiting from corporate account growth. Healthcare sales showed good growth, benefiting from skin care lines and textile care sales also increased. Adjusted for the divestiture of a property services business last year, Pest Europe increased as programs to improve sales and profitability gained traction. Key metrics, including service delivery in the UK, new contract sales growth in France and overall customer retention showed good improvement and helped offset the elimination of a couple of larger but low margin contracts in the UK. As an update, our work to improve Europe's performance. The business information systems development work continues to move ahead and is completing the build stage. A multi-phase rollout will begin in the third quarter starting with two countries and then rolling out to additional countries over the next 24 months. Obviously, it is still too early to see results and while these improvements will take time to implement, they are critical to the fundamental development we need to make to achieve better growth and profitability in Europe. We have started the first moves to our regional headquarters and expect to make major staffing relocations this summer, as we build a Pan European operating structure. On a significant cost of 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 second quarter fixed currency sales to show a more modest growth in the first quarter, primarily reflecting the timing of distributor orders. However, we look for better results ahead as the actions we are implementing take hold. Asia Pacific sales grew 10% in fixed currencies. Excluding acquisitions, sales increased 8%. When reported in U.S. dollars, sales increased 21%. 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 guided program for retail stores. We achieved important account wins in casinos, catering, hotels, and restaurants as well as food retail markets. Food & Beverage sales also enjoyed strong growth. Both the beverage and brewing sectors continue to show good growth in Asia. The Food & Beverage division benefited from increased product penetration and account gains. Asia Pacific expects continued good sales growth in the second quarter. First quarter sales for Ecolab's Canadian operations were up 3% in fixed currency and rose 20% when measured in U.S dollars. Institutional and Pest Elimination sales were strong benefiting from corporate account gains, accelerated street growth and the rollout of Apex. Food & beverage sales also improved. Latin America reported an outstanding performance with sales rising a very strong 18% at fixed exchange rates. When measured in U.S. dollars, sales rose 26%. 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 and beverage sales reflected strong demand in the beverage and brewing markets as well as the benefits of new accounts. Pest Elimination continues its outstanding performance throughout Latin America. Overall, we expect healthy growth trends to continue in Latin America. We expect Latin America sales to show another double-digit gain in the second quarter. Turning to the expense side of the income statement, as we expected, first quarter gross margins decreased to 150 basis points to 49.4%. The impact of acquisitions, which by their business model operate at lower gross margins than our historic business, were 110 basis points of the margin decline and along with higher delivered product costs and an unfavorable business mix more than offset sales leverage, pricing and cost savings initiatives. SG&A expenses were 38.3% of sales or 90 basis points below that last year. The SG&A ratio reflected leverage from our healthy organic sales growth and the impact of acquisitions, which operate at lower SG&A ratios. These more than offset investments in the business systems and efficiency, R&D and information technology. Turning to the segment profits, operating income for Ecolab's U.S. Cleaning and Sanitizing segment increased 6%, driven by the higher sales and improved cost efficiencies and a resulting strong operating leverage, which more than offset higher delivered product costs and investments in the business. Operating income for U.S. other services, decreased by $2 million as continued profit gains at Pest Elimination were offset by systems deployment and stabilization and optimization costs in GCS. International fixed currency operating income rose 13%. Europe and Latin America led the growth with double-digit gains as benefits of the strong sales increase more than offset higher delivered product costs and unfavorable business mix. Corporate segment includes special gains and charges which are reported as a separate line item on the income statement. Special gains and charges for the first quarter included 3.6 million of non-recurring costs to optimize our business structure, including the establishment of our European headquarters in Zurich, Switzerland. These costs were partially offset by an additional $1.7 million gain from the previously announced sale of a business in the UK. The corporate segment also includes $5 million of investments included within our pro forma EPS reporting, primarily related to the development of business systems and other corporate investments we are making as part of our ongoing efforts to improve our efficiency and return. Ecolab's first quarter consolidated tax rate was 29.4%, down from last year's reported 34.5%. Excluding discreet tax benefits, primarily from the ratification of the new tax treaty between the U.S. and Germany of approximately $0.02 per share, and the tax impact of special gains and charges, the adjusted effective income tax rate for the first quarter 2008 was 32.8%. The decrease in the adjusted first quarter effective tax rate was primarily due to tax planning efforts, international rate reductions and U.S. tax legislation. We also repurchased 0.4 million shares during the first quarter. The net of this performance is that reported diluted net income per share for the first quarter was $0.41, up 17% over the $0.35 earned a year ago. Pro forma earnings were up 11% to $0.39 when adjusted for the discreet tax benefit and special gains and charges. These results included dilution of $0.01 per share for the Microtek and Ecovation acquisitions. And as mentioned in our opening comments, pro forma EPS from operations, increased $0.06 in the quarter, the benefits from favorable foreign exchange, the lower tax rates, shares and interest were fully offset by higher delivery product cost, further, the strong earnings also funded our Europe investments and acquisition costs. Turning to the balance sheet, Ecolab's total debt to capital was 39% at March 31, compared with 33% reported a year ago. Our net debt at March 31, 2008, was 35%. Depreciation and ammonization for the quarter was 85 million and capital spending for the quarter was 76 million. That's the review of the first quarter. In summary, Ecolab delivered yet another solid quarter. Our performance was a result of continued growth led by our U.S., Latin American and Asia Pacific 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 could differ materially. These statements do not include the potential impact of additional business acquisitions, divestitures, higher than anticipated raw material price increases or material events that may occur after the days of this web cast. This business outlooks sections should be considered in conjunction with the information on risk factors in our press release and our Form 10-K which limits risks factors that may cause results to differ. For 2008, we continue to expect another superior year of growth. We expect solid sales gains, continued strong sales efforts and pricing along with acquisitions that accelerate our top line to be leveraged by productivity and efficiency increases and cost savings to yield another year of attractive earnings growth. For the full year, we look for pro forma diluted earnings per share, which excludes special gains and charges and discreet tax items to be in the $1.84 to $1.88 range. These expected pro forma earnings include approximately $0.02 of dilution for the Microtek and Ecovation acquisitions. But in 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 discreet tax items that we presently expect to net to a range of zero to a positive $0.03 per share in 2008. This income statement line will include the sale of a plant in Europe, as well as certain costs associated with establishment of our European headquarters that moved to Zurich. In the second quarter, we looked for our U.S. operations to show continued solid momentum. New products like the ongoing roll out of Apex, our new warewashing platform that provides unparalleled performance and energy and cost savings for customer, as well as the first solids for QSR, new on-premise laundry products in the U.S. and Europe and new floor care line that will provide further differentiation in opportunity and will help drive results. We look for international sales to again be led by strong growth from Latin American and Asia-Pacific, as they enhance modest gains from Europe. We believe this will result in overall good fixed currency international sales growth. Second quarter, gross margin should be 49 to 50%, selling, general and administrative expenses are expected to come in around 37 to 38% of sales. This decline in gross margins and SG&A primarily reflecting the acquisitions, and interest expense should be around 15 to $16 million. We expect the effective tax rate in the quarter will be 32 to 33%. Overall currency translation is expected to benefit second quarter earnings. As a result, we expect Pro forma diluted earnings per share for the second quarter, excluding gains and charges to be the $0.45 to $0.47 range, compared to Pro forma earnings per share of $0.42 earned a year ago. The second quarter 2008, pro forma results, will include between $0.01 to $0.02 per share of dilution from acquisitions. Except as noted, the second quarter and full year results and remaining impact on earnings per share estimates do not reflect the impact of special gains and charges or discreet future tax events that may, even they occur are recognized in the appropriate period. Overall we expect a superior performance in 2008 as these are strong sales in service team to drive growth through aggressive selling, additional solutions per account, new services and appropriate pricing to drive our top line and a constant focus on the efficiency and the effectiveness, to leverage the bottom line, while at the same time making the key investments to assure growth for the future. A final note, we plan to hold the tour of our booth at the National Restaurant Association show in Chicago on May 19th. We will be sending out more details on the event next week. In the mean time if you have questions please contact me or Nicole in our office. That concludes our remarks this conference call will be available for replay on our website through May 2. Operator, please begin the question and answer period. Question And Answer

Thank you [Operator Instructions]. Our first question comes from David Begleiter with Deutsche Bank.

Mike you discussed pricing versus raw materials the GAAP and how you will close that going forward?

Well I think is David, you get the raw material head right away and for our contracts which are spread basically over the year, we rolled the price increases into those, I think we have been pretty effective in our pricing that far but again you get the hip from the raw materials upfront, and you get your pricing back as you go forward our 2005-2006 experience showed that we are able to certainly recover those as well as bulge our margins.

What was that -- what was the GAAP in Q1 Mike, do you have the number?

I am sorry the GAAP?

Between pricing and raw material cost?

It was favorable.

Fair enough, and can you just comment on European profitability, I know it will take time to improve it, our margins are down in the quarter year-over-year?

Our margins are up in the quarter again I think that benefited I guess in comparison last year was fairly easy but also you had some additional volume, and the institutional division which we mentioned, I think for the full year we looked for a European margins to be above flat.

And last thing is on GCS what were GCS head wins in the quarter, how did they loose?

Loss about $6 million.

Thank you very much.

Thank you.

Our next question comes from Michel Morin with Merrill Lynch.

Yeah Mike just wondering on the institutional side, how much of an impact are you seeing from the economy?

Well, I think that we are starting to see may be more in tons and much more than that -- we are starting to see customers get apprehensive about the economy and as a result of that you see them a lot more cautious than before if you look at our results were certainly within the long term range that we expect for institutional which has been 68% or within that range we continue to see positive for traffic under the restaurants so that's been good news and then we also continue to drive our wrong growth through a count of wins through additional solutions for account itself. Overall I would say that its more of a ton than it is anything significant.

And in terms of the pricing gains you said it, you did contributed 2% to organic growth, total organic growth. Can you talk a little bit about how does that differs either by segment of region where you being more successful at passing on price and where you not having as much success?

Well, I think that kind of reflects some regions for example on North America, I think we have been, more successful, in Europe which is much more been independent, type of account where you really need strong sales force to deliver those, they are not as strong as sales force so they're not able to deliver as much pricing but on the other hand our rows in Europe has now risen as much as they have in the U.S., I think the U.S. in you are seeing better pricing, but that's where we also have a stronger sales force and also had a stronger raw material cost increases.

Great. Thanks very much Mike.

Our next question comes from Mike Harrison with First Analysis.

Hi. Good afternoon.

Hey Mike.

We've heard some company has specifically mentioned that they've seen some weakness in the UK and in Spain. I was wondering if you could talk about what your seeing in terms of economic health from country to country as you look at mainland Europe?

I don't think, that we've seen much for UK and Spain in terms of weakness. Can't really say too much to that. I mean, overall its been more the central countries Germany, France where we've seen more weakness. The East Europe, Northern Europe has been very good.

Okay and then in healthcare, can you break out what the top-line contribution was of Microtek in the quarter and then maybe talk a little about what are you seeing -- whether the top-line synergies are tracking about with where you would been expecting at this point?

Well, as we said. Growth for the division was 9%. With Microtek, it was up 17%. Excluding Microtek, was about 34 million in the quarter. In terms of synergies it was -- things are coming along well.

Right. And then as you look at the, staying with healthcare, as you look at the infection prevention market, it seems like you have some hospitals looking to improve basic sanitation. You maybe have others looking at testing incoming patients for infections. Obviously, the basic sanitation rout is probably much more cost effective but we, at the same time are seeing some state legislatures pushing for these testing requirements. Can you talk about how you are taking your offering to market in this environment where you are essentially pushing, head washing, which isn't that fancy against this, fancy in expense of test.

Well, what we're driving toward is a comprehensive solutions for the customers to try and breakdown, as we call the vectors between the sources of potential HAIs and the patients. So, for us that means trying to drive that on a broad base throughout the organization. So, for us we're trying to go towards the sea levels to drive the concept fed. Number one, this has to be a comprehensive solution and broad based. Number two, this is a way that you are going to be able to reduce your cost, particularly as you see healthcare reimbursement change to one that does not necessarily pay for the HAIs going forward. We think that our real strength in this area is that we've got strong positive approach but even more so it's the training that we can provide because again to treat MRSAs,etcetera its not fabulous technology that's needed, it's much more of a practice of it and we think that we've got excellent background in helping train people in the use of cleaning sanitizing products and multiple areas and that's going to be the real key for the healthcare area.

Tim, last question I had. You seem to have quite a bit of cash sitting on your balance sheet. I was wondering if that's related to your desire to buy some shares from Henkel. Are your keeping that around for potential M&A opportunities or do you have some debt that's actually coming due any time soon?

No. It's just timing Mike.

All right. Thanks very much

Thank you

Our next question comes from Laurence Alexander with Jefferies. Laurence Alexander - Jefferies & Company: Good afternoon. First of all, with INIS, so sorry, with Cleaning & Sanitizing in the U.S., have you seen any push back on the adoption of Apex or some of the other new products as customers become more nervous.

No, not really. In fact, we have seen quite an embracive of it. For a couple of reasons, first of all is it does offer demonstrable cost savings for the customer in terms of not only water, energy and labor but the other aspect has been sustainable aspects of Apex in terms of its total footprint from sourcing through productions, through disposal by customers. So, we actually had one customer that bought it solely for the sustainability reasons. We have had a couple of others that actually have been in the news that have picked at up because of the cost savings. So, so far I'd say that its doing very, very well and we are very pleased with the rollout of Apex. Laurence Alexander - Jefferies & Company: And for the 5 million investments in productivity, is that the restructuring in Europe or is that across the firm and what will be expected payback period on this kinds of investments?

That's the investment in the European systems as well as the creation and of a Pan European organization establishment of the facility in Zurich. Laurence Alexander - Jefferies & Company: Thank you.

Thank you.

Our next question comes from Chris Shaw with UBS.

Hey Mike. How are you doing?

Hey Chris. How are you?

Good. Seriously, the amount of shares you have bought back this quarter is that the kind of sort of minimal levels we'll see until we get some sort of resolution at Henkel.

Well, there is a couple of things. First of all, our target debt-to-total cap is 35 to 40%. We are at 39%, so we are up there. But the second thing is obviously there is a potential pending action and we just like to keep some powder dry.

And there is no news on, no new news to report on Henkel, right?

Nothing to report. No, sir.

Okay. And Ecovation, do you know how much of their sales went to the ethanol market?

It's a fairly small market today. Its really something will be pursuing in the future. Right now its much more aligned with our traditional food and beverage business in terms of dairy and beverage and meat and poultry.

Okay. And then, curiously, given sort of the weaker economic environment, I know in past, in a cycle like this, you guys get a little more aggressive with share and shred accounts. Are you doing something similar at this time?

Absolutely. When we came into 2008, we were expecting, a more difficult economic environment, so as part of our plans we really built in to be much more aggressive on the streets in terms of new accounts, in terms of solutions per account, in terms of our general approach to the market. So, so far what we have seen has been pretty much inline with what we expected and again its driving just those things which you mentioned Chris. which are going to the enablers for us to continue to outperform the market.

Any numbers you can attach, any share gains, or greater circle of customer selling?

Well, in terms of solutions per account, its tough to measure on a quarter-by-quarter basis simply because you get it a large base but as you have seen, we have continue to expand that over the last couple of years, in fact I think over the last three years we're up two solutions versus, two years ago, it was about 5.5 versus 3.5. So, we continue advance that and I think if you look every quarter we're continuing to make further progress on those.

And one more. In pest, theoretically, its not showing up in the numbers, but would that be something the customer would cut back on before some of your other product lines just because -- pest elimination is a bit, almost insurance kind of thing.

No, I don't think so. I mean, the fact is that the pest will continue to return to the environment consistently and so, flies, rasps, bugs whatever, there are going to keep coming back in. so, if you try and back you are simply inviting a demonstrable public health problem. I mean, you the mouse run across the floor does not exactly bring in more people to your restaurant.

Yeah. Good point. All right. Thanks Mike.

Our next question comes from Rosemarie Morbelli with Ingalls & Snyder. Rosemarie Morbelli - Ingalls & Snyder: Mike if you're not alone or to you alone. Could you give us a feel for the losses from GCS in the quarter.

Yeah, they are about $6 million. Rosemarie Morbelli - Ingalls & Snyder: So, they don't seem be diminishing, are they?

Well, as we said when we completed the installation in September of the ERP that there was additional stabilization and implementations costs for that system going forward. We had hoped to avoid relative to a number of things bit we weren't. The people I talk to regarding these ERP installations, will tell that its very typical to have things like this and what we are doing right now is we are -- we may have some reports that in the new system weren't complete, you have to fill in a few fields maybe some missing reports, you have to get those regenerated. Its all that clean up work after you have installed something that's major. So that's pretty normal activity. The second thing is you have got people relearning the system. They are relearning reports, format etcetera, so the productivity is not what it was on the old system. But its improving day by day and we think over the next couple of months you are going to see continued improvement there such that, we expect that as we go through the second, third, fourth quarters, we'll be able to improve the productivity significantly on this and secondly, the number of the costs are related to -- if you were perfecting this system, will said to go away as well. Rosemarie Morbelli - Ingalls & Snyder: Are you still planning and breaking even by the end of the first quarter?

What we said is that we expect the possibility improved this year and be profitable next year in terms of timing I don't think I really want to try in time as because my record on that has been so hard. Rosemarie Morbelli - Ingalls & Snyder: Okay you so -- the could you give us a feel for the economic situation you are expecting behind that $1.84 to $1.88 you made comments regarding the fact that you thought the things were going to be worst and they were actually and so I am guessing that this is why the first quarter was a little stronger or at the high end of the range, what can you help us with your expectations then with you think you are being conservative.?

Yeah, we were looking for the U.S. economy to slow down we're looking for slightly better but not robust international economies, on the raw material side as you know Rosemary, we've been a believer that we are in kind of secular high raw material environment so we'll expecting rod to be high may be not quite as this high but certainly high and as a result we took action early on in all of our plans to drive higher growth to drive appropriate pricing and cost savings to offset that. So, so far the economic environments pretty much what we expected and I think our actions in that environment are paying off pretty well. Here we've got on top economy we held our estimates for the year, we still are confident our projections for the year so, I think that tough environment we're feeling pretty good about where we're at and what we can do in this environment. Rosemarie Morbelli - Ingalls & Snyder: I know you are doing a great job, I was just wondering if you had expectation of things actually slowing further deteriorating further in the U.S. in your number?

Pretty much the same. We're not looking for any disasters here but I think like everybody are looking for a general slowdown, in the timing which is kind of what we are getting and there is really been no surprises for us yet. Rosemarie Morbelli - Ingalls & Snyder: Okay, and then the signs have slowed down within the institutional, hotels, restaurants and so on, do you see some gross in other accounts of such as Kay versus your general institutional accounts and those margins at Kay than those of institutional.

Let me work in change to win accounts to all our areas and for example you mentioned Kay's had some great account win this year, we think it will be up digits in the second quarter and for the full year and so I think that as you look across the business we are good success -- what advantages if you well at this environment where people are worried about causes, Ecolab's products and solutions are about really helping customers control cost while providing good results, so it's a great environment on which we can sell and really address specific customer name. Rosemarie Morbelli - Ingalls & Snyder: I understand that but are your margin higher in the regular institutional than the in the QRS?

Yeah, I think if you look at the operating margins and take out the impact of acquisition that were in good shape, in fact if you look at the U.S. Cleaning & Sanitizing we said sales were up 5% operating margins were up 6%, operating profits on 6% so expanding our margins there. Rosemarie Morbelli - Ingalls & Snyder: And this Kay grows a lot faster and the rest of the institutional restaurants flows down, should we expect to see those margins decline?

I'm sorry what was that Rosemarie Rosemarie Morbelli - Ingalls & Snyder: Well, if you grow Kay at a faster rate and the rest of the institutional business is down should we expect to see some decline in the operating margin?

No, they are both above average margins so we would expect continue operating margin, operating profit improvement Rosemary. Rosemarie Morbelli - Ingalls & Snyder: Okay and if I may, you made a comment regarding Europe Michael, saying that margins were up in the first quarter and you expected them flat for the year so I would translate that to mean that they are coming down in the next three quarters or am I missing something?

All we said is the first quarter benefited by some distributed or some machine sales that were in the third and second quarter in fact some of those distributors orders will offset in the second quarter, so I think the second quarter will be a little tougher than the first. Rosemarie Morbelli - Ingalls & Snyder: Okay. Thanks a lot.

Our next question comes from Gary Bisbee with Lehman Brothers.

Hey, Mike good afternoon.

Hey Gary how are you doing?

Good, thanks. Just a couple of question first of all what exactly does it mean that your putting together food and beverage and water care. Is that just in terms of reporting or is there sort of big structural change in terms of how its run how its sold?

That's both. I mean they have been working together for some time. Both of the marketing for water cares bent to S&B accounts [indiscernible] accounts so that's kind of a natural alignment there and then secondly with Ecovation which is really addressing food and beverage accounts being reporting in to food and beverage and the fact that there are some synergies between water care and Ecovation just made all the sense of the world to consolidate that and strengthen the efforts.

Does that mean you put the sales force together its now managed by one person or one team of people that type of thing?

They are separate one -- they are separate sales forces but the overall businesses are reporting into one individual?

Okay, you said there is no update on Henkel but could you give us any sense how much would you be willing to go above or beyond that the cap -- target you have set since it seems like a sort of a onetime thing would you doing on the gulf frame above that or is that still pretty high range?

What Henkel actually says they are going to do, I mean its hard for us to comment before then if you look back in history when we bought Henkel out of joint venture our total debt and total capital went up to about 50%

Hello

Well that was it.

Okay, alright, and then, I guess just the last question on the GCS can you give us a sense of that $6 million loss, how much of that is sort of the ongoing systems spend versus the loss of the business, as this operating system spend.

By that was what we called one-time.

Okay

As far I remember the GCS is its pretty much a fixed cost if you will business now so as you get sales you can get tremendous operating leverage so its kind of operating or sales are kind of below the break-even line if you will, and so as we continue to grow those sales which we think we will be able to do that double at your rate, you are going to see some significant operating improvement to offset that and that's how we think we break into profitability next year, particular as we also those one time cost go away.

Okay, and then is there last quarter you mentioned you would call the few account now that the system allows you to look much closer profitability for client, any sense that you are going to take more step in that direction or is it much more you just said just all about accelerating the top line?

I don't think there is going to be any major ones, I think its -- we are focused on accelerating the growth and driving the growth.

Okay, thanks a lot.

Our next question comes from Dmitry Silversteyn with Longbow Research.

Hi Mike, couple of questions first of all I would just like to follow up on your comment on Kay they had relatively slow growth here in the first quarter and you expect double digit growth for the year, so I just want understand what its about what's the timing or how are you going to get to that accelerated growth, compared to which delivered in the first quarter?

Well, first of all first quarter was other than comparising it's a very strong quarter in the last year was up about 16% in the timing and some distributors this year, so that s why it had a less growth -- again we expect very strong, we expect good double digit growth in the same quarter its got a very robust new customer pipe line, so we are very confident in the outlook for now for the second quarter for the balance of the year.

Okay, alright fair enough and this is something that I think was asked at least one time in this call but I would just like trying to get a little bit of feel where your program for Europe you got an headquarters relocated I guess retreating the sales force now kind of give us an idea where you are in putting in the foundation for the program so that we can look forward to actually reaping the rewards of this or is it all done and you are just now waiting to get attraction from all the efforts you have put in?

Well in terms the sales force training we just started that around the beginning of the year we rolled out to most of the countries but that's going to take time to change as you can guess when you looking at human behavior so I think you are looking at probably end of the year, early next year before you see some material impacts but I can say already in the countries where you have been in the long that's where we are restarting to seeing some benefits in some metrics there like solutions for accounts, so that part showing positive sign but the EBS system the earpieces on, we don't make the person relation until the third quarter and that's in two countries and they will be rolling out over the next couple of years country by country or couple of countries at a time. So its going t take some time before you actually start to get some in that so I think that's more a 2009 before we start to see any meaningful impacts from that and really on EBS

Okay so until that time, the way for us to judge your performance in Europe is what? Top-line growth or...

Yeah, you should start to see the top-line start to improve in 2009, as the benefit start to come along.

Okay. Okay. Thank you.

Our nest question comes from John McNulty with Credit Suisse.

Hey. good afternoon. Two questions, first of all, with regard to the high fuel prices Ecolab has a lot of vehicles out on the road. Can you remind us how you actually deal with them, whether there's a fuel surcharge to your customers or was it just part of your general pricing increases that you tried to put through.

It's part of the general pricing, John.

Okay. So there would be a bit of a lag between when you actually feel the pain coming in versus -- on the fuel side versus when you are actually recovering it on the price?

Yeah, I mean, its like anything. The price goes up right away for us and then we role our pricing with customers as the contracts renews, the pricing agreements go into effect. But that's how you'll earn.

Okay. And then on the Latin America business. It seems like it took a pretty big step up. Is there anything kind of significant there or special there that maybe you had a one-time benefit or is it really just you finally got kind of it to scale and its really starting to hum on all cylinders.

No, I think it's a story that is a good one particularly to start to look at some other things we doing elsewhere. We had lot of investments that we have been doing in Latin America in terms of people training programs etcetera, and we think they are starting to pay off and you have seen to have benefits of that.

Great. Thanks very much.

Thank you.

Our next question comes from Robert Koort with Goldman Sachs.

This is Amy Jon, sitting for Bob. Most of my questions were answered and then I have a one last. What's your outlook for the raw material cost of inflation? Whether you see or a material [ph], you are confident, your pricing part is fully offsite, the higher rose going forward.

Well, I mean to think that we're looking at raws to be at, maybe about 5% or so this year.

Okay. And then you can... you maintain a 2% year-over-year price increase and then you think that 2% can fully offsite as 5%.

Well, yes because raw materials are only about 20% of sales. So, the pricing goes now, all of your sales, the raw materials costs is only 20% of your sales. Analyst: Okay. And then obvious there is some soft in your sigh [ph] and underlying demand for your business have you seen... your customers give you push back on your pricing actions. Obviously because of superior service, Ecolab provides to your customers and then typically its hard to hire their competitors for those products and services. Have you seen any major push back.

Customers never really get excited about a price increase. So, Doug always says they always start with no and then you try and work back from there. So, no we haven't seen any material impact.

Okay. Thank you.

Our next question comes from P.J. Juvekar with Citi.

Hey Mike.

hey PJ. How are you doing?.

Your new European headquarters, why wouldn't you include that in your CapEx and amortize that amount rather than take a special charge.

Well, because they are operating costs. That's not capital. We're talking about relocations of people. We're talking about the cost of establishing a business operation, lower the accountants etcetera. So, its operating our capital.

And you did that for tax reasons, the headquarter relocation?

The move to Zurich is multi purpose. I mean first of all, we need to create a Pan European operation. So you need a location for that we felt that Zurich was very attractive in terms of the incredible talent pool it's got because of the many multinationals that are based there. And second Zurich also has very attractive tax reasons and you are starting to see that flow through in our reduced tax rate and you'll see more of it in the future, so there is a lot of good reasons to do it.

Yeah but I'm not sure why you want to take a special charge for that if you're going to keep the tax benefit in the number. And the second question I have is the $0.01 dilution from Microtek and Ecovation, again why was it dilution of special charge. When you appear to do an accretive deal, would you take that accretion as a special charge also.

Well let's go back to the Zurich deal, I mean, the special charge is only related to expenses that we feel are one-time in nature. So for example that's where you are moving a lot of people from one area to another one, so that's really a reason for a special charge. The other cost related to move are showing up in the corporate segment which is part of the P&L. And none of this, we think this is a very positive move PJ, especially when we look at the special charge this year will be -- end up being a positive as we said when you include that plan sale that will incur in the second or third quarter. So non of it, the special charge would be positive and the only reason we break all this stuff out is that you can have greater transparency to the actual underlying European and international business.

Yeah and anything about the dilution from Microtek and Ecovation. Why the dilution is a special charge?

It's not

I though you said that $0.01 dilution maybe --

No, that's within our P&L. We have not included that in the line called special games and charges.

Okay, okay

All we did is we identified that as an item for your information.

And the second question I have on operations. Can you elaborate on your comments about restaurant traffic softening and related question is that do restaurant and lodging trend go hand in hand with each other?

Well there are currently not doing that. I mean lodging continues to show good room demand trend and restaurants, we've seen restaurant traffic being fairly consistent with what has been for at least last year or so. So, all I was referring to is we're starting to see, if you will, are more of a tone change and institutional customers where they getting little more cautious because like everybody they are reading all the headlines about the economy, so its just little more caution from there since. But as you look at our numbers like we said for institutional, it grew 6% in the quarter. We've always said it's a 6% to 8% growth business, so its been a long-term growth trend.

Okay. And one last question on your water treatment business, I mean what are your ambitions in water treatment. How large do you want to get it and do you want to get -- go after all the industrial customers or stick to some of commercial customers.

As we've always said we're focused on the middle market. We are not going after large industries and municipals. As you've seen we have made significant investment in the affluent water treatment with Ecovation for the food and beverage plants so. We are focused on our customers base, we want to continue to serve that customers, base serving at their water needs and we hope to continue to do so in the future but again you can see what are best of Ben, which is middle market.

Okay. Thank you.

[Operator Instructions]. Robert Felice, Gabelli & Company. Your line is open. Robert Felice - Gabelli & Company: Hey Mike. Most of my questions have been answered just have one or two more, I guess first how much of the operating income margin compression in U.S. cleaning and sanitizing was attributable to Ecovation at Microtek. And as the year progresses would you expect a similar level of year-over-year compression?

Yeah, because actually if you look at excluding acquisitions margin expanded. Robert Felice - Gabelli & Company: So, what was the absolute amount attributable to Ecovation and Microtek?

Well, in gross margins it was 1.1 percentage points of the climb. Robert Felice - Gabelli & Company: And that's for the entire P&L or for U.S. cleaning and sanitizing?

For the entire P&L. Robert Felice - Gabelli & Company: And if you were just to break it down in U.S. cleaning and sanitizing in terms of the operating income margin.

You exclude it, Ecovation and Microtek, margins expanded for U.S. cleaning and sanitizing. I don't have a number, the margins number in front of me but profitability would have been up 7%. Robert Felice - Gabelli & Company: Okay. And as the year progresses you expect a similar level of your rear compression.

Yeah, because we are looking for -- well, I don't about the level of or the greater progression but we're looking for them to become accretive in the second half of the year. Robert Felice - Gabelli & Company: Okay. And then how long do you think it talked before the business gets back to its pre-acquisition margin levels.

You mean the Ecovation and Microtek? Robert Felice - Gabelli & Company: The entire U.S. cleaning and sanitizing business in terms of the reported operating income margin.

I don't know. I don't know. Let me give some thought and I'll get back to you Rob. I haven't really talked about that -- the terms of that. Robert Felice - Gabelli & Company: Okay. I'll follow-up with you offline. Thanks.

Okay.

Our final question comes from Michel Morin with Merrill Lynch.

Hey Mike. Quick follow-up. I think Apex is being rolled out off, if I'm not mistaken purely aggressively. Is that are the dispensing equipment here mostly expense or capitalized and are we seeing a bit more than usual in terms of these kinds of costs falling through the P&L.

The equipment itself has capitalized. There is some expense obviously on installing of that slower to the P&L.

Okay. It won't be relative to prior years. It's nothing unusual.

No.

Okay and then --

Its one of pacing that we're doing for the roll out.

Right. Okay, and then in terms of pricing you've been at 2% since the second quarter of FY06, if memory serves me right. Is that kind of a number that we should expect going forward or is there any hope that you might build to get that to 3. If we had an extra decimal point to the 2%, which way is it trending?

I think that 2% is probably good number for now. I mean, it all depends on where we're seeing things go but at this point I think you should forecast at 2%.

Okay. Thanks Mike.

At this time we have no additional questions.

Well thanks everyone for your attention and your questions today. If you have any questions please let us know otherwise have a great day. Thank you.

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