Ecolab Inc. (ECL) Q2 2011 Earnings Report, Transcript and Summary

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

Thank you. Hello, everyone, and welcome to Ecolab's second quarter conference call. With me today are Doug Baker, Ecolab's Chairman, President and CEO; and Steve Fritze, Ecolab's Chief Financial Officer. A copy of our earnings release and accompanying slides referenced in this teleconference are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements on Slides 2 and 3. Stating of 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 second quarter earnings release and in our recent Nalco merger agreement and on Slide 2. We also refer you to Slide 3, which describes additional merger information and where to find it, as well as participants in this merger. This conference call does not constitute an offer to sell or a solicitation of an offer to buy any securities. We also refer you to the supplemental diluted earnings per share information that is also in the release. Starting with Slide 4, we delivered an accelerated sales and profit gain in the second quarter. We leveraged the improved sales volume and pricing growth, along with strong acquisition performances to offset the significant run-up in delivered product costs and produce a double-digit increase in our adjusted earnings per share. Our actions to transform our Europe business into a higher growth and more profitable geography are going well and we remain confident in our prospects for a substantial margin improvement. Looking ahead, we expect to continue outperforming our generally improving markets and show continued strong quarterly earnings gains in the second half as better sales growth, pricing, innovation and margin leverage work to deliver double-digit adjusted EPS growth once again in 2011. Reflecting this robust outlook, we raised our forecasted adjusted earnings for the full year to $2.52 to $2.56 per share, excluding the impact of a recently announced merger agreement with Nalco. Further, we believe these continued improving business trends, along with accelerating benefits from our Europe transformation and the additional growth opportunities from the Nalco merger will lead to better EPS growth for Ecolab in the years ahead. Moving to some highlights from the quarter as shown on Slide 5 and discussed in our press release, reported second quarter earnings per share declined 2% to $0.53. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, second quarter 2011 earnings per share increased 14% to $0.64, which was at the top end of our forecasted range. The adjusted earnings per share growth was driven by better volume and pricing from new products and new account gains, along with the strong performance from acquisitions, which more than offset higher delivered product and other costs. We enjoyed strong sales growth in our U.S. Cleaning & Sanitizing, Asia Pacific and Latin America operations. In the U.S., we benefited from an improved momentum across the board, including our Food & Beverage, Kay, Institutional and GCS divisions. We continue to be aggressive, focusing on accelerating our top line growth, as we emphasize our innovative products 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 implementing appropriate price increases to help offset higher delivered product costs. We remain focused on expanding our margins, emphasizing productivity and efficiency improvements to help increase profitability. We are underway with our actions to improve growth and profitability in our Europe business. While still early in our process, we are seeing good initial results and we continue to expect strong margin improvement for the full year 2011 and more significant progress over the next several years. And we are also making significant investments in key growth businesses and acquisitions to build future growth. This includes last week's announcement of our merger agreement with Nalco, which we believe will bolster our opportunities set for customers and position us as the leader in additional high-growth markets that leverage our mutual core strengths in product technology and sales and service execution. Looking ahead, we expect continued strong adjusted quarterly earnings growth 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 our third quarter adjusted EPS to be in the $0.73 to $0.75 range, compared with adjusted EPS of $0.66 in the third quarter 2010. We raised our full year forecast and outlook for 2011 adjusted EPS to be in the range of $2.52 to $2.56 per share, showing a 13% to 15% gain over last year, excluding the prospective impact from the Nalco, which is expected to close in the fourth quarter. That EPS gain 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 strong earnings gains to once again deliver attractive growth and shareholder returns, and set the stage for improved results in the years ahead. Ecolab's reported consolidated sales for the second quarter increased 12%. Looking at the components, volume and mix increased 4%, pricing rose 1%, acquisitions were 3% and currency increased sales by 4%. Slide 6 includes sales growth by segment and division. Sales for the U.S. Cleaning & Sanitizing operations rose 9%. Adjusted for acquisitions, sales increased 6%. Institutional sales improved in the second quarter, growing 4%. Sales initiatives targeting new accounts and effective product and service programs continue to lead our results. Our markets were mixed, with further expansion in lodging and softer food servers' foot traffic. We are introducing more new products that deliver improved value to reduce labor, water and energy costs for customers in our warewashing, laundry and housekeeping markets, as we continue driving our growth and industry leadership. We showed a number of these at the National Restaurant Show in May and are confident these solutions will have important benefits for our customers and business results. These new products include Solid Power XL, our new concentrated warewashing product that provides 50% more cleaning power per capsule, as well as the Cleaning Caddy, which won an industry innovation award and provides customers with the ability to more frequently clean their restrooms with less downtime, thereby saving money and improving guest and employee satisfaction. We're also making additional investments in our sales and service force and leveraging additional marketing initiatives to drive sales growth. We expect these growth initiatives, as well as additional pricing, to help offset raw material inflation and deliver improving institutional sales gains over the balance of the year. Kay's second quarter sales were up 7%, led by strong new account growth from food retail. We expect continued good new account growth in food retail, along with better quick service sales in Kay's third quarter. Reported sales for Textile Care increased 70%. Adjusted foreign acquisitions, sales were up a solid 9%. Good customer gains, momentum from new product launches and additional sales within existing customers more than offset soft but improving industry conditions. We expect to have further gradual improvement in textile industry conditions, when combined with our strength in Textile Care business, will yield good sales growth, and again in the third quarter. Healthcare sales increased 27%. Excluding the acquisition of OR solutions, sales were flat as we compare it against a large one-time government order in the prior year and the transfer of some sales to Ecolab International segment. Adjusting for these items, U.S. Healthcare division sales increased 5%. The equipment and patient drapes, hand hygiene and instrument processing led the sales gain. We continue to be pleased with the acquisition of OR solutions. It is performing well. We also continue to see new account gains from our OptiPro instrument reprocessing line for central sterile and further progress in our EnCompass environmental hygiene line for patient room hygiene. Looking ahead, third quarter sales are expected to show continued good organic and strong reported sales gains. Food & Beverage sales grew 10%, led by strong water management sales. Sales increased in most 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 and is expected to show strong growth in the third quarter. EcoCare sales increased 3%. Division continues focusing on new products and accounts. EcoCare once again outperformed its markets, offsetting mixed and market conditions with good growth led by In-Bev and auto dealership volume. We look for our Vehicle Care to continue showing year-over-year sales growth in the third quarter. Sales for U.S. Other Services rose 1% in the second quarter. Pest elimination sales were flat as gains in food processing, healthcare and food retail were offset by 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. Recent new program launches like Guardian Plus for full-service restaurants and bedbug treatments in non-hospitality markets, such as long-term care, retail and restaurants are showing good results. We expect our new products and programs, along with aggressive selling, to help offset the soft markets and yield sales improvement in the second half of the year. GCS sales increased 7% in the quarter. Once again, profitability improved over last year. New account wins and appropriate pricing helped to drive the sales gain. 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 improved profitability in the third quarter. Measured in fixed currencies, international sales increased 7%. Adjusted for acquisitions, sales increased 5%. Europe, Middle East and Africa sales rose 3% in the second quarter at fixed currency rates. Europe's Institutional second quarter sales increased modestly adjusted for divestitures. 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 rose nicely over last year, reflecting market share gains. Food & Beverage continues to focus on corporate accounts, emphasizing the cost savings benefits of our innovative products. Textile Care sales declined modestly in a continued weak market. And Europe Healthcare sales showed a solid increase as gains in pharmaceutical and infection prevention led the growth. After Europe reported a solid increase benefiting from operational improvements as well as seasonal shifts that will be partially offset in the second half. Our work to improve operating efficiency in our Europe operations is well underway and showing good progress. We're nearly finished with the rightsizing of our European headquarters. We have implemented logistics improvements in France. We opened our shared services center in East Europe, with the first transfers of work completed. In addition, discussions with the works councils had been successfully concluded. We are still early in the process, with more actions to be taken, as we work to realize the approximately 100 basis point margin improvement in 2011 from transformation activities, and double that in each of the next 2 years. Looking ahead, we expect Europe's third quarter fixed currency sales to show continued modest growth. We are seeing the expected margin improvement from our transformation work, though it will be offset by higher delivered product costs and higher variable compensation in the third quarter. However, we expect the fourth quarter profits will be markedly better. Asia Pacific sales grew 16% in fixed currencies. Adjusted for acquisitions, sales grew 5%. We estimate the effects of the earthquake in Japan reduced that second quarter sales gain by about 3 percentage points. Institutional sales, adjusted for the Cleantech acquisition and the impact of the Japan earthquake, were strong. Food & Beverage sales also showed strong organic growth. Both the beverage and brewing sectors continued their increase, benefiting from improved product penetration and account gains. Looking ahead, Asia Pacific expects continued good sales growth in the third quarter but there will be, perhaps, 1 percentage point of negative impact on Asia-Pacific's third quarter growth from the earthquake in Japan. Second quarter sales for Ecolab's Canadian operations increased 7% in fixed currency rates. Strong growth in the core businesses drove the strong results. Latin America reported a strong sales gain, rising 14% in fixed currencies, as all divisions in their region grew double digits. Institutional growth was driven by new accounts, increased product penetration and continued success with 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 us double-digit gain. Overall, we expect attractive growth trends to continue in Latin America and they should yield a solid gain in the third quarter. Turning to margins on the income statement in Slide 7 in our presentation, second quarter gross margins decreased 140 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 that the second quarter will be the peak in terms of year-over-year impact from the higher delivered product costs in North America, and in total, and that pricing and cost reduction actions that are underway will increasingly offset the cost impact in future quarters. We anticipate that the delivered product costs will peak in Europe in the third quarter. SG&A expenses represented 35.9% of sales, 130 basis points below last year. Leverage from the sales gains and acquisitions more than offset cost increases. Operating income for Ecolab's U.S. Cleaning & Sanitizing segment rose 3%. Adjusted for acquisitions, U.S. Cleaning & Sanitizing operating income was off 4%, as higher delivered product costs more than offset pricing and volume gains in the quarter. Operating income for U.S. Other Services declined 15% as higher service delivery and other costs more than offset pricing and cost savings actions. International fixed currency operating income increased 26% versus last year, while margins expanded 130 basis points. Volume and pricing gains, along with improved efficiencies, more than offset higher delivered product costs. Corporate segment and tax rate are discussed in the press release. We repurchased 0.9 million shares during the second quarter. The nether's [ph] performance is that Ecolab's reported second quarter diluted earnings per share of $0.53 compared with $0.54 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 14% to $0.64 when compared with $0.56 earned a year ago. Turning to Slide 8, Ecolab's balance sheet and cash flow remain strong. Total debt to total capital was 32% at June 30, compared with 34% reported a year ago. Our net debt was 27%. As detailed in Slide 9, 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 our key growth markets. We are using pricing and innovation to benefit margins, and along with favorable currency trends, expect to more than offset delivered product cost increases in the second half. Further, recent acquisitions will be a meaningful contributor to 2011 earnings growth. Europe's work to transform itself into a higher growth and more profitable operation continues to go very well and we continue to look for about 100 basis points of margin improvement from Europe in 2011, though higher raw material costs and higher variable comp will offset that progress in the third quarter. Despite this short-term impact, we expect the results from our actions to accelerate in the fourth quarter of 2011 and continue to increase significantly over the next several years. Looking at the third quarter 2011, we expect adjusted earnings per share, excluding special gains and charges and discrete tax items, to be in the $0.73 to $0.75 range compared with the adjusted earnings per share of $0.66 earned a year ago. We raised both the top and bottom of our full year estimate by $0.03 and now look for full year 2011 earnings per share to increase 13% to 15% to the $2.52 to $2.56 range, excluding the impact of our recently announced agreement to merge with Nalco. We expect the second half gains to be driven by improving sales volume, higher pricing, cost savings, acquisitions and the actions we are taking to improve your profits. In summary, as noted on Slide 10, we deliver at the top end of our forecast range in the second quarter while offsetting higher delivered product costs and while still investing in our future. We look for the third quarter to show continued growth, and for 2011 to represent our ninth year of adjusted double-digit EPS growth out of the last 10 years. And we expect the investments and actions we are now taking will yield better sales and EPS growth in 2012 and '13. We are very excited by the potential of the merger with Nalco. Nalco's position in large and high-growth markets, its technology and sales and service leadership, offer substantial compelling benefits for our customers and provide significant additional growth drivers for our business. In response to questions we received following the announcement, we're including some supplementary financial information in Slides 11 and 12. I'll turn the call over to Steve Fritze to walk through these slides for you. Steve?

Thanks, Mike. In response to questions from investors, we are providing a detailed view of the 2012 P&L, the pacing of cost synergies through 2014, depreciation and amortization changes due to purchase accounting, capital additions, as well as return on invested capital information and perspective. Remember, this is way before we would normally give guidance for the following year. So of course, we have risk-adjusted the information accordingly. First, the 2012 P&L Slide 11 as we see it. To explain the chart, we've started with the median consensus forecast of each entity for next year in the first 2 columns. Remember, these are the median. So for example, if you took the high and low analyst sales forecast for next year for each of the 2 businesses and added them together, you'd get a range of about $800 million. Hopefully, that puts into perspective our adjustment column, which is merely our adjustment to the median view of 2012 for the combined business base. This is our view before synergies and other deal-related P&L changes. You can see our view is for strong underlying business performance from both entities. Both businesses just increased 2011 guidance last week, yet the 2012 consensus for each is largely unchanged. Then we have synergies. We have started with a pretty conservative assumption here. We know it. Integration planning will begin soon and we will be all over it for 2012. Finally, on this slide, there are other transaction impacts. First is the expected accounting impacts on tangible and intangible assets. For tangible assets, while there will be a write-off in value, there will also be a reset on remaining useful lives so as to reduce depreciation and net of $42 million. Then the impact of customer list, technology, et cetera, should increase amortization from Nalco's current amortization rate and it'll add $211 million to it. Thus, the net of $169 million between amortization and depreciation. These numbers are educated in the sense that we have used outside valuation resources to get a preliminary view. But of course, they are not final. Interest expense is our view of the financing cost based on expected structure and current interest rates with some cushion. Tax is simply the reduced taxes due to the additional expense. Finally, the increase in shares. So, that's the walkthrough of the 2012 P&L, getting to $3. The next page provides some important information on depreciation and amortization expense and capital additions for cash flow modeling and our views on synergy pacing, tax rate and importantly, returns. I think they all speak for themselves, but I want to give some perspective on ROIC. We expect our ROIC, including the impacts of purchase accounting, to be at 10% next year, growing about 400 basis points over the following 3 years. So we expect a strong improvement, and this is very consistent with our history. For perspective, in year 2000, Ecolab's ROIC was 18.3%. In 2002, the first year after we acquired the other half of the European joint venture, it dropped to 13.6%. And it then continued to grow and increased to 18.9% in 2007 before we did some healthcare and food and beverage acquisitions, which dropped it back to 16.3% in 2008. And by 2010, just a couple of years later, it was at 20.5%. So we have a strong history of focus on improving returns, which can be accomplished when you operate with a highly recurring strong cash flow business. And you can see the strong cash EPS of the combined businesses up about $0.60 or 20% from Ecolab alone next year. So you can see that strong cash flow. So that concludes my financial remarks, providing more transparency into what I view as a transaction that brings a lot of opportunity and is very attractive from a financial perspective. Now, I'll turn it over to Doug Baker.

Good afternoon. Look, I want to offer perspective on 2 key points, one is our business performance in the second quarter and then also our outlook for the year. And then on the planned merger with Nalco. So first, our business. I characterize our second quarter as a very good quarter. We don't use the words "very good" around here easily. I would say if you take a look at our sales and you exclude FX, foreign exchange and acquisitions, we grew it plus 5%. And so we're really closing in on our 6% to 8% historic target much faster than we had predicted. In the last call, we predicted that we'd start reaching, if you will, the 6% mark by year end. And so clearly, we're on a pace to do that in a much shorter time period. The sales acceleration was really driven by our own efforts. We've got great innovation, it's working, being accepted by customers. Our team is doing a great job driving it. We also, in part because of innovation, have great new business activity. We've had very strong results and we're very pleased with what we're doing in the market in terms of capturing new customers and driving new sales. New growth initiatives are working. We had strong healthcare, strong emerging markets, strong wool [ph] results, Water, Energy & Waste results in this quarter. And I would say, the sales acceleration and the stronger growth initiatives are very important because the market still is quite slow as we projected. So really, market turnaround would be in front of us. It certainly isn't behind us at this point. If we turn to Europe, Europe, you saw improving growth on the top, albeit still slow, 2% to 3% range. Good margin expansion, 130 basis points year-on-year for the quarter and we're on track for the year to hit our target in spite of, really, unplanned, insignificant raw material increases that are affecting all of our regions but also Europe. Now we also want to say that we expect a little lumpy story in the second half. In Q3, we will have raw materials peaking in Europe and we also have a year-on-year bonus comparison, which frankly turns favorable in Q4 and is a little bit of a problem in Q3. So we expect strong results in Europe margins in the second half, but it's going to be lumpy, much, much -- really strong in Q4, not as strong in Q3. We want to make sure that's clear. Margins overall. They are gaining traction. We've got pricing coming on, the raw price delta declines as the year progresses, not because we expect our raw material prices to decrease this year but simply because the base gets easier. Last year, you had raw material inflation in the second half versus the first half. So if you will, what we have to overcome in terms of year-on-year comps becomes easier in the second half. The second quarter globally or in total for the business was our toughest comp period for raw material or for margin compression. So that's behind us and we know with pricing and frankly easier comps, our margin story is going to get stronger, which is important because this going to leave us in a very good position with very strong momentum, leaving the year and moving into 2012. So as a result of our sales acceleration, margin recovery, we raised our forecast for the year, and it now stands on an EPS basis of a 13% to 15% increase versus last year. So in that, we expect to have another very, very solid year this year and are excited about what's going on in our business. So now let me turn to the planned merger with Nalco. Let me start with the logic. And so we've talked to a lot of people about this. At the end of the day, we're excited about this merger because it makes us a bigger, faster and better growth company. It equips us to grow our existing portfolio in a much better way long term. Currently, if you look at our current customer set at Ecolab, over 50% of them buy water processing management sustainability services, not always from Nalco, but from a provider of those services. It is an existing revenue stream in those markets. Our customer needs in this area are growing. Water, while everybody talks about the secular trends, is becoming a real issue, particularly in our industrial set but also in hotels and hospitals in terms of their need for competency, help assuring quality water, handling ebb flow to water and handling the captive water in their environment. For us, long term, it was very clear that strategically, we were going to need enhanced water competency to thrive going forward. Wasn't urgent, but it was very important. And we knew it's something we're going to need to do to make sure that we continue to thrive long term. This combination opens up great innovation opportunity for us to meet our customer needs as we work to couple this and package deals in a way that we can do it uniquely, given the combination of our businesses. It also will bring core innovation that we can leverage back in our traditional businesses, too. Second, we bought a great company. Nalco has the best market position. Number one. [indiscernible] technology, they're the clear leaders in this business in this industry, and buying the leader is really going to put us in a very advantageous position. We also believe that we will enhance Nalco's ability to compete going forward. Number one, we believe, they say, they have been somewhat hindered from moving as fast as they want because of their cash or their debt position. That gets cleared up. We add significant management bandwidth. Why? Because we're taking their talented team, coupling with our talented team and we know there's overlap that goes away, we will have additional capabilities and we run identical models, which means we can add value right away. There is great technology overlap and there are tremendous CTC, Circle the Customer, opportunities. We estimate that there will be $0.5 billion in CTC sales over the first 5 years, which equates to about 1 point of additional sales in each of those years. And it's really because there is over $1 billion opportunity up in B. There's also great opportunity at Textile Care, hotels, healthcare, et cetera. There is significant opportunity to get after. Ultimately, the combination opens up a broader list of M&A bolt-on and technology play opportunities for us. Net, we expect to live at the top end of our traditional organic range, call it 8% plus moving forward, which means we will grow, and that is without M&A, because when you start adding M&A, we really believe we've got a very, very strong top line growth story as a result of this combination. Net, we've got a faster growth portfolio, chasing $100 billion opportunity. The fit of these businesses is excellent. They fit together very naturally. We have very similar cultures, servicing growth mindsets. We have very similar technologies and most importantly, we have nearly a mirror image in terms of the business model we deploy in our markets. Taking technology and field service, coupled in unit to deliver outsized value to customers. And we trade for product premiums, but deliver enhanced value through energy, water and other savings. That is exactly the model we deploy. That is the model they deploy. So we understand how this business works and are quite confident we can add value, given our long history in running these types of models. This combination creates real cost synergies. We have conservatively estimated these to be $150 million on a run rate basis. We project that we will be at full $150 million run rate at the end of year 2, which means at the end of 2013, there is significant corporate in G&A overlap, there are purchasing synergies in supply chain. We see 0 synergies coming from R&D in field sales and service. This is principally about growth, but there are great cost synergies and we plan to get after them quite aggressively. On top of the cost, there's also interest and tax savings synergies as well. Net, the sum total of the cost synergies more than exceeded value, the premium we paid for this business and handily covers it, which brings me to deal valuation. We paid a real premium on this business but we get an excellent deal for our shareholders. We spent a lot of time on due diligence. We're confident that their business is accelerating, that their margins are on track to improve because they're getting pricing. They've recently made, we think, very smart, but P&L punishing investments and expanding R&D significantly, which we think they did the right thing, on adding 500 net sales people, 900 specifically in the emerging markets. So their P&L base is quite solid. It is fully invested and we have not, I don't think, seen all the benefits of these investments because they don't appear immediately. We believe they are poised for strong performance, and the combination of these businesses only enhances their opportunities going forward. The deal, as a result of the cost synergies alone, is accretive. In 2012, we talked about $0.10. Nearly $0.08 of that is coming from the cost savings. $0.24 will come from the cost savings in 2013, and $0.34 in 2014. So you can see just from the cost savings, this does not include growth, it doesn't include growth synergies. The cost savings alone drive significant accretion as we go through this. Last point, enterprise valuation. Ecolab has earned a premium over the years because one, the market understands our near and long-term growth story and buys into it; and two, the market understands our model and rewards us for our transparency, predictability and consistency. We believe firmly in our ability to continue to deliver on both of these fronts going forward. Our growth story, we believe, has only been enhanced as a result of this combination, we chase a bigger opportunity, there are clear CTC opportunities. The portfolio, we think, is naturally a faster growth portfolio, which is why we are talking about 8% plus organic growth going forward. Our consistency is also an area we believe we can drive great improvements in their business. And in total, our consistency is driven by steps we take. It is not naturally occurring, not like gravity in our business. We do a number of things which drives this over time, which we also believe can be successfully applied to their business. How we procure, how we reward and compensate people, how we incent customers. All are designed to reduce, not accentuate, cyclicality. Most importantly, how we manage. We know the details of our business. We get into it monthly. We understand the issues early. We develop excellent forecast capabilities. We demand it of our general managers. All of this allows us to start predicting and driving consistency in our business, and all of the above are going to enhance our ability to do the same with them. And we are quite confident we will end up with a business which is predictable and ultimately consistent. So in the end, we know that the only thing that really determines value in any enterprise is how successfully one executes against marked strategies. And this is exactly the case here. And we like this deal. We think it's strategically perfect for us. It is a very natural fit. It's ripe with opportunity. And so, our commitment is to realize the value for our shareholders, which we are very confident we can do. And we will do it predictably and consistently, and we will ultimately drive, we think, a very successful enterprise that will show value for customers, for our employees and for shareholders. So with that, let me turn it to Mike.

Thanks, Doug. Some final notes before the Q&A. As mentioned on the last call, we plan to hold our biennial investor meeting on September 8 in St. Paul. If you have an interest in attending or you have any questions about it, please contact me or Nicole in my office. And with that, operator, will you please begin the Q&A period?

[Operator Instructions] Our first question today comes from Nate Brochmann with William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C.: Wanted to talk a little bit, Doug, I think you said obviously going to the fourth quarter, you see some headwinds in the third quarter dissipating between the comp and the raw material prices. I just wondered if you could elaborate a little bit on that in terms of what you see in terms of the strength of the top line going into the end of the year, as well as your confidence in those headwinds abating?

Yes. So Nate, when I was talking specifically about the comp and the raw material comp challenge in Q3, that was with Europe specifically. In total, I would say the margin story gets easier and better as we go forward, not more difficult with the exception in Europe. So we peaked globally in Q2, Europe peaks in Q3. Right, it's just what I would call a quarter delay there and you just have a very different story in Q4. In terms of organic sales growth, we expect continued acceleration in our organic sales growth. So we are a little north of 5% here. We expect to be North of that in Q3, and 6% rate in Q4. Nathan Brochmann - William Blair & Company L.L.C.: Great. And then also on Europe, I was wondering if we could dive into that just a little bit. Mike, I think you said in your prepared comments that you have actually worked through all the work council issues at this point, was wondering if you could just elaborate a little bit on that because that sounds like a pretty big turning point there?

Yes. Not much more to say, Nate. We did them, we did them successfully so we're pleased to have that behind us. And as we said, we're on to the many other projects we've got underway. So we're starting to see some real traction there. So, good news. Nathan Brochmann - William Blair & Company L.L.C.: And do you need growth in Europe on the top side to get to all your promised margin expansion? Or can you do that even if Europe stagnates?

Yes I think, Nate, I think what we said still applies here. We don't need dramatic growth there, but we're growing in the 2% to 3% range right now. That growth is certainly sufficient to drive the type of margin performance we've talked about. Obviously, more growth is going to drive even better results. And in our forecasts suggest that that's exactly what we're going to see is continued slow growth, but growth going forward.

Our next question comes from Mike Harrison with First Analysis.

The European business typically sees a seasonally strong quarter in Q3. I guess my first question is do you expect that seasonal strength, given the economic environment there? Or do you have some concerns about what's typically a stronger quarter?

Yes, Mike, Doug. We'll still see a stronger Q3. You're right, seasonally it's the peak quarter in Europe. We still expect that. We expect to have modest top line growth versus last year in the quarter, and it will be our strongest margin quarter. The margin comment we were talking about is really just your delta.

So I guess that kind of answers my second question then, which is would you expect to see the seasonal strength more than offset the raw material pressure on margins?

No, not completely. And it's really just -- it is the roughest comp period that we have, and it's a combination of margin and variable pay we had, frankly mostly in the base is a challenge last year. So it'll be our strongest quarter for the year. It almost always is on margins, because it's the strongest sales quarter. So the comments are year-on-year, not quarter-on-quarter.

Got it. Okay. And then was hoping that you could also maybe give us some metrics on new account growth year-over-year, maybe I guess as a portion of the 4% of volume growth number? And then if you could also give us some color on where you are in terms of leveraging Circle the Customer opportunities with those new accounts?

Well, that would come later, Mike. Traditionally, we drive Circle the Customer opportunities in accounts that have been with us for a period of time. We haven't had the practice of releasing exact new account data, corporately. I would offer this. We, at the end of last year, talked that 2010 was one of our strongest all-time years in new account productivity, particularly in corporate accounts. And we are outpacing that right now handily.

Our next question comes from Edward Yang with Oppenheimer. Edward Yang - Oppenheimer & Co. Inc.: In pest, volume growth was flat again and it's been flat for a while. That's historically been a very nice growth business for you. When do you think that will accelerate?

Yes. Our pest business is clearly, from a top line standpoint, I'd say one of the few not bright spots in our quarter or year so far, and I guess that's the nature of having 14 businesses, they're not going to all be kicking. And our expectation of pest is that we're doing a lot of work within that business to what I would say enhance value, drive innovation and improve service quality performance. We're making great traction on service quality at this point in time. We're starting to drive innovation in some of the other call it new programs. And we expect this to be a sluggish year all year for pest as a result of the need to go drive these. But our goal is to start rekindling growth so that we'd leave the year with much more promising prospects for 2012. Edward Yang - Oppenheimer & Co. Inc.: And Doug, you touched with regards to Nalco some of the Circle the Customer opportunities, and most of your existing customers already buy water treatment services, et cetera. I would think pest is kind of also logical extension and makes sense from that standpoint as well. Where do you think the penetration level of Circle the Customer with pest in your existing Institutional business? And do you think the ramp-up with regards to the Nalco opportunities would be faster than that?

Well, we've had a lot of success driving CTC over the years, and so it's been successfully deployed. I just happen to have gone through a pretty thorough review of pest yesterday. And so a comment here, we think we've got very promising prospects in several of our key industries and we're really going to do focused effort. And so right now, we have a fairly consistent share across these industries, which is really a function of probably we need increased focus where we've got the best shot at winning long term. And that's exactly what we're going to do on pest. What do we estimate on customers? In Institutional and many of our customers, we will be on average about 25% to 30% penetrated with pest. Well, there's upside there clearly. We have other segments, which I'd rather not go name here right now, where we are going to focus on what I call extra efforts to go drive penetration, which we think we can get to upwards of 50% plus in some of those segments because of the need, because of the fit and because we've got the right programs to go drive that type of penetration right now. That is going to evolve here in the next 6 to 9 months. Edward Yang - Oppenheimer & Co. Inc.: And you think the Nalco CTC opportunities will be an easier or harder or equal sell?

I think they're going to be in many of the segments, the segments we've talked about, a much more natural fit right now. What is front-mind of many of our customers right now is how we integrate and manage water use in their facilities. You can go look at Coke's commitments, Pepsi's commitments, all our brewer customers' commitments. Food & Beverage processing, protein, hotels are under huge issues on water usage and sustainability. This is like the top-of-mind. I've gotten letters from customers in all those industries, post this announcement, telling us how excited they are that we are going to be bringing these 2 things together because the fit is intuitive to those in those industries. Water, we are the #1 consumer of water in many of these industries as part of our cleaning processes. And so being able -- and when you clean basically what you're doing is treating water to create cleaning capabilities. That's what cleaning is. And what we also have to understand is the ramifications on F1 and on equipment and everything else and integrate these. We've learned a great deal about this in running the water business we have today, which is growing at a very fast rate. The problem is our scale. That business globally is $130 million. I mean, it's just a little pebble in a big landscape. And what we really need is the footprint to go leverage. And so huge issue for customers. It's going to be a growing issue. And this is isn't the secular conversation that water is going to be scarce in parts of the world. These are issues that our customers are facing day in day out now and need the technology now, and we've got a great chance of driving significant share gains for our Nalco once this merger is consummated.

Our next question comes from David Ridley-Lane with Merrill Lynch.

Sure. I'm just checking that the Nalco acquisition changed neither the timing or the size of the European transformation benefits that you've talked about in the past?

No, it hasn't. What we've said is this. The only thing we're going to do from an integration standpoint are moves that we think will accelerate and enhance the commitments we've already made. So we do not believe this is going to slow down nor impact negatively on what we've committed to, which is 500 plus margin points by the end of year 3, or the end of '13.

Okay. And maybe just following on to some earlier questions with a llittle bit of a different angle. Is the point of sales for the Cleaning & Sanitizing Ecolab products today the same as the water treatment Nalco-type products among your Food & Beverage and other industrial clients?

The answer is by and large yes, in our industrial clients. It can be in healthcare. Healthcare has many, many points of purchase. Healthcare would probably, be the one exception, but hospitality and F&B and textile would be the same point.

Okay. And then what's been sort of the cross sell success with the existing water treatment offering? And I know it's going to get a lot stronger with the Nalco acquisition, but just sort of wondering what's been the success with the existing offering?

Yes, it's been highly successful. We have our 40% growth in the quarter. It's been driven by a number of outside successes in F&B. Honestly, we are impaired from pulling the leveraging the F&B opportunities to the footprint. The F&B business in particular, is our most global business. In that business, you need a big, large footprint if you're going to go fully leverage the CTC capabilities, and that is really true in water. So one of our great advantages in F&B is our capabilities around the world to meet our customer needs and to drive consistency and the high standards. That's exactly what you're looking for in water. But we have the relationships in this business, and we have deeper penetration in this market, frankly, almost any other person in any other industry, and it's those relationships and that penetration opportunities that we can start leveraging on behalf of Nalco.

Our next question comes from Dmitry Silversteyn with Longbow Research.

A couple of questions. To kind of the follow-up on the Nalco integration. Part of your efforts in Europe has been integrating the ERP system. Can you talk about what -- the value proposition, I think, you'll bring to Nalco and I think Steve talked about it in his prepared remarks or maybe Doug did, I forget, is leveraging the systems and the information technology and the data gathering that you have developed for Ecolab on to Nalco's business to, I don't want to say stabilize it, but to make it a bit little more predictable, if not less cyclical. Where does Nalco stand with their ERP systems? How fragmented it is, or have they gone through the common ERP platform and how easy will it be to combine with yours and transfer, your expertise onto their business.

I guess, Dmitry, I'll answer 2 ways. One, over 3/4 of their business is on an SAP platform, right? So they're fairly well integrated and frankly are probably a little farther along integrating SAP than we are from that standpoint. So that's additive, not subtractive. However, what I was talking about really wasn't leveraging, if you will, IT systems. What it was is leveraging business processes in terms of how we buy goods, how we incent people, how we structure contracts with customers, right? In terms of pricing, but also in terms of incentives for growth and how you structure those and over what periods of time. Because what we don't like are things in our business which accentuate cyclicality or pro-cyclical by nature. We try to reduce those because it makes it harder to manage the business and predict the business. And so there's a lot of steps that we've taken over the years that are not yet deployed in the Nalco business. And their business model is very similar to ours. 90% of their sales are consumables. They sell annuities like we do. So their business and their patterns, if you will, the EKG of their P&L, when we went through 5-year history and 3-year forecast going forward as part of due diligence, look and feel just like ours do as we go forward. But we know we can do something to amp it. And the #1 thing is frankly just the, I would say, overzealous approach we take to making sure people know and understand their business down to little details. Our business is predictable if you know what's going on day-to-day in your accounts with your teams. What are the accounts, what are the metrics? And so we've learned this over many decades and we keep enhancing it. And I would say there's only 3 other guys in the world who run a model like this, it would be Nalco, Best and Diversey, and all 3 of those have gone through all kinds of management changes in recent years. And we're the one with continuity in this and frankly, having much longer Institutional history and knowledge base about how to run these models than anyone else. And we do believe that we'll bring advantage. Nalco believes that's going to bring advantage. And they've got a talented team, they just don't have the same history. So we believe that's where it comes, not SAP.

Got it. Okay, that's helpful. Secondly, somebody noted that your Pest Elimination business has been stalling. But conversely, your GCS business has been delivering good mid- single-digit growth over the last 3 quarters. Can you update us on what the profitability of that business is and what your outlook for the second half of the year is?

Yes, the GCS is improving substantially. I would say when we started looking underneath, we like what's going on. The quarter had a little bit of an outside loss of 1.2, slightly better than last year. But what was driving it was we had to deploy a lot of overtime because we really had a lot of demand in that business and we are now expanding the sales and service team to make sure that we reduce overtime. And we had a number of markets where that makes a lot of sense for us from the P&L. We expect the second half, I mean, dare I say, to be profitable in total? I don't know if that'll happen exactly in Q3. It will happen in total during the second half and we like what we see heading into next year.

Sounds good. Sounds good. And then finally, we've clearly seen the acceleration in margins in the international operations, not just in absolute but also if you look at kind of the delta year-over-year. How much of that is just help from currency versus markets growing a little bit faster versus the efforts in Europe?

Yes. I would say a lot of it. Europe is the dominant factor in our international sector or segment. And so clearly, Europe's margin performance drives that. But your point is right. AP and LA also had margin growth. And what we've said is mostly that it's been driven by volume, right? And it's really volume overcoming, because they got raw material pressure, too, right? We're just volume growth on top of a fixed infrastructure, which is also what's leveragable in the Nalco acquisition, it's really what drives margin expansion.

So were you helped out a lot by foreign exchange or was that kind of a small part of the improvement?

No. The margin discussion did not include FX benefits. So when you're talking about our margin, or when we're talking about margin grew internationally, it had no impact from FX.

Our next question comes from Gary Bisbee with Barclays.

I guess the first question, can you review exactly what's going on within the supplementary merger information on the interest expense line? So it looks to me like what you've got going on is that you're assuming you will refinance their existing debt, but maybe if you could break it down, what's the $1.6 billion cash you're paying? How are you going to finance that? Is that the line of credit? What's the rate likely to be? I think you said something about updating your revolver, and then what is your expectation for refinancing your existing debt?

Yes. So this is clearly in motion, but we intend to put in place quickly some facilities, probably a upsized $1.5 billion multiyear revolver. We'll probably also have a significant 364-day revolver. Structurally, we will have -- we will term out a bunch of the debt and we'll have it staged properly, because part of this is simply, this is a huge cash flow business. So we won't be putting out a bunch of very, very long-term data. It'll be a good mixture based on cash flow and other considerations, that we've said that the overall interest rate we expect is something around 3.5%.

Did that include refinancing their debt and the new debt you're going to have to issue to pay the cash portion of that 3.5%?

Yes. All of this is still to be finalized.

Okay. And then a follow-up question, can you give us a sense how much easier the raw material comparison gets for the U.S. business in the third quarter versus the second? And I guess what I'm getting at is it looks like the margin comp year-to-year is a little easier as well. So would it be the right assumption that, that business will return to year-to-year operating margin or segment margin expansion this quarter or next?

That's just simply the roll through of pricing. So yes, the year-over-year raw abates and at the same time, the power of the increasing pricing amount comes through. It's both.

And the margin being up is it...

Yes, we've said margins to be growing again, certainly in Q4. Fingers crossed, sometime in Q3.

Our next question comes from Jeff Zekauskas with JPMorgan Chase. Jeffrey Zekauskas - JP Morgan Chase & Co: How different is the compensation structure for the Nalco sales force versus Ecolab? Is it a large difference or a small difference? How do you see that?

Yes. I'd say, historically, there wasn't much difference. And of course, we all have different compensation programs in each of the country due to custom, laws, right, et cetera. If you were to compare here, I would say we are still much more on a traditional program, which I would call more variable. A, ultimately, we believe that is a better way to compensate because it enables people to really push, take care of their customers and grow the business, to make more money. And we like that reward system. And also, as I mentioned, provides a buffer against pro-cyclicality which, I think, when you get a fixed compensation structure, you end up with some of it. We know how to change compensation systems and manage people through it. We do it all the time and we don't do it quickly. We do it very thoughtfully. And we usually do it over a long period of time where we're running dual compensation systems, so that they could take the best of it and learn how to earn money on the new compensation system. But we don't have any shocks in the system. Jeffrey Zekauskas - JP Morgan Chase & Co: And then lastly, your healthcare revenues grew 0, and I think Mike made some comments about it that if you make various adjustments, you get to something like 5% growth. But I think the original expectation when you started on making your healthcare acquisitions, is that the rate of growth would be maybe double that. Maybe somewhere closer to 10%. So why has healthcare not grown as fast as one might have hoped, if that's a correct characterization?

Yes. So the number you're talking about, obviously, so I'd agree with the question just to be clear for everybody else, excludes M&A, right? In the North American number, not a global number. I mean, Europe had organic growth. Well we try to give color on it. I mean, we would say when we go look at this, that business right now is growing, mid to upper single digits on an organic basis if you start waiting the 2 quarters, and that's the expectation in the year. To your point, when we initially got into this business, we thought that organic growth was going to be closer to double-digit than it actually is. Certainly, there's a number of factors which I probably don't need to take you through that have occurred since we got into this business and we sit here. One is huge changes in healthcare, right? In terms of federal reform and other things, which has dislocated some growth temporarily. But we see it coming back and we are growing organically much faster this year than we were last year and expect to continue to accelerate. And there's economic pressures, right? Unemployment rates and all the like, which means you've got fewer people on the systems, at least temporarily. We like this business a lot. We are making very good headway in this business. The acquisitions we've been making are beating fairly aggressively with projections and are delivering even outsized returns. So we like those businesses and we think what we're putting together in healthcare is, in fact, a very strong long-term growth driver, both top line and bottom line. And I think healthcare in total, for the quarter, was up at around -- not organically in total. 27%, I think. Yes, it was nearly 30%.

Our next question comes from John McNulty with Crédit Suisse. John McNulty - Crédit Suisse AG: Just a couple of quick questions. I know in the last I guess 12 to 18 months, you've put some significant investment in the emerging markets and I realize it takes a little bit of time for those things to actually get some traction. So I guess I'm wondering, have you already started to see that impact the growth on the margins yet or is that something that's on the comp?

Yes. I would say what Brazil had -- we made a bunch of growth investments in Brazil and strengthened management and added to our corporate account team, everything else. Our Brazil business has been accelerating and really driven because they have taken a number of pieces of a very important business there, which is exactly what we wanted to do. That, I think, in the the quarter, Brazil is up 18%. We are still investing in that business. What we want to make sure we do is have the leadership position in Brazil. We think strategically it's very important. It's a big breadbasket. And we have got a number of big customers who are headquartered there, and we want to make sure we have the right position there. China had 25% growth. That's Greater China. In the quarter China is further down the track, has got greater scale at this point in time than Brazil. It is not only growing at a very fast rate but also delivering attractive profit. John McNulty - Crédit Suisse AG: Great. And just 2 questions on the Nalco acquisition. I guess the first, in terms of your legacy water treatment platform, in terms of where the actual chemicals or chemistry and manufacturing came from, was that outsourced or did you do that yourself?

We made it ourselves. We've been manufacturing water care products for 15 years.

Okay. Okay, and then with regard to the debt that you're going to be putting in place, just in the off chance the U.S. government doesn't seem to get its house in order in time, have you locked in the rates in terms of where you might be exposed?

Yes, we have not yet locked in the interest rates.

Our next question comes from Bob Koort with Goldman Sachs.

This is actually Brian Maguire on for Bob today. Just wanted to go back to the raw material issue, I think you said on the fourth quarter call, that you're expecting about a $0.10 hit to EPS for the full year and then last quarter you updated that to about $0.20 and cost has gone up a little bit more since then. So I was just curious if you could update us on that expectation now. And then also the comment you made about it peaking in the second quarter, is that strictly from a year-over-year basis, the comps getting easier or are you actually expecting some sequential drop in your raw material costs?

Yes, so you're exactly right. We talked about $0.10 at first. It went to $0.20. Our projection now is $0.22, $0.23. So good thing is we're not increasing by $0.10 anymore. The bad thing is it did increase a little bit. But we think in terms of what our expectation is, we do not forecast, although others do. We do not forecast if pricing is going to abate. What we're talking about is our base. It's easier. Because last year, the raw runup that we started in the second half of last year. And so as a result, we're starting to go against easier comps if you look at raw material versus raw material pricing. But we are not forecasting the raw material prices to come down. If they do, it will be a benefit.

Got it. And then just on the price mix composition of sales growth, so it's still only up 1% despite being a couple of quarters into the raw material situation now and trying to pass those on. Is mix holding you back there? Is mix adding or subtracting from that or is it just that tough to get pricing still?

No, it's building, so some of this is the unhappiness surrounding. We were shy of 1 point in the first quarter, a little north of 1 point in the second. We're going to be thirdly tracking throgh 1.5 in the third and probably expect 2% in the fourth.

Okay, great. And then here he write that the Foodservice foot traffic sounds like it was a little bit weaker. I think in last quarter's call you may be seeing some stabilization there, less than 1% year-over-year. Has it taken another level lower recently? Or has it just kind of continued off of a little bit lower base?

Yes, I would say it's -- I think we predicted to be down 1%. I think for the quarter it was down 2%. So in spite of that, I would say there has been clear acceleration in Institutional. Institutional North America grew at 4% in the quarter, up from 3% in the first quarter. So they continue to gain very solid top line traction in what I would call a not great market situation. And they're doing it the old fashioned way. We sell at more restaurants now, right? And that's the way that they're growing the business, which means we continue to grow share. And when you do see the market, right, firmly bottom and start bouncing back, that's only going to be beneficial.

Okay. And then just last question. Can you give a quick update on how the rollout of Apex in Europe is going?

Yes. Apex in Europe hasn't been fully launched. It's planned for test markets in the second half of this year and more likely going to have real impact next year.

Our next question comes from Laurence Alexander with Jefferies. Laurence Alexander - Jefferies & Company, Inc.: I guess first question, how much of the FX to your assuming in the back half of the year?

For the second half, I guess we got $0.05. Laurence Alexander - Jefferies & Company, Inc.: Okay. And secondly, as you look at the Nalco business and your own business particularly in Europe, is there anything you can do to reduce the trade-off between growth investments and margins? I mean Nalco has had this issue where to accelerate their top line growth, they've had to suppress their margins for a couple of years. And Europe had in the past has been described as having a similar dynamic. Is there anything you can do to change that over the next 4, 5 years?

Yes, for a couple reason I think the answer is yes for a couple of reasons. One, they may have made real outsized investments on their P&L over the last 3 years, right? When the current team led by Eric took over, they were way underspent in R&D, upped it by nearly 100%. They added significantly to sales force during that period of time. And I think -- felt they were in catch-up mode, making these types of maneuvers. I think they're in a much more, fully balanced investment standpoint now than they were say a couple of years ago. What the combination is going to do clearly is lower G&A overheads and costs, lower cost of products, so you're going to get cheaper product and open up further innovation opportunities for both sets of businesses. And we know those have -- will enhance the profitability of the business and frankly allow uncontinued investment without the type of margin compression that you've been seeing, I think, principally on the Nalco side. I would say what we have seen in our business over the last 7, 10 years is we have steadily increased our investment in our business while also increasing the OI margin or the output of the business. And that is just getting into the right rhythm. And I think they made a big step upping the investment they just did in R&D and sales team so that they're in a more natural point at this point in time. But there are clear synergies that are going to drive more cost from these businesses. Laurence Alexander - Jefferies & Company, Inc.: And then lastly, are there any of Nalco's processed chemicals such us the dispersants that might be considered non-core or do you want to keep the entire portfolio?

Yes, I would say broadly our view of Nalco is, we very much appreciate what they do, their portfolio of businesses and products.

Our next question comes from David Begleiter with Deutsche Bank.

In the U.S. Institutional, with sales up 3% or 4% in the first half, did you gain share and do you expect to gain any share in the back half of the year as that business picks up?

Yes, Dave, Doug. I would say, what fewer units and fewer restaurants and traffic is down in that industry. And so we know that we are clearly outpacing our market growth in that business. And we do prosaic things like count the number of restaurants that we sell and all the rest of it, and how many products we sell these restaurants, we're making progress on those fronts. As how we're growing the business.

Just lastly, I know you're investing for pest, but should we see, expect similar margins in the back half of the year in that segment versus the first half of the year i.e. around 13.5% or could it be a little bit higher?

Yes, I think margins in the back half, GCS is going to be a contributor in the back half and pest is going to be modestly better. So the sector will be improving in the back half versus the first half.

Our next question comes from Rose Morbelli with Gabelli & Company. Rosemarie Morbelli - Ingalls & Snyder LLC: Doug, if my memory serves me right, you have talked during the roadshow about the fact that you believe that your sales force was better than Nalco's and on the other hand, that Nalco's purchasing model was better than yours. Could you give us a better feel as to what the differences are in the purchasing as opposed to just scale? Are they doing something else differently?

I guess, Rosemarie, I guess, what I believe I said was on -- I think what I said was corporate accounts. I think Nalco has recently made very smart investments in corporate accounts. But it's a more recent part of Nalco's, if you will, organization construct. We have had a corporate accounts organization for decades. And so, we have just a longer history, we equip our corporate account organizations with finance teams to make sure that they have the right information to go out and drive mix profitability, right? Do the right thing to win contracts, et cetera. So what I was talking about is in that specific area and we're talking about combined team of 300. So just for perspective. In that area, I think both of us see that some of the methodology that we have learned over the years would be advantageous. And I was just trying to say there's also plenty that we will learn and leverage from Nalco, too. So this is not talking about the field sales and service team. I mean their field sales and service team in the water area is the best in the world. So we do not have a field sales and service teams equipped with the breadth that they do across all the geographies to compete with them. So that is a huge asset that we would be gaining. In terms of other opportunities, I said I think they are -- we estimate that they are better industrial supply chain guys. That they've got a better industrial supply chain model that's going to bring us real benefits, and the reason for that is that what they do 100% of the time. What we do is we've got big institutional plants with industrial sections, if you will, as a buildout as part of these facilities. And so you just haven't built it the same way from a process standpoint. So I imagine, some of our industrial volume will be moving to them i.e. F&B, Textile, because they're excellent at bulk and tank type of deliveries, which is really what that business is all about. But we see that we will probably pick up synergies that we haven't calculated yet in that area. That's what I would say. Rosemarie Morbelli - Ingalls & Snyder LLC: Okay. And that is very helpful. I was wondering about a couple of trends. First of all, on the Textile side, do you see there towards from your hotel customers, for example, going to independent commercial laundries and are you in that particular market? And the other trend would be on pest. Is the issue that you may be overpriced versus your competition and customers do not see necessarily see the benefits you bring?

Yes. So first, Textile, there's been a move, I think, over a long period of time to outsource. So those are running on what we call OPLs, On-Premise Laundries. Many continue to do it. We'll do it for long time. But there've been those who have been faced with capital equipment, decision points i.e. their old equipment's shot, maybe to buy new stuff. They will decide instead to outsource. That's what our Textile Care business does. It takes care of the large commercial laundries and Institutional, we have On-Premise laundry capabilities. So we basically -- whatever the trade is, we end up having a fairly significant share on both sides of that business. Rosemarie Morbelli - Ingalls & Snyder LLC: And on the pest side?

Yes, I would just say I mean in short, look if you don't have a business rolling, you either got a product problem, a message problem or a delivery problem. And we run a lot of these businesses. I would say pest has not been shrinking, it's just not growing like it needs to do. So we recognize we're going to have to enhance our product and how we talk about it. And if we don't, we can't expect different results. And that's exactly what we're working on doing.

Our next question comes from John Roberts with Buckingham Research.

On Slide 11, where it had the cost synergies at $34 million pretax, and that's about $23 million after-tax, that would be only 15% of the $150 million target. And then on Slide 12, you talk about 23% instead of 15%. Am I doing some math wrong here maybe?

John, I'd like to clarify. There's clearly a typo on Slide 12, which I was going to handle at the end of the meeting. It says $150 million after-tax. It's really $150 million pretax which is consistent with all of our communications so far. There's a typo on this slide.

Okay. And did you say somewhere earlier instead of 23% that you might get 1/3 in the first year? Or 23% has been the number all along?

No. Obviously, this is all early so I clearly didn't say anything like that. However, what we have said is we'll be all over integration planning and work and we'll see and continue to update.

Yes. And just to build on that. What we communicated is the $150 million is our commitment right now. We have a clear vision of the $150 million. We believe it is probably on the conservative side, but until we have firm numbers to back up a better number or a different number, which we would expect to be larger, not smaller, $150 million is the number that we want to commit to.

Our next question comes from Mark Gulley with Ticonderoga Securities.

Hey, Doug. Two kind of higher-level questions, if I may. The first is would you acknowledge that growing 8% per year on a consistent basis for a company of your type, sort of a growth industrial, that's a pretty highly ambitious goal, given the kind of companies that we cover?

Yes, I would say we've always had ambitious goals and we typically either met them or come darn close to meeting them. And Mark, when you look at -- we like our markets that we're in today. We think they're attractive long-term growth market. And I think we've proven over time that we can grow in these businesses. I would say when we looked at Nalco's markets, and really dug in, we would say, on average, they are faster growth markets than our market. And so we believe the addition to this is accretive to growth, not dilutive to growth. Plus, we unlock the potential of those markets uniquely to the combination i.e. the Circle the Customer that we talked about i.e. the leverage relationships that we have. And also if you will, kind of clearing this stuff in the way of the Nalco team today, too much debt, right? Or I'll say probably higher G&A costs and we wish we did which we layer on the business, and we get product supply synergies so we're going to get lower cost to goods. All of these things could drive growth, not just bottom line, but top line because they put you in a position to be more competitive. So it's for all those reasons.

And my second question is this, Doug, you gave a great recap of the transaction in your prepared remarks after the quarter review. I'm going to ask you to pick one, but just one misconception of this transaction after you and the team have been on the road here for several days.

Well, boil it down, I guess there is conversation about -- I think that Nalco's model, the inconsistency people start laying on to that business is overblown. Not that it hasn't been inconsistent to some degree. I even think when you look at what Eric and that team have done, he ran that business in '08 and '09 and '10, which are challenging years. Have significantly upped investments during that period of time to continue to be. So as a result, and I would say leverage, right? Exacerbates those results because it forces it all on a much smaller part of your enterprise value. And so when we look at that and get into the detail, we would say their markets are likely or somewhat more cyclical, but the raw materials aren't. The percentage of raw in total enterprise are about the same as our 24% versus 21%. And the basket arrives, operates or acts differently than ours, but sometimes it goes up at a lower rate, sometimes it goes up at a higher rate. But it is not more volatile. In their fundamental business is the same model as ours. And so the predictability, once you can see transparency inside and outside, we think is going to improve significantly which will modulate greatly the consistency. So we believe -- I'd just think there's a legitimate question there. I just think it is overblown based on what we understand, but really, proof is going to be in the delivery. And we are quite confident that we can run that business collectively together in a way that shows much better consistency than people expect.

Our next question comes from Andrew Wittmann with Baird. Andrew Wittmann - Robert W. Baird & Co. Incorporated: I just wanted to dig in a little bit on the Europe Institutional. I think I heard you say that was flat in your prepared remarks. Is that as a result of just the tough operating climate there or is that maybe partially a result of all the changes that you're making?

Yes, institutional in Europe increased modestly. I think it was up 1 point. But I would say it's operation conditions in Europe, particularly in Institutional aren't ideal. But that's also a business that I would say we have significantly strengthened the management team. They've been in place less than a year. We're starting to get after and drive results. I would say it's much more market and just building momentum. By and large, our field sales and service teams there or not involved in any significant way around the Renaissance program. But we work very hard to make sure that we protect our sales and service folks from noise. Andrew Wittmann - Robert W. Baird & Co. Incorporated: Makes sense. And then just quickly for Steve, on the incremental $211 million of amortization that you're forecasting right now, in conjunction with the deal, can you just give us a bit of a sense about what that amortization period you looks like, maybe an average life, sharply said to be down 50% in '13? Or can you just give us some idea of how that might flow-through in your outlook?

I think the kind of like the overall average is more than 10 years. It's probably like 14 years. The customer list in and of themselves are 15-year life, which really kind of speaks to that recurring nature and the very low turnover of their customer set, which is part of the value of the business, very similar to ours and in that sense to have very strong, deep, long-term customer relationships. Andrew Wittmann - Robert W. Baird & Co. Incorporated: Okay. So then the read into that is a go-forward basis to the deals close, this comment noncash portion to your earnings than there has been historically? Is that a fair characterization?

Yes, absolutely. That's why we were trying to speak to cash EPS because next year should be like 20% accretive to Ecolab's cash EPS, which is really all that amortization costs.

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

Doug, Jim, given that the recovery's been choppy so far in this last couple of years, are you adding more salespeople this year? And how does that hiring difference change in light of the proposed Nalco merger?

Yes, P.J., we added 200 sales folks in Q2. So we are adding. I would say, I agree with your assessment that the overall economic recovery has been choppy. I would say our overall organic sales growth has been fairly steady. And so we are continuing to make sure that we are making the investments we need to fuel that. What was the impact from Nalco? We really see the combined business, Nalco pre-announced their second quarter. I think their formal calls next week in your pre-announcement today, the fact about second quarter growth of 16%. I think it was 11%, 12%, excluding FX. And this also exclusive I think dispersement from last year, but their business is growing quite rapidly. Our business is also accelerating. We don't expect or see that we're going to have what I would call any huge excess capacity in sales and services. And if we had any, we would not, by any means, plan to reduce it. We would rather just grow into it because of the time and effort it takes to hire and train sales and service people, which is why we've can clearly say we see no synergies in that area. And our combined revenue right now, when you add it double-digit, right? And give you the base of $1 billion a year. You're going to be sucking up any kind of sales and service excess capacity in a very short period of time.

One quick question for Steve. Steve, I'm looking for combined topics on the slide of $650 million to $700 million. It seems like almost $150 million higher than each company's CapEx added together? So what's causing that? Is there a need to invest in Nalco assets?

Yes. I think P.J., you might be looking at a number that excludes software. So Ecolab in and of itself, including software additions should approach around $400 million, even in the current year. So then another $250 million for Nalco and it's closer to $200 million. It's still about 5%, little bit more 5% of sales. So it's really a number that's very consistent with history. Does that help?

Yes.

The capital addition number without software.

Our final question today comes from Bob [ph] with Broad Arch Capital.

Just one quick question, when you look at the cash EPS of $3.60 on Slide 12, and then you look at the $150 million pretax now that you've corrected that, how much is in the $3.60 of that $150 million? In other words, if the cash EPS next year is $3.60, $3.70, how much is included. Is any of the $150 million in that number or is not of that in that number?

The number on the previous slide, so the $0.08 a share coming from cost synergies and the rest is basically the amortization.

Then the second question is just a clarification by the end of 2013, we should see all the synergies in the number, is that correct?

Yes, and then it'll be $0.34.

It there's no further questions, we thank everyone for their participation today. The slides will be up on our website and if you have any other further questions, please give us a call. Otherwise, have a terrific rest of the day. Thank you very much.

This concludes today's conference. You may disconnect at this time.