Ecolab Inc. (ECL) Q1 2011 Earnings Report, Transcript and Summary

Welcome to the Ecolab First Quarter 2011 Earnings Release Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. Now, I'd like to turn the call over to your speaker, Mr. Michael Monahan, Senior Vice President, External Relations. Sir, you may begin.

Hello, everyone, and welcome to Ecolab's first quarter conference call. With me today is Doug Baker, Ecolab's Chairman, President and CEO. A copy of our earnings release and the accompanying slides referenced in this teleconference are available in Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statement on Slide 2 stating this teleconference and the slides include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent Form 10-K under Item 1a Risk Factors in our first quarter earnings release and in Slide 2. We also refer you to the supplemental diluted earnings per share information that is also in the release. Starting with Slide 3, we delivered a strong gain in the first quarter and sales growth improved in all areas. We leveraged these sales to offset the run up in higher delivered product costs and produce a double-digit increase in our adjusted earnings per share. We are underway with our actions to transform our Europe business to a higher growth and more profitable entity, following implementation of our new systems in that region. Looking ahead, we expect to continue outperforming our improving markets and show accelerating quarterly earnings gains as better sales growth, pricing, innovation and margin leverage work to deliver double-digit adjusted EPS growth once again in 2011. Further, we believe these continued improving business trends, along with accelerating benefits from our Europe transformation, will lead to better EPS growth in the years ahead. Moving to some highlights from the quarter. As shown on Slide 4, and discussed in our press release, reported first quarter earnings per share were flat at $0.40. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, first quarter 2011 earnings per share increased 10% to $0.45 and were at the top end of our forecasted range. The adjusted earnings per share growth was driven by better volume and pricing from our new products and new accounts, which more than offset higher delivered product and other costs. We enjoyed good sales growth in our U.S. Cleaning & Sanitizing, Asia Pacific and Latin America operations. In the U.S., we benefited from improved momentum across the board, including our Institutional, Kay, Food & Beverage and GCS divisions. Our end markets continued to show steadily improving trends. Asia Pacific and Latin America continue to see good growth across all market segments. Global lodging continues to record solid gains and room demand. Food & Beverage and Healthcare are showing steady progress worldwide, while the U.S. and Europe Foodservice market trends are seeing improvement from prior periods. We continue to be aggressive, focusing on accelerating our top line growth as we emphasize our innovative product and service strengths to help drive increased market share in our core businesses and deliver new account acquisition among our national, regional and independent prospects. We are also making significant investments in key growth businesses and acquisitions to build future growth. And we are making appropriate price increases to help offset higher delivered product costs. We remain focused on expanding margins, emphasizing productivity and efficiency improvements to help increase profitability. And we are underway using a range of actions to improve growth and profitability in our Europe business. While still early in our process, we are seeing some preliminary returns and we continue to expect strong margin improvement in 2011 and more significant progress over the next several years. Looking ahead, we expect adjusted quarterly earnings to show an accelerating pattern through 2011, as pricing, innovation and efficiency improvements, along with favorable currency trends, offset the impact of higher delivered product costs and as our restructuring efforts accelerate. We look for a second quarter adjusted EPS to be in the $0.62 to $0.64 range compared with adjusted EPS of $0.56 in the second quarter of 2010. We expect earnings growth to accelerate in the second half and show 11% to 16% EPS gains. We raised the lower end of our full year forecast and outlook for 2011, adjusted EPS to be in the range of $2.49 to $2.53 per share, showing a 12% to 13% gain over last year. That would represent the ninth year in the last 10 of adjusted double-digit EPS growth. In summary, we expect 2011 to reflect a strengthening performance by Ecolab as we show accelerating earnings to once again deliver attractive growth in shareholder returns and as we set the stage for improved results in the years ahead. Ecolab's reported consolidated sales for the first quarter increased 6%. Looking at the components, volume and mix increased 4%, pricing rose 1%, acquisitions were 2% and currency decreased sales by a fractional amount. Slide 5 includes sales growth by segment and division. Sales for the U.S. Cleaning & Sanitizing operations rose 8%. Adjusted for acquisitions, sales rose 6%. Institutional sales improved in the first quarter, growing 3%. Sales initiatives targeting new accounts and effective product and service programs continue to lead our results. Distributor inventories did not impact sales growth in the quarter. Our markets continued to get better with further expansion in lodging and gradual improvement in Foodservice. We will be introducing more new products that deliver improved value and reduce labor, water and energy costs for customers in our warewashing, laundry and housekeeping markets as we continue driving our growth in industry leadership. We are also making additional investments in our sales and service force and leveraging additional marketing initiatives to drive sales growth. We expect these growth initiatives to deliver improving Institutional sales gains over the balance of the year. Kay's first quarter sales increased 11%, led by strong growth and new account wins from food retail, along with good gains in quick service. We expect the second quarter to show continued good new account gains in food retail and drive further sales growth for Kay. Reported sales for Textile Care increased 71%. Adjusted for an acquisition, sales were up 7%. Good customer gains, momentum from new program launches, additional sales within existing customers more than offset soft but improving industry conditions. We expect gradual improvement in textile care industry conditions, combined with our strength in Textile Care business to yield further good sales growth in the second quarter. Healthcare sales increased 18%. Excluding the acquisition of O.R. Solutions, sales increased 8%. Equipment and patient drapes, hand hygiene, instrument reprocessing and environmental hygiene led the sales gain. First quarter organic growth benefited from new account gains and the continued innovative efforts as we expand our product portfolio. Recent launches included the OptiPro sanitizer line for central sterile; Virasept, the first non-bleach EPA approved, ready-to-use disinfectant that kills C diff spores and a new hand care dispenser platform. We closed on O.R. Solutions acquisition in early March. We are excited by this terrific addition to our surgical solutions product line, the outstanding sales and service team it brings and the strong growth potential it offers us, both in the U.S. and international markets. Looking ahead, second quarter sales are expected to show continued good organic and strong reported sales gains for healthcare. Food & Beverage sales grew 6%. Sales increased in almost all segments, led by corporate account wins, pricing and product penetration. Food & Beverage will continue to focus on new account acquisition, pricing and new product sales to show strong growth in the second quarter. EcoCare sales increased 4%. The division continues focusing on new products and new accounts. Vehicle Care once again outperformed its markets, offsetting mixed end market conditions, with growth led by in bay and auto dealership volume. We look for Vehicle Care to continue showing year-over-year sales growth in the second quarter. Sales for our U.S. Other Services rose 2% in the first quarter. Pest Elimination sales trends improved as first quarter sales rose slightly. Gains in fast food, retail grocery stores, Healthcare and Food & Beverage plants more than offset slow conditions in other major end markets. We continue to develop new product and program solutions to better meet our customer needs and differentiate our offerings. For example, we recently launched Guardian Plus to the full-service restaurants. This is a new program that offers increased value to customers by providing expanded service coverage to our core monthly service, as well as more effective and proprietary service protocols that are more sustainable and use nonchemical technologies to improve safety and prevent pests. We have also launched new programs for bedbug treatments in non-hospitality situations where bedbugs have become more prevalent. We expect our new products and programs, along with aggressive selling, to help offset the soft markets and yield sales improvement in 2011. GCS sales increased 8% in the quarter. Once again, profitability improved significantly over last year. New account wins and appropriate pricing helped to drive the sales gain. GCS profitability also continued to significantly improve as productivity and efficiency gains were realized throughout the business. We remain focused on developing chain account relationships and driving sales through their regional and franchise organizations. We expect GCS to show continued sales growth and profit improvement in the second quarter and for the full year 2011. Measured in fixed currencies, international sales increased 5%. Europe, Middle East and Africa sales were up 1% in the first quarter at fixed currency rates. Europe's institutional first quarter sales increased modestly. New business gains among regional and local customers leveraged new products that offer customers superior results, cost savings and better efficiency to deliver the increase. Food & Beverage sales were slightly lower, reflecting reduced beverage consumption. The business continues to focus on corporate accounts, emphasizing the cost savings benefits of our innovative products. Textile Care sales rose modestly in a continued weak environment. Europe healthcare sales were flat as gains from new accounts and new products were offset by lower distributor orders. Pest Europe reported a solid increase as we continue to improve operations. Looking ahead, we expect Europe's second quarter of fixed currency sales to show continued modest improvement. We are underway with the work to improve operating efficiency in our Europe operations. While still early in the process, we have started to rightsize our European headquarters and began logistics improvements in France, as well as efforts to outsource selected back office financial transaction work. Discussions with the works councils are ongoing and have been constructive. Many more actions are underway and will unfold in subsequent periods. We continue to expect these various actions to deliver improved margins in the second half and accelerate in the following years as we work to realize the expected 100 basis point improvement in operating margin. Asia Pacific sales grew 17% in fixed currencies. Adjusted for acquisitions, sales grew 6%. We estimate the floods in Australia and the New Zealand earthquakes reduced the first quarter sales gain by about 1 percentage point. Institutional sales were strong and occupancy levels improved. Food & Beverage sales showed strong growth. Both the beverage and brewing sectors continued to increase, benefiting from improved product penetration and account gains. The Cleantec acquisition is doing well. Integration efforts are going smoothly and we remain optimistic regarding Cleantec's capacity to expand our customer base, improve our business position and provide additional services and coverage to our customers. Looking ahead, Asia Pacific expects continued good sales growth in the second quarter, though there will be perhaps 2 or 3 percentage points of negative impact on Asia Pacific's second quarter growth from the earthquake in Japan. The first quarter sales for Ecolab's Canadian operations declined 4% at fixed currency rates. Strong growth in pest elimination and quick service were more than offset by the impact of last year's Olympic Games, excess customer H1N1 inventories and soft sales elsewhere. We expect stronger second quarter sales growth. Latin America reported a strong sales gain, rising 11% in fixed currencies as all divisions in that region grew double digits. Institutional growth was driven by new accounts, increased product penetration and continued success with the global and regional accounts. Food & Beverage sales reflected good demand in the beverage and brewing markets, as well as the benefits of new accounts. And pest elimination sales showed a double-digit gain. Overall, we expect attractive growth trends to continue in Latin America and they should yield a solid gain in the second quarter. Turning to margins on the income statement in Slide 6 of our presentation, first quarter gross margins decreased 70 basis points to 49.3%. The decrease primarily reflected the impact of higher delivered product costs, which more than offset the impact of volume and pricing gains. We expect the pricing and cost reduction actions underway will begin to offset the cost impacts in future quarters. SG&A expenses represented 38.3% of sales, 70 basis points below last year. Leverage from the sales gain more than offset cost increases. Operating income for Ecolab’s U.S. Cleaning & Sanitizing segment was off 1%, as the rapid run up of delivered product costs in the quarter more than offset volume and pricing. Operating income for U.S. Other Services was up 1%, as pricing and cost savings actions offset higher delivered -- pardon me, higher service delivery and other costs. Margins declined by 30 basis points over last year. International fixed currency operating income increased 12% versus last year, while margins expanded 40 basis points. Volume and pricing gains, along with improved efficiencies, more than offset higher delivered product costs. The Corporate segment and tax rate are discussed in the press release. We repurchased 1.5 million shares during the first quarter. The net of this performance is that Ecolab's reported first quarter diluted earnings per share were $0.40 compared with -- $0.40 compared to year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 10% to $0.45 when compared with $0.41 earned a year ago. Turning to Slide 7, Ecolab's balance sheet and cash flow remain strong. Total debt to total capital was 35% at March 31, compared with 36% reported a year ago. Our net debt was 31%. The total debt levels reflect the purchase of Cleantec and O.R. Solutions and the $100 million contribution made to the U.S. pension plan in early January. The decline in cash flow from operations reflects the pension contribution. Looking ahead, we expect continued improvement in all of our global end markets. We are seeing our investments in growth areas deliver with a double-digit growth from emerging markets, our water, energy and waste management business and improved results from healthcare. We have seen increased momentum on the acquisition front, and Europe is ready to deliver improved profit growth. Turning to the near term, and as detailed in Slide 8, we will continue to take aggressive actions in 2011 to drive both our top and bottom lines, expanding our market share and customer penetration, using differentiated new products and leveraging our investments in emerging markets and growth businesses like healthcare and water, energy and waste management. We will use pricing innovation to benefit margins, and along with favorable currency trends, offset delivered product cost increases. Further, acquisitions will be a contributor to 2011 earnings growth. With the systems implementation behind us, we are underway with the work to sharpen our Europe business competitiveness, improve efficiency and effectiveness and accelerate growth and profitability. As previously discussed, we expect results from these actions to accelerate in the second half of 2011 and their impact should increase significantly over the next several years. We now expect to develop more than 100 basis points of operating margin improvement from efficiency gains in Europe in 2011. But we also recognize that increasing raw material costs could impact the net benefit realized to operating income. Based on our current raw materials forecast, we continue to expect to achieve approximately 100 basis points of net margin improvement in Europe in 2011 and will continue to work aggressively to offset the impact of any further raw material increases. Slide 9 shows our EPS forecast for 2011. Looking at the second quarter 2011, we expect adjusted diluted earnings per share, excluding special gains and charges and discrete tax items, in the $0.62 to $0.64 range, compared with the adjusted earnings per share of $0.56 earned a year ago. We raised the lower end of our full year range by $0.02 and now look for full year 2011 earnings per share to increase 12% to 13% to the $2.49 to $2.53 range. We also expect quarterly earnings to show accelerating gains driven by improving sales volume, higher pricing, cost savings in acquisitions and the actions we are taking to improve Europe profits. In summary, as noted on Slide 10, we delivered on the top end of our forecast range in the first quarter, while offsetting higher delivered product costs and while still investing in our future. We look for the second quarter to show improved growth with accelerating quarterly earnings comparisons the rest of the year. We expect 2011 will represent our ninth year of adjusted double-digit EPS growth of the last 10 years and we expect the investments and actions we are now taking will yield better gains and EPS growth in 2012 and '13. And now, here's Doug Baker with some comments.

I want to offer a couple of thoughts and then I will open it up for questions. So our view on this quarter is that we got off to a very solid start for the year. Sales are on track. Last year's new business and new product successes really helped us drive core acceleration, particularly shown in U.S. Cleaning & Sanitizing. New initiatives are also accelerating, so we are getting more than 20% growth from our water energy and waste in emerging markets, plus 18% from U.S. healthcare, and that’s 8% without acquisition impact. Our P&L, ROI is also moving our way. Europe initiatives are on track with Q1 margin of 80 basis points versus last year. The battle is really around raw materials, which have become clearly a stiffer headwind than they were the last time we talked to you in February. Though right now, at our forecast rate, they're still substantially below 2008 from a year-on-year impact basis. So like before, we will likely see early margin pressure from the raw materials but we are also quite confident in our ability to recover. First, recover absolute dollars and then start recovering margin in out years as we have done in previous years. In that, we feel good about the business, accelerating top line. We see improving bottom line. Major initiatives are on or ahead of plan. And with that, I'll open it up for questions.

[Operator Instructions] Our first question comes from Nate Brochmann with William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C.: Just wanted to talk about, or a little bit about, I think it was pretty impressive given the raw material pricing pressure that you did have during the quarter and your ability to offset that. Could you talk a little bit about what you're doing on the efficiency side, as well as the pricing side and how that's being received by customers?

Yes, Nate. Doug. I'll take this one. I would say, we take a number of steps to mitigate inflation, particularly when it comes at us at a steeper climb later as it will this year. So we do go after pricing but pricing typically, for us, means that we will work to negate the absolute dollar impact of the raw materials this year. And we are working to do that and believe we can do that. The second thing is really where we see most margin impact historically and including going forward is through innovation. And so we talked last year that we had our second largest innovation pipeline in our history. We have, this year, a pipeline which is 6% larger than last year's. So another very strong innovation pipeline, which we are going to use to help drive trade-ups, if you will, to our customers. We like that best because it's a real value conversation with customers. They get benefit, we get benefit. So we like that in terms of our ability to also solidify relationships as we get forward. From the efficiency standpoint, obviously most of the focus is Europe, it’s not exclusively in Europe. So if you start seeing headcount productivity continuing to leverage technology and all of the other things that we've been doing over the years, those continue to bear fruit and continue to help us drive sales productivity throughout the globe. Nathan Brochmann - William Blair & Company L.L.C.: Great. Very helpful. And then just kind of follow-up on Europe, I mean obviously, it sounds like you guys are making good ground in terms of the productivity and the cost reductions there. How's -- I mean it sounds like the top line is a little bit sluggish. Could you talk about a little bit about the trajectory there and what you’re kind of seeing beyond, Mike, your general commentary on the end markets?

Yes, so Europe, our expectation is that we will have improved growth going forward on the top line. But it's not going to be our headline growth number. But we do expect to have growth going forward. And so that's going to principally come from share gains because the markets in Europe are still pretty soft. I mean they're flattish at best. So our ability to continue to capture share, which we've been doing the last couple of years is really going to determine our ability to accelerate growth. We had a very successful year last year in Europe, obtaining new large chain customers and that's really going to be the primary fuel driving share gain this year. Nathan Brochmann - William Blair & Company L.L.C.: Great. Thank you very much. I'll turn it over.

Our next question comes from John McNulty with Crédit Suisse. John McNulty - Crédit Suisse AG: Yes. Just a couple of follow-up questions. On the raw material, from what level of pricing do you need to get through this year in terms of increases to offset the entire raw material headwind?

Yes. A little north of 1%. John McNulty - Crédit Suisse AG: Okay, so nothing too, too bad for you guys. Also, I believe in the prepared comments, Mike had talked about F&B being weak in Europe and actually being down. Given the stability of that business, why is that down and where do you see that trending over time?

Yes. I mean long term, we see the F&B markets to be very favorable. Population's growing around the world, people are shifting diets to protein. So ultimately, that's what's going to drive the market, however you go through temporary issues in those industry segments, particularly beverage and brewery right now is going through a pretty sizable consolidation. You've got the ASB moves, the InBev moves. You also have Pepsi and Coke both buying their bottling operations. And so there's quite a bit of consolidation in both beverage and brewery. John McNulty - Crédit Suisse AG: Okay and then just 1 last follow-up. It looks like GCS is actually finally starting to get some traction in terms of growth. Can you give us some clarity as to what percent of your restaurant and food and beverage customers are currently using the GCS platform and kind of where you think that might go over the next couple of years?

Yes, I don't have the precise number. It would be small. And it would really be our foodservice customers, food and retail customers and then to a lesser extent, our lodging customers would be the primary tool [ph] to encircle the customer targets. It would be in the less than 10% range. So obviously, that's 1 of the real focused areas as we go and drive GCS but you're right, we see -- as we've said, once we start seeing top line traction, that's the key to driving profitability. Our loss in GCS this quarter, because somebody will ask, was $400,000. I mean, it is making money in periodic months at this point in time. And so, we're really just bouncing around the break-even point. John McNulty - Crédit Suisse AG: Great, thanks for the color.

Next question comes from Andrew Wittmann of Robert W. Baird. Andrew Wittmann - Robert W. Baird & Co. Incorporated: I just wanted to dig in a little bit. Given the raws headwind that you're facing, you mentioned a number of things, FX, pricing, efficiency gains that are all kind of offsetting that. Can you just quantify which one of those offsets are going to be larger, maybe in magnitude borderline to quantify which ones are really driving the offset here?

Yes. I would say one of -- it's hard to know which one, they all go towards driving a wide margin growth and help deliver that even in the face of rising raw material. But raws at this point in time, we expect, I think we talked about a 10% headwind or $0.10 headwind last call. We expect it to be more in the neighborhood of a $0.20 headwind now for the year. FX has clearly moved our way. FX in terms of ROI impact for the year, under our forecast, is around $0.11 favorable, right, for the year. So it's a material offset, if you will, towards raw material. And we'll give you the standard caveat here. Forecasting FX is a game you know you are never going to get exactly right. But that's our current view of how we think the FX will play out through our P&L statement. And then obviously, pricing we talked about, being in the neighborhood of an equivalent offset to the type of raw material inflation we'll see this year. And the key value driver which gets lost in sole equation is volume, right? Driving increased organic sales growth on our core businesses. That's where we make most of the money. Andrew Wittmann - Robert W. Baird & Co. Incorporated: So if you feel like you can price the -- if you can get pricing to offset the raw material costs and if FX is a headwind, is there something I'm missing or should the guidance number be moved up a little bit higher?

Well, what you've got, a number of things that we don't know. 1, we don't have any guarantees on our FX. We don't have any guarantees that it's only $0.20 on raw materials. That's our best forecast and we think we are more confident from that forecast, frankly, than we do on FX as we go forward. So there are still uncertainties out there. But yes, our plan is to continue to drive the business forward and hopefully be in a position to have good news throughout the year. But right now, this is our forecast. Andrew Wittmann - Robert W. Baird & Co. Incorporated: Okay, and then just a little bit of detail, maybe a little bit more detail on key end markets, hotels and restaurants perhaps. Just talk about the foot traffic there and the levels of demand and increase that you're seeing in those businesses?

Yes. I would say they are somewhat improved. The Foodservice business or the Full-service Restaurant business in the U.S. is still forecast to be modestly negative in terms of foot traffic year-on-year. But now, we're talking like less than 1% negative where we've been dealing with 3% declines for almost 3 years in a row. So it is substantially better, if you will, in terms of the environment that we've been having to deal with. Lodging, room demand, is forecasted to be up again this year on top of very strong demand increases last year. So that market's still as favorable. F&B we just touched on. I would say the F&B issues we are dealing with are somewhat transitory. They are negative in terms of this consolidation but it's not fundamental to our ability to drive that business forward long term. John McNulty - Crédit Suisse AG: Great. I’ll leave it at that. Thanks, guys.

Next question comes from Gary Bisbee with Barclays Capital.

I guess the revenue clearly accelerated nicely in the quarter, even excluding the acquisitions and you seem to indicate that you'd expect further acceleration as we move throughout the year. Now, how much of that is actual momentum you're getting with new customer wins and additional sales over the last few months and how much of that is for comps and other things like that? I know a quarter, but you told us the quarter was better than it actually looked. Is this quarter about how it looked?

I'd say this quarter was pretty much as it looked. I think last quarter we knew was better than it certainly looked on paper and we worked to give transparency to that. So we saw, I'd say continued but in line improvement in our underlying sales trends. And what I think you saw was a quarter where you didn't have any real impact from distributor inventories, either positive or negative. And so it was a fairly pure quarter. Going forward, what's going to drive it? I think what you're seeing here, what we also felt but didn't see in the fourth quarter was like the solid results of new account productivity, new innovation pipelines. All of those remain on track. We continue to drive those. The teams are doing a very good job in those areas and that's how we drive our business forward. So when those things are firing, we know as long as the markets are at minimum stable, we will generate some organic sales growth.

And Gary, this is Mike. I guess the thing I’d add is that is we saw this basically across the board, essentially every country that we had, every region we had essentially was improved over the last quarter. So it's good momentum.

Okay and just a quick follow-up. Can you review for us -- I don't think I've heard an answer on this in a couple of years, what the actual exposure to raw materials and commodities is? What percent of sales or what percent of cost of goods sold? Then -- and how much of that is contract? And I know in the past, you've said you're not as reliant on spot prices but sort of contracts that rollover once a year or something like that?

Well, I mean, I guess the big number is if you look in our P&L, Raws represent about $1.2 billion of spend on a $6 billion P&L. So roughly 20%, which is why the earlier comment what do you need in pricing to offset raw material inflation, you get a little bit of a 5:1 leverage as you go through that, if you're just doing the absolute dollars, which is the advantage of margins, all right, I mean at the end of the day. Where’s our exposure? As we've always said, no one substrate represents a huge percent of that spend. However, if you start looking at it in terms of oil related, right and then, stuff your plastics and the like, there are -- oil related is going to be half of what we buy. And it's going to have some impact on it. It's not direct. It's not a 1:1 but it certainly impacts it because they've got to use energy, right, to create these raw materials so certainly that's a large input cost. And even if it's not oil, oil going up typically drives up other energy sources. So I hope that adds color to it. So we've got real inflation but we believe it's a manageable part because of the nature of our P&L, right, breakdown and part of it is because we can drive value in other ways to customers.

Thank you.

Next question comes from David Ridley-Lane with Merrill Lynch.

Sure, do you have a continued appetite for M&A in 2011?

Yes, absolutely. I would say though the historic equation we talk about is 68% organic plus 2 to 3 additional growth points from acquisition and add in some leverage every year and that's how we work to drive 15% EPS. So we see M&A as an important part of the formula every year including this year.

Maybe just 1 more. I know in Kay, it's big game hunters in terms of landing the big clients. Are there other big clients in the pipeline that could further accelerate growth in that division? I know we were topping 20% a few years ago in that division.

Yes. I mean Kay is not out of people to sell or ways to grow by any stretch. And so yes, there are a number of large chains both in the quick service segment and the Food Retail segment, which are the primary segments that they focus on in that division.

Thank you very much.

Next question comes from Edward Yang with Oppenheimer. Edward Yang - Oppenheimer & Co. Inc.: Thank you. On pricing, Doug, you mentioned that in order to offset the raws you need to get a little over 1% pricing. Is that basically your expectation for the year to drive pricing up 1%, and do you think you could get that up more?

Yes, Ed, that is our expectation. It's probably in line with history. I would say history is a little south of 1% rounds up and our expectation is there will be a bit of a round down to 1% if you want to put a finer point on it. Can we get more? I would say the thing that the divisions are really focusing on is to make sure that we manage our gross profit line. And so, some are going to use more pricing. Others are going to drive it more through innovation pipeline. And so, our key is making sure that we recover gross profit over a period of time, and divisions will deploy different tactics to get there based on where they sit and what the environment will allow. So I would say we are also going to use innovation in a material way to go recoup the gross margin pressure. Edward Yang - Oppenheimer & Co. Inc.: A lot of companies have been very successful leveraging high raw materials to expand margin and drive pricing above raw material pressures. And when I look at the historical revenue breakout, I only have it going back about 7 years or so. Your pricing has actually exceeded 1% per year, more like 2% to 3% per year, 5 of the last 7 years or so. And I guess going back to the original question, do you feel that with your end markets improving, can you drive price -- is 1% basically a limit without destroying demand or do you think that your customers are more resilient and can shoulder higher price increases?

Some of this is the timing as to when we started our pricing activity and when it's going to show up because we went into the year without a lot of pricing momentum moving through the P&L. I guess you've already answered there's -- We don't think 1% is a governor based on our near-term history. However, some of this is a calculation that we make, and part of this candidly is feel for how do we best manage long-term relationship and ultimately, our ability to work with our customers and drive value with our customers, for our customers and through our customers. And so pricing's part of the equation, where are they. And right now, I would say is a lot of people are having great difficulty passing on inflation to consumers. And you see a disconnect between PPI and CPI and a number of our customers are caught in that trap. And so we are working to leverage innovation as a key component because it also provides more absolute benefit to our customers and still enables us to address our margin issues. Edward Yang - Oppenheimer & Co. Inc.: Maybe just a final question on margins. Cleaning & Sanitizing really had a banner 2010, at least the first 3 quarters. And then the fourth quarter, you saw the margin drop off. In this current quarter, another year-over-year decline in margin. And you mentioned that again your focus more is preserving the gross dollar profit and look later on to extend those margins again. From a timing perspective, when do you think on a percentage margin basis, Cleaning & Sanitizing will be back to expanding margins?

Yes. I'd say in the second half, you'll start seeing us cross the threshold of year-on-year margin. It will take that. So now is it the third quarter or fourth quarter, it's in there. I would -- my guess is it's going to be the fourth quarter for sure. Third quarter, we may be more break even on margin year-on-year. Edward Yang - Oppenheimer & Co. Inc.: Okay. Thank you for your time.

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

This is John Hirt, standing in for P.J. today. With respect to your expectation for a $0.20 raw material headwind for 2011, how much of that did you see in the first quarter and how much is still to come?

$0.05 in the first quarter, therefore, $0.15 in the remainder of the year.

Okay. And what raw material cost headwind did you embed into your 2Q EPS guidance?

We’re at $0.10 -- oh, I'm sorry, for Q2?

Yes.

We're getting -- I think it was higher. I think it's in the $0.07 to $0.08 range.

Okay. And can you...

A little more -- part of that is based on not absolute spend level but comparison versus a year ago.

Okay. And can you just remind us what percent of your customers have passed your contracts for higher raw material costs?

Oh, vast majority now, I would say. That was a very big issue back in 2004 and '05 when we really first saw the beginning of what I'll call this inflation trend. We did not have -- a lot of our contracts at that time did not have annual pricing provisions. I would say virtually all of our contracts. I'm sure there's a couple out there that don't -- virtually all of our contracts have at minimum annual pricing provisions built into them to allow us to reflect raw material costs.

Okay. And then just a follow-up. You mentioned that you expect a 2% to 3% negative impact on sales growth for 2Q in Asia Pacific due to the Japan earthquake. Was there any impact in the first quarter?

No. Our international quarters are different. They are one month ahead, if you will. So the international quarter was really November to February. So as a result, the March tsunami had no impact on Japan because it wasn't included. I would also point out that's why we really had no FX impact or material impact on sales in this quarter as well because a lot of that movement was in March.

Okay, great. Thank you very much.

Hey, John. This is Mike. I just want to add that as we mentioned in that quarter, the first quarter, we did see some impact in Asia Pacific and Latin America from the Australia and New Zealand, which was about 1 point. So that was within the first quarter.

Okay. Thank you, guys.

Next question comes from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas - JP Morgan Chase & Co: Your sales growth in the United States was about, in Cleaning & Sanitizing, was about 8% or up about $50 million and your International sales growth was up about $45 million. But your profits in the U.S. were down year-over-year but your International profits were up. So why is it that in the area where you had the faster rate of sales growth, you had a slower rate of profit growth? And why do you have a faster rate of profit growth in the slower sales growth area?

That was mostly, Jeff, raw material impacts and where they hit geographically and also in comparison to last year. So clearly, you got a sleeping dollar, the raw materials are hitting the U.S. disproportionately. Last year, I would also say U.S. had disproportional favorability. So you've got kind of a comparison issue going on here. That explains the vast majority of what you're describing. Jeffrey Zekauskas - JP Morgan Chase & Co: And you said that your sales would accelerate through the course of the year. Which end markets do you think will be growing faster in the subsequent quarters than grew this quarter?

Well, if I answer that in terms of public reporting segments, I would say we would expect about the same sales growth, 7% to 8% in U.S. Cleaning & Sanitizing in the forward quarters. We expect to see acceleration in U.S. Other as the quarters progress and the same is true internationally. We expect the International sales, that fixed currency, to grow and obviously, when you add FX, it'll grow even more. Jeffrey Zekauskas - JP Morgan Chase & Co: Okay. And then lastly, I think in the course of your remarks, you said that you needed about 1% price to offset your raw material headwind. But you got 1% price in the first quarter and it didn't offset the raw material headwind. So don't you need more price? And raw material seems to be going up at a little bit faster rate than you expected. So maybe 2% is what you need?

No. We think we need a little north of 1%, as we've said earlier. Not a hard equation. What happened is it's rounding. I mean we're using 1%. I mean pricing in the first quarter was less than 1%, and I would also say you're going against in the first half a substantially different base when you compare raw material prices than you are in the second half. So raw materials rose last year. First quarter, they were at a very low point. They increased a little bit in the second quarter but really increased much more for third and fourth quarter last year. So the base is different. So that also explains why you might need 1% per year but 1% might not work in a quarter. Jeffrey Zekauskas - JP Morgan Chase & Co: Okay. Thank you very much.

Next question comes from Bob Koort with Goldman Sachs.

Thank you. Doug, can you talk about how retention rates in your U.S. Institutional business vary over time? Has there been any discernible customer attention changes either through the recession or during periods of expansion?

Well, I guess, as you would expect, our customer retention rates tend to degrade during downturns. And it's a function of you have a lot more closures. And so that runs through our retention rate calculation as well. So we got more people going out of business. And I would say it's a more dynamic competitive environment. But these are fairly muted moves. I would say the retention rates that we see today are back to our historic norms for what I will call healthy periods. And so the business fundamentals, when you look at it, work very similar to how they would have looked in mid-2000s from a retention standpoint.

Okay, thanks. And then Mike said that there's been raw materials masking the progress you made in European margin uplift. Can you just give us maybe a couple of concrete examples of some of the bigger things you've done there that have contributed to that margin improvement? Or maybe -- and maybe what's on the horizon as far as a few specific examples?

Yes. I'd say 2 things. I'd be happy to give you some more info on what's happening in Europe. What I would say is when we're talking about raw materials potentially pressuring, right, the European margin and our goal of 100 basis points, that's really going forward. There was not significant raw material pressure in Europe in the first quarter, back to the conversation I had earlier due to the time period, which is really that November to February period. With that said, we believe with the forecast we have in our forecast to raw materials, we are still standing behind the 100 basis point forecast for year-on-year margin improvement for that delta. What's happened? We announced this just a couple of months ago. But I would say the team is all over this, highly engaged. I think doing a great job. And so the leadership team, it stood up there and owned this. They are all over it as I mentioned before. This is their plan and already, we've got significant resizing done in Zurich in the headquarters, which is exactly what needed to be done. They have made great headway in developing the shared-service site that is going to be the consolidation point, if you will, for a lot of the work that we are going to shift and move. There's been very good progress with the works councils. Those are, I think we use the word been constructive, and I think the team and the works councils have done a very good job of managing through this in a way that works. And I think everybody feels very good about how that's moved. The French logistics plan, which is pretty core to what we were going to go do in terms of cost and service impact is already in place. We have the warehouses open and running. So that has moved quite quickly and is working quite well. So I think the team's done terrifically and we've had a very clear map of what needs to get done for the balance of the year to not only deliver the 100 basis points that we talk about for 2011 but to set up the 200-plus basis points that we also referred to for 2012 and 2013.

Great, thank you.

Next question comes from Rosemarie Morbelli with Gabelli & Company. Rosemarie Morbelli - Gabelli & Company, Inc.: Just following up on Europe. It looks as though you are going to eliminate sites. You probably will shut down some facilities. When you are done and before the growth rate that you are expecting going forward, how much will you have shrunk Europe in order to be profitable?

Well, I think, Rosemarie, we -- in the release in February, we talked about a 900-position reduction in Europe. And that's off of a base of about 7,000 to give you perspective on what that means. And so yes, there's going to be -- included in that is significant back office consolidation and some supply chain consolidation. It is not a reduction of any material sort of our field sales and service force. Rosemarie Morbelli - Gabelli & Company, Inc.: Okay. And just following up on that. Are you following -- because this is management team number, I don't know, maybe 4, trying to turn around Europe. Are there any changes in what you are going to do there versus what you are doing in North America? I mean in the U.S., really. Are you following the U.S. model, which had been the game plan or have you realized that maybe the U.S. model doesn't work in Europe? Could you help me understand what you are doing differently this time in addition to the consolidation you talked about?

Yes. I guess, Rosemarie, I'm not sure this is, I would count this as management team number 4. We've now -- this business, if you want to start at the beginning of the JV to now, has been in existence for 20 years. So certainly in 20 years, you're going to have some rotation of a number of leaders and maybe we are on number 5 over that period. I haven't sat down and counted. But with that said, yes, I don't think it's as simple and nor have we ever described this as overlaying a pure U.S. model in Europe. We don't believe that would be the right plan. We've never had that as our plan. With that said, we are trying to implement what we think are fundamentals that lead to a successful Ecolab model, not only in the United States but throughout Latin America, Asia Pacific and we are quite confident in Europe. And so that would be let's leverage our product supply chain across businesses and in Europe across the continent. We're not the first to have a pan-European supply chain. And frankly, we were hindered from doing so until we got a system in that would enable us to do that, which of course we talked about. It is done and complete. So we're working to leverage that. We have added sales firepower in Europe. We were under gunned there. So we think we have addressed that, and we've seen a notable change in a number of corporate accounts that we've been securing and bringing on in that business as a result of adding heads in that area. But driving back-office efficiency, we don't believe it should be stopped culturally. It makes no sense to have way too many folks doing work that we know to be done in another way. We have got to free up those resources and those dollars to pound back into innovation, pound back into customer experience investments and all the other things that our customers expect, which is the formula that we are going to try to drive. But we will have distinct sales and service teams by country, because you need to. We are going to have customer service by country, because we feel we need to. But where we pay bills and where we handle accounting, we don't believe needs to be customer or country specific nor where we make products or even how we ship products needs to be country specific. So that's the model that we are driving and we feel very good about it. So does the European team. Rosemarie Morbelli - Gabelli & Company, Inc.: That is very helpful. I appreciate it. And on the innovation pipeline, you said that the pipeline has never been as strong as it is today. Could you remind me as to how many new products, however you define them, are currently in place as a percentage of sales and then what you see that percentage getting to a couple of years out?

Yes. Right now, so we call that, I mean not uniquely, the vitality index, to measure what percentage of our sales are coming from products and programs introduced in the last 5 years. And our target has been 35%. We’re at a little north of 38% right now. I would imagine that we will stay at least at 38% as we move forward as old ones roll off and new ones go on. Obviously, 38% we hope continues to increase as a target because we expect the top line to continue to increase. So the pipelines have to get bigger. Rosemarie Morbelli - Gabelli & Company, Inc.: Okay. And lastly, if I may, could you talk a little bit about your latest healthcare acquisition and how you are integrating it?

Yes, so the company was O.R. Solutions. And we closed on it finally in early March. So it only had a little over 3 weeks of impact on Q1. This is, if you will, if I simplify it to a razor and razor blade model. The razor blades are fundamentally infection barrier basins and drapes, which fit over the warming devices. And those ultimately are very similar to the types of things that we make via the Microtek acquisition. And so long term, we see supply chain consolidation here, which will make sense and not in a very distant long term when we need to make sure that we understand how to do this properly. And certainly integrating all the back office will be done. From a sales and service standpoint, the plan isn't to integrate that right now. We've got a dedicated and focused team. It's not a huge team and they're out there operating as they have, driving sales of this specific technology and doing a very good job. Rosemarie Morbelli - Gabelli & Company, Inc.: Okay, thanks a lot.

Next question comes from Laurence Alexander with Jefferies.

This is Jeff on for Lawrence. Just a question, how much of the earnings growth in International segment was specifically in Europe rather than the rest of the world? I mean which end markets in particular?

Yes. In Europe, I mean Europe represented a sizable key to the improvement. And Germany, from a regional standpoint, Pest Elimination had a very strong quarter year-on-year as well throughout Europe.

Got you. And just to go back to your pipeline again, which end markets are you targeting the most with the new products?

Well, I would say we hold all of our businesses accountable for continuing to drive innovation and to meet the 35%. We have a number of big initiatives in all of our large core businesses. F&B's got a very strong pipeline, Institutional does, Kay as well, Pest Elimination, which should be working on it different also has a number of key and core innovations coming out this year. So we don't really overload on one versus the others because you got a natural governor, which is how much can any 1 sales team take in any 1 year?

Right. Thank you.

Next question comes from Mark Gulley with Soleil Securities.

I’ve got 3 questions if I may. Doug, you were talking about pricing dynamics and the fact that you have the ability to raise prices contractually just once a year. Although that sounds like it’s an improvement over the past, it still sounds like there’s a lot of inertia in the system. Any effort on your part to shorten that to maybe to quarterly, a real purse?

Mark, as we talked, I guess over time, we feel -- yes, I understand the question. I mean we've gone through this. I guess our choice is we really sell on the value that we're going to deliver to the customer and it's based on a number of things. We don't want to end up with kind of basket pricing and in a mechanism like that because we don't think it's going to either benefit the customer or us long term. And so when you've made that decision, you've made a decision, right, not to be able to attract exactly raw material input costs or declines as they move through your P&L. And I would say, I think that's worked for us. We've been living in a fairly inflationary or dynamic period in terms of raw materials really since '05. So I think there's a good track record to see that we have been able to recover these. And I think that what we're doing is the right thing for our relationships with our customers and long-term value creation for the business. So that's why we're there.

That's helpful. Okay. you talked about innovation being a driver for margin improvements through mix. Can you give us a feel for the kind of price uplift you might get for product B succeeding product A, let's say in warewashing for example. How much more dollars per day or whatever, how you want to think about it, would the new product have over the old product?

Well, I will give you a couple of recent examples. We’ve talked to Apex. So Apex is often being -- is the trade-up from solid power. And when we do that, Apex is a 20% per pound premium. So it's not inconsequential. I would also point out that Apex represents great value to the customer even with that, if you will, per pound increase, because they get 2 to 3 times that return, if you will, versus the delta in water and energy savings. So that's exactly the type of equation that we want to drive. We're not going to be able to get 20% naked price increases. Right, it's not going to happen. But if you really have innovation to deliver value to the customer, you have the opportunity to have what I would say outsize impact to benefit them and also ourselves.

Okay, that's helpful. Thank you.

Next question comes from Dmitry Silversteyn with Longbow Research.

Thanks for getting to my question. A couple of questions. First of all, you were fairly aggressive it looks like this quarter with the share repurchases and I think you probably are going to start the June quarter around 235 million shares, correct me if I'm wrong. Is the pace of share repurchases going to be at these levels going forward, are you accelerating, decelerating? I mean, what's your use for cash going forward through 2011?

Dmitry, so we repurchased 1.5 million shares in the first quarter. Last year, we were somewhere around 7 million shares. So we don't forecast share repurchase. I think if we've talked, it's the natural offset to our M&A goal. So our primary use of cash, if you will, would be M&A first. But that would be smart M&A. And in the absence of being able to utilize cash there, we do not sit on it. We have returned it to the shareholder. We typically have done it for our shareholder.

Okay. So basically, we're looking at this as either growth in revenue and profits through some future M&A forecasts or just taking a share count down, if you don't find M&A?

Yes.

Second question on the year-over-year declines in profitability of the North American operations for Cleaning & Sanitizing and Other Services in terms of percentage as a percent of revenue, but also in the case of Cleaning & Sanitizing, just the outright dollar declines. I think you talked about the Cleaning & Sanitizing being an issue with timing of price realization, if I remember correctly, in answer to your earlier question. But is the other services, given that you got flattish volumes and you have actually lower losses from the GCS business, has Pest Elimination gotten that much worse? And is it mostly delivered costs and higher diesel and gasoline costs? Or is there something else going on in the Other Services business?

Yes, I mean Pest will see some margin pressure from certainly gasoline prices as they go through. And they've got to lower growth, right? So they're growing at very low single digits and even south of that at times. And so when that happens, it's very hard to recover any kind of inflation at all. So the Pest focus is on sales. And if you get sales moving there, that removes the issues in Pest. In terms of U.S. Cleaning & Sanitizing, as we discussed, 1, you're going against the kind of artificially low base, you had the EPCs[ph] just proportionately hitting it there and you had a few other one-timers here and there in that business. So I would say we’re quite confident that the play that we've seen in the past will play out again in terms of us recovering U.S. Cleaning & Sanitizing margins over the coming quarters.

So you were kind enough to give us kind of your feel that the second half of the year will be the time that you'll see positive comps on year-over-year basis in Cleaning & Sanitizing on the margin side and fourth quarter for sure, maybe in the third quarter. What do you anticipate as far as timing is concerned on the Other Services? Do you expect to be basically comping flat year-over-year in terms of operating margins or do you expect those to ramp up going forward?

Yes. I would say the story is pretty much the same, second half.

Okay, thank you very much.

More money on the fourth than the third.

Got you.

Next question comes from Mike Harrison from First Analysis.

Just 1 quick question. Couple of questions I guess. With 1 quarter under your belt in Healthcare, can you talk in a little bit more detail on your outlook for that business this year in terms of organic sales growth and what's going on with margin? Can we get to double digits this year in terms of the organic growth rate and maybe comment on what kind of customer inroads the O.R. Solutions business brings?

Yes. I guess our expectation on Healthcare is that we'll be close to double digit organically, high single digits is probably more in our sight line right now as we look at it. And then obviously, you brought up the acquisition. We'll have acquisition activity on top of that, which will drive substantially higher growth than that in total. O.R. Solutions, it builds further penetration in operating rooms. Right, and that's an important focus for us because it's an important place that you need to control and stop infections. So it's right at the heart of our infection prevention strategy.

All right, thanks very much.

At this time, we have no further questions.

Okay. Thanks, everyone. Some final notes before we finish here. As mentioned on the last call, we plan to hold a tour of our booth at the National Restaurant Association show in Chicago on May 23. In addition, we're planning to hold our biannual investor meeting on September 8 in St. Paul. If you have any interest in attending either of these events or if you have any questions about them, please contact me or Nicole. That wraps up our first quarter conference call. This conference call and the associated slides will be available for replay on our website. Thank you, everyone for your time and participation. Our best wishes for the rest of the day to all of you.

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