Ecolab Inc. (ECL) Q1 2013 Earnings Report, Transcript and Summary

Michael Monahan - Senior Vice President of External Relations Douglas M. Baker - Chairman of the Board and Chief Executive Officer

David L. Begleiter - Deutsche Bank AG, Research Division Nathan Brochmann - William Blair & Company L.L.C., Research Division Gary E. Bisbee - Barclays Capital, Research Division John P. McNulty - Crédit Suisse AG, Research Division Edward H. Yang - Oppenheimer & Co. Inc., Research Division David Ridley-Lane - BofA Merrill Lynch, Research Division Dmitry Silversteyn - Longbow Research LLC Laurence Alexander - Jefferies & Company, Inc., Research Division Michael J. Harrison - First Analysis Securities Corporation, Research Division Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division John Quealy - Canaccord Genuity, Research Division Robert Koort - Goldman Sachs Group Inc., Research Division Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division Eric Petrie Rosemarie J. Morbelli - Gabelli & Company, Inc. Jeffrey Stafford - Morningstar Inc., Research Division

Welcome to the Ecolab First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to your host for today to Mr. Michael Monahan, Senior Vice President, External Relations. Sir, you may begin.

Thank you. Hello, everyone, and welcome to Ecolab's first quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO. A copy of our earnings release and the accompanying slides referenced in this teleconference are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statement on Slide 2, stating that 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 on Slide 2. We also refer you to the supplemental diluted earnings per share information in the release. Starting with an overview on Slide 3, we delivered strong results in the first quarter, hitting the top end of our forecasted earnings range despite continuing economic headwinds and higher pension and delivered product cost. We leveraged improved sales volume growth, pricing and our synergy and cost efficiency work, along with our lower interest expense and tax rate to produce yet another double-digit increase in our adjusted earnings per share. Looking ahead, we expect to continue to outperform our markets and show double-digit earnings gains again in the second quarter and the full year, as better sales growth, appropriate pricing, innovation, synergies and margin leverage are -- more than offset increased pension and delivered product costs and investments. Moving to some highlights from the first quarter and as discussed in our press release. Reported first quarter earnings per share were $0.53. On an adjusted basis excluding special gains and charges and discrete tax items from both years, first quarter 2013 earnings per share increased an outstanding 20% to $0.60. The adjusted…

Right. First of all, obviously, a very, very strong EPS quarter, which is what we anticipated, hence, the range we had given. We would characterize the sales quarter, I guess I would, as mediocre. The reported 2% I don't think really reflects our underlying rate. We would estimate that to be north of 4%. The differences between the reported 2% and our underlying estimate has really been driven by year-on-year challenge in terms of comparison. Last year, we had a very strong sales quarter. And even at that time, we talked that it was really driven a couple points higher by onetime events in Institutional and Energy. We also saw a sizeable inventory reduction this year in Institutional, EMEA in particular, and clearly, overall, the 4% rate, 4% plus is really, I think, partially reflecting a difficult economy. And we expect the economy to remain difficult for the balance of the year. Good news in the quarter. We saw improving results in both new business and innovation. We know this will drive top line improvement going forward. We closed on the Champion deal, and that is also off to a very strong start from an integration standpoint. So all told, our performance in the quarter has put us in a good position to deliver a very good year. So going forward, our expectations, we expect sales acceleration, better sales reported and continued improvement in the underlying rate. We expect continued strong synergy delivery. We expect good margin performance. Net, we continue to forecast a strong year, made even stronger by Champion. So for the year, our EPS estimate, including Champion, is 16% to 19% growth. So with that, I'll hand it back to Mike for some housekeeping duties. Then we'll do Q&A.

Our remarks. A final before Q&A. We plan to hold our annual tour of our booth at the National Restaurant Association Show in Chicago next month on May 20. Looking further ahead, we also plan to hold our 2013 Investor Day in St. Paul on September 12. If you have any questions, please contact my office. Operator, would you please begin the question-and-answer period?

[Operator Instructions] The first question does come from David Begleiter with Deutsche Bank.

Doug, can you comment on the competitive intensity in the U.S. institutional market in the quarter? Any changes that you're seeing from Diversey or others?

No, not materially different. I wouldn't say that's what's really coloring the quarter from an Institutional standpoint. U.S., when we look at it, we would say the underlying rate there is around 4% in Institutional in North America. I think that's more a reflection of continued softness in the market. We still continue to win in terms of gains and losses, and are, we believe, gaining share overall. So I think the Institutional business is doing decently in a lousy environment.

And just briefly, Doug, how did Champion do in Q1, sales and earnings?

Yes, double digit on both, so in line with where we expected. So I think we've talked about this combined business run rate in the 12%, 13% range and we saw that maybe a little north from Champion. So that's what we expect to see going forward.

The next question comes from Nate Brochmann with William Blair. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Doug, wanted to talk a little bit, you were just mentioning towards the end of your comments expecting some sales acceleration throughout the second half of the year here. Is that just based on the counts being a little bit easier relative to 1Q? Or is there additional new business in the pipeline, particularly maybe in -- within the Energy segment that's going to be coming on? Or just other things that you could provide a little bit more color on there.

Well, yes, it's certainly both. I think if we just stood still, which I don't think is possible in business, we would certainly see improved reported sales numbers in the out quarters because you do have an artificially high comparison quarter-on-quarter in the first quarter. But I think it's also important that, yes, we see momentum in terms of new business. Productivity, we see that in all of our core businesses. So we feel good about those efforts. We've got a number of new innovations that take time to roll out throughout the year. Yes, specifically in Energy. We would have viewed Energy on a normalized basis to be certainly in the range we talked about in Q1 of 12%-, 13%-type performance, is what we really saw when we look at the underlying trends in energy. So that's going to come through, and that's what our expectation for the year is in Energy, is a double-digit top line and bottom line performance pre-Champion. And then obviously, when you add Champion, you got a bigger base. And we would expect the same on a pro forma basis when you have the Champion on top of it. Nathan Brochmann - William Blair & Company L.L.C., Research Division: And then just related to that, how are you guys viewing Europe right now in terms of the environment? Obviously, you mentioned it's still soft. Is it getting a little bit softer? Is it kind of maintaining where it's at? And what are you guys doing to be able to continue to gain share over there?

Yes, Europe's -- Europe, if anything, and I think we talked about this in the last call. I mean, risk -- Europe, we view it as we had a bias that was negative, certainly, going in. And I'd say Europe is softer than last year. No doubt about it. I guess for the quarter, our Europe business is down a couple of points. If we look at the legacy Ecolab business, we were still able to increase margin by over 200 points in the quarter. Some of that is it's a very small quarter in terms of profit contribution. I mean, just in terms of numbers. We don't expect 200 basis points for the year, but we are still quite confident that we're going to exceed the 100-basis-point commitment that we made at the beginning of the year for this year in Europe, just looking at legacy. If I look at Europe in total for the year, I think when we add the WPS and Energy business in there, we would expect modest sales increase for the year and pretty good OI margin increase, north of 100 basis points in total.

The next question comes from Gary Bisbee with Barclays.

I just wanted to ask a question on the new segments. Can you give a sense to how, with the Industrial and Institutional segments, how we should think about the mix on a global basis? Is one of them much more overseas than the other? How do we think about Europe versus Asia versus Latin America? Are they pretty similar? Is there any real difference we might think about in forecasting?

Yes, I don't have the -- we'll get you a mix breakdown by geography. Institutional is going to be heavier in the U.S. just given the size of the U.S. Institutional business. My guess is industrial and Energy are going to be more on the balance side. In total, we're 50% U.S., roughly, 50% outside of the U.S. So we'll give you a breakdown by area.

And then I guess the follow-up, the distributor shipments timing issue, which you'd cited, seems like the big reason that Institutional slowed down. But how do we think about the Industrial business? And given that Water's been struggling relative to the long-term 6%-to-8% targets you've put out there, when do get back to that, I guess, is really the question?

Yes, so I guess the Water business, if we split out what's reported. So we have Water and Paper split out. And within Water, you've got 2 fundamental businesses. You've got, what I'll call core Water and you have mining. Mining in the first quarter going against a very strong first quarter, and I'd also say a tough market, mining was off 7%, and was also off on a like amount on operating income. If you look at the core Water business, it's growing. It's not growing at the 6% to 8%. We do believe that the core Water business is going to accelerate throughout the year. We're having -- we have a lot of momentum on new business in that area right now. We like what we're seeing in a number of areas, but we're also changing the focus, and we have de-emphasized large-cap build projects, which were part of the Water mix previously, because we really didn't like them from a return standpoint. Fundamentally, they took a lot of capital and didn't have much margin. It's not a great business equation. We want more emphasis on the annuity type equation where we know we can have sustained economic growth for the company and frankly, drive great improvement for our customers. So this move, the de-emphasization, if you will, of that business is going to weigh a little bit on the top line but not on the bottom line because we really didn't make any money there. So we adjust for that in the last year basis, which we talked about. Water is growing at about a 4% clip right now and has double-digit OI performance. We think that gets better as we go throughout the year. So we think water is in decent shape. We aren't going to be happy till it's in the 6% to 8% organic, and we think we start building towards that by year-end.

The next question comes from John McNulty with Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: With regard to pricing, you indicated you had about 1% price kind of on average for the quarter. How does that break out by segment between Industrial, Institutional and Energy, if there is any difference?

Yes. So John, this is Doug. I'm just digging out our pricing chart. So if I look in total, it was a little north of 1% but around 1%, so guess what, it wasn't 1.5%. And as we look at it, a little stronger in Institutional than Industrial, but they're both -- they're not very far apart. There's really not big delta amongst any of these guys, right, 50 basis points. So everybody is north of 1%. John P. McNulty - Crédit Suisse AG, Research Division: Okay. And with regard to raw material pressures and the cost there, how should we think about that by segment as well? And then kind of comparing that to the pricing that you're seeing, which I guess, does look like it's relatively stable.

I guess how we feel is we're going to be able, in almost every segment, to have pricing more than cover. Basically, we're in a catch-up year right now. So we see very modest raw material pricing pressure for the year, and we believe pricing is going to more than cover that. In total, we see gross profit increasing for the year, and it's really a story principally of pricing swamping raws and catching up versus what we experienced last year. So we don't believe that's going to be, at this point based on our forecast, any kind of headline story for the year.

The next question comes from Edward Yang with Oppenheimer. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: I think you mentioned that you saw some destocking again in this quarter. Was that in the Institutional business? And was that in Europe or North America?

Well, in the big disk, it was a little bit in both but more material in Europe, which was, I'd say, not all that usual in terms of a percent. And so you had kind of a onetime event. Even with that said, that was principally in the Institutional business, that business is certainly under market pressure. Now we're also, I would say, working very hard on the bottom, the contracts which have the lowest profitability, i.e., where we might even lose money. And so we're doing some self-induced trimming of our sales forecast there, as we are working hard to make sure that we drive profitability in Europe at this point in time. And I think we're having success. So big, big move in Europe, onetime. We don't expect it to see it to repeat. Last year -- in North America, it's more a year-on-year delta. Last year, reported sales in Institutional were like 6%, and I think we talked at that time it was inventory moving in our favor. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay. And in relation to the earlier question on Europe, qualitatively, it sounded like you were a bit more confident, at least in your own ability to drive margin expansion. I think last year, you had 200 basis points plus of margin expansion, but the decline in the market in Europe shaved off about 100 basis points and you're up 200 basis points, you mentioned, in the first quarter. But qualitatively, you sounded more confident that you could exceed that 100-basis-point target. Am I reading more into it? Or is there anything that's changed that's giving you more control over the margin expansion in Europe this year versus the prior year?

Well, I guess I'm confident that we're going to exceed our 100-basis-point forecast sitting here right now. Part is I'm a little over 1/3 of the way through the year, or 1/3 of the way through the year. And as we look at how our efforts are impacting the P&L, I guess we have confidence that we can overcome the softness that we see in the market. Will this year exceed last year in terms of margin improvement? My guess is it probably will. It's not going to be -- we don't believe it's going to be 200 basis points. It'll be probably north of 100. My guess is below 150 but in that camp.

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

Sure. Just following up on the comments around gross margins being up for 2013. Does that include the impact of Champion? Or was that on an x Champion basis?

Included. It's the underlying business pre-Champion. So you're going to have underlying [indiscernible] from Champion.

Okay, got it. And then have you seen any change among the Energy specialty chemical competitors like Baker Hughes? Or is that a bit too early to see that anyway?

Yes, I mean, we closed 20 days ago. I don't -- I think certainly, it's not new news to anyone that we are working to put together Nalco Energy Services and Champion, and certainly competition has had to take notice. We have not seen significantly different activity from a competitive standpoint as a result.

Got it. And then maybe just if I could squeeze in one more. In the first quarter, the Industrial segment's operating margin was up quite nicely. I'm familiar with the actions you're taking in the Paper subsegment there, but are there other actions you're taking in Industrial that are helping to drive that? Or is it mostly just a story about the Paper segment?

No. We probably throughout the segment, we had core Water improve profitability, Paper improve profitability, F&B improve profitability. So it was pretty much across the board as you have a number of things. We've got sales growth driving F&B, and I think just smart margin play. You've got core Water. I talked about what's going on there, and I think the way we're managing mix is going to benefit us for the long term. And so that business, I think, has got the right idea. Paper, in a very difficult environment last year, enhanced profitability quite well, and we believe that continues throughout this year. So I believe the strength there is pretty strong and across the board.

The next question comes from Dmitry Silversteyn with Longbow Research.

Couple of questions if I can. First of all, just a bookkeeping question. Can you talk about what the share count will be in the second quarter after the Champion deal close? It's going to be in the neighborhood of $308 million -- 308 million shares still?

Yes, 307 million.

307 million, okay. Second question. If you look at your commentary on the energy market and the upstream business doing well, and the downstream being a little bit soft, from what I remember, Champion is mostly upstream. So aside from just a delta of adding Champion, would you expect, on a pro forma basis, this segment to be growing faster because of the increased upstream concentration?

Yes, I mean, I think it's a favorable mix. So Champion is a 100 -- it's 0% downstream because their downstream business, which was quite small, we did not acquire. And so 100% of what we're adding is in the, either the well drilling and additives and/or the upstream. And so those businesses have been performing and growing at a faster clip. They will be now larger as a percent of the overall Energy and/or overall percentage of Ecolab. So yes, we think it's favorable from a mix standpoint.

It's unusual to see the Water business being down in revenues for Nalco in sort of outside of a disastrous economics scenario. You talked about mining being down 7%. Was the rest of the core Water -- you said it was growing, but was it growing just barely? I didn't realize that mining was that big of a part of water treatment. So can you talk a little bit about other markets that may be holding back the growth in Water in the quarter?

Yes. I think, Dmitry, you've got funny comparisons. North American water, right, even pre, grew at about 4%, little better and had very, very strong operating income performance. Really, if we do adjustments, we try to look and understand what our underlying rates are. Our belief is the business globally, Water x mining, when we get out of this, stop doing this big capital play and some of the other stuff which we think doesn't fundamentally help drive the business ultimately from a profit standpoint, when we adjust for that and look at the underlying stuff, we believe it's growing at about a 4% clip x mining. And I think that's probably the best measure of it. So if I come and tell you we're growing 3% next quarter, it's going to look like improved on a reported basis. But that would be a slowdown versus where we think we are right now. That's not what I expect to tell you next quarter, by the way. So we think it's in the 4% area. So some of this is a very minor remodel on our part of the business we acquired in terms of changing emphasis. And so we're going to go through a couple of quarters where it's going to look a little worse than it actually is, but we think this is the right move because I really -- we don't like the business that we're de-emphasizing. We don't think it's strategically right. We don't think it's a good return on capital. We don't think it's important to our long-term competitiveness. And so we'd rather go through the optic noise right now because we know this is the right thing to do for the business and what we're trying to do is be transparent on it. So margins are improving, OI performance is very solid in the quarter, and we expect to be solid for the year. So the Water business, we think, will come through this in a stronger profit position and a stronger focus position.

Got it. Okay. The 29% tax rate you reported in the first quarter, what should we think about it for the balance of the year when you add Champion?

Well, I think for the year, we're saying about the same. I think typically, the tax area, we're going to be a little conservative on forecasting. I would forecast the same even with Champion. It takes a while to understand what the tax opportunities are because you've got to dig pretty deep, and you need to be inside the company to understand what smart plays are and sustainable plays.

Okay, but it shouldn't be increasing?

No.

Okay. And then final question on just on Paper. You had this business for about a year. You weren't excited about it when you got it. You've obviously done some things to improve the profitability with which makes it potentially a more appealing divestiture. Any updates on sort of how you view this business longer term? And what -- if you are waiting for a decision, exactly what will be driving that decision? Is it growth rates? Is it margin opportunity? At what point will you be satisfied that this business is as good as it's going to get, and it's probably going to be better with somebody else?

Yes. I guess the easy answer is we'll leave an immediate decision to make that decision. I would say, the paper business right now is part of our portfolio. We are driving it for long-term benefit. We are making sure that our customer and product mix makes sense for us. I think the Paper team is doing a very good job. So obviously, we haven't been driving for optical perfection. We've been going through and cutting cruddy contracts and making sure that we've got business relationships that will sustain our ability to continue to invest in the business. I think the ultimate answer, I think, on any business in our portfolio on fit, I would say 2 things: if we run this out and look at our portfolio, we think it is, by and large, in very, very good shape. And I will also say if you start mucking around and moving one out or the other, it does not have a material difference in what we think our performance is going to be over the next 5 years. So our real emphasis right now in across the portfolio is execution excellence. Get on new business, get on innovation, get on driving the team to do the things that we know drive performance, and that's the mantra. So we went through a very successful integration year last year. What we really tried to do is minimize outside distractions, and so our whole focus is driving the businesses we own for maximum performance, both near term and long term. And that's really the company focus. And I don't want to do things that are going to detract that.

The next question comes from Laurence Alexander with Jefferies. Laurence Alexander - Jefferies & Company, Inc., Research Division: Two quick questions. First, on CapEx as a run rate. How are you looking at the next 2 to 3 years for a CapEx run rate on the integrated portfolio?

I think if you're doing the model, 5% to 5.5% of sales is in that camp. Pick the midpoint. Laurence Alexander - Jefferies & Company, Inc., Research Division: Okay. And separately, as you look across the portfolio now, how are you thinking about opportunities to improve free cash flow conversion over the next, call it, 3 to 5 years?

One, I think even this year, it's going to be free cash flow. Our cash flow's going to be very positive compared to net income and all the rest. We talked about last year, first half of last year was a very unusual period where you had this disproportioned amount of special charges and other things hitting a low profit period. So I think as we go forward, I think just, one, drive OI margin. It is the #1 driver of returns and of capital or of free cash. Two, we will be smarter stewards of working capital. And I think there's opportunity there, but I think the big needle mover is driving the business and driving OI and tax rate and those conversion factors.

The next question comes from Mike Harrison with First Analysis.

Doug, without ranting too much about the state of U.S. Antitrust policy, can you just give us some additional details on what was delaying the Champion acquisition for so long? It seems like you agreed to divest the downstream piece pretty early, and then it took quite a bit longer to get to agreement on the deepwater pieces that you had to get rid of.

Yes. Well, okay, I promise not to rant. I would say, I don't think businesses and the DOJ are supposed to see eye to eye on all these things. You're naturally set up to have differing views. So I guess that's probably not a big surprise that we had a differing view there. I think that's the way it's set up. With that said, I think the length of time was really that the area of concern for the DOJ was clearly Deepwater Gulf of Mexico, hence, the focus of the remedy. And then it was coming up with a remedy that satisfied, I think, conditions that the Department of Justice had laid out and doing it in a way that fundamentally could work. And that just -- that took some time. And I think we ended up satisfying their criteria and their requirements that they laid out very early and doing so in a way that certainly had an impact in our Deepwater Gulf of Mexico business but didn't have -- didn't resonate outside of that area of concern for the DOJ, i.e. it didn't impair us in other parts of the world or other markets. And that just took longer than we all hoped. I think the resolution, I'd rather not have had to do anything, of course. But I think the resolution has left us with a still very, very favorable deal from an economic, strategic, competitive standpoint.

All right. And then just on the Food & Beverage side, is the FEMSA acquisition fully integrated at this point? And can you maybe, talk about how that acquisition improves your prospects in Latin American Food & Beverage?

Yes. No, it's not completely integrated. I mean, it's still relatively new. What we think -- the long saga here is we have desired this business for a long, long period of time. We think it improves our position in a very important market. It extends our reach in important customers, enhances our ability to meet customer needs because it gives us a bigger footprint. I think that this is a perfect type of bolt-on acquisition that we seek, when we seek acquisitions like this. So I think this is going to be a very positive move for us. Our F&B team has been doing a great job in Latin America. I just think this gives them a bigger platform upon which to perform. So I would expect great things out of them.

The next question comes from Mike Ritzenthaler with Piper Jaffray.

Just I guess one question for me. If you could elaborate a little bit more, Doug, on Healthcare, which has been a key growth market for you that we've discussed in the past. Is the growth this quarter just optics on strong growth last year and therefore, kind of a temporary air pocket in terms of the long-term positive growth trend? Or is it more of an artifact of breaking through the procurement practices at the health care providers?

Well, I guess what I would say, look, Healthcare is still an important business for us, and we still are excited about its growth prospects. So you referenced the base. Last year was a very good year. Healthcare was up about 12% in sales and almost high 20s in terms of OI last year. It had a very strong year. In '13, I guess, we expected stronger balance of the year than we saw in the first quarter, more of second half than first half. And we expect a decent full year; mid-single-digits growth, which is really reflective of organic growth; double-digit OI performance for the year. And so the drivers here, the health care environment is not ideal, either in North America or U.S. where we've got our large footprints. We think that may be the case for a couple of years. We don't think it is forever. We think we can still drive double-digit OI even in a lousy environment. So we think it's a positive contributor and quite accretive. And so, really, the story is going to be new business has got to swamp lousy environment, and they're on it and driving it, both in Europe and here. We've got very good innovation, brand-new hand care platform going out, strengthening our ability in central sterile and others. So long term, we like the fundamentals. We think this year will be solid, not spectacular. But ultimately, that market starts curing and certainly that market's a little upside down if you look at other health care earnings reports, right? Nobody's knocking it out of the park.

The next question comes from John Quealy with Canaccord Genuity.

Just one quick question. Can we just review again why the focus on increasing field -- the field sales force in the Energy business line right here? And then how long will it take? Is it more of a productive focus on getting the Champion and the core Nalco businesses done? Or is it protecting some channel conflict? Just trying to get a little bit more color on why you're breaking that out this quarter.

Well, I think we talked about it. Simply, we've been increasing our field capabilities there. We've certainly adjusted our thinking once we announced Champion, but that was really fourth quarter of last year. So we're talking year-on-year comparisons in terms of field sales and the like. And so I guess I shared with you we've got very strong sales performance in our OFC, in our well business, and it's really muted somewhat by our downstream business. But we're investing in those businesses, and so we think the underlying sales rate in Energy was in the 12% to 13% rate in Q1, but we had a reported 7%. When you got that kind of dislocation, you can have some funny optics in terms of OI. I guess, I would just tell you that it's a 13-week period. That business is in good shape. It's going to deliver double-digit top and bottom line, and it just got bigger.

The next question comes from Robert Koort with Goldman Sachs.

Doug, just once more on Energy. I guess, it looks like sequentially, you'd see a pretty dramatic pickup to get to that double-digit revenue run rate. So is there something about lumpiness in order trends in that business that expressed itself in the first quarter and comes back in the second quarter? And then you mentioned throwing more cost to the business. Is this purely headcount? Or are there some other costs that you're incurring?

Yes, I mean, look, the biggest issue you've got is, we had a reported 29% growth rate last year in the first quarter, and then it was in the teens for the balance of the year. So it's like a 10-point delta versus the next quarter. That is, frankly, the biggest part of the story. The underlying business and the absolute sales growth rate -- sales rate we think are very much in line with a teens-type delivery for the year, if you look at any more normalized year and normalized seasonality patterns. So we don't see any big hockey-stick ramp up or anything unusual. So the pattern is more normalized than it might appear, and it's really an unusual first-quarter comparison.

I just -- I can clarify that. I meant last year, you had sequential growth of 2% first to second. If we normalized that first quarter, it would appear to be more of a high-single, low-double digit typical sequential move.

Sorry?

I'll ask you offline. And then, what about the cost basis in Energy that you mentioned? Is that headcount or is there more to it, the upfront investments?

No. It's mostly headcount.

Next question comes from John Roberts [ph] with UBS.

Just a clarification question. Is mining a core part of Water, and it's just down? Or is it lumped with those other questionable areas of Water?

Mining's a core business, and it's a business that's been quite successful, and we anticipate will be very successful going forward. We only pull it out because mining is certainly more cyclical than the balance of the Water portfolio that you see in there. And so for us, we look at it with and without mining, and so we offer that as an understanding. Mining is under a little pressure, but we believe the business is going to perform well again this year.

And then could you just give us a sense of the dispersion in the sales performance across some of the regional businesses? Was the weakest business European Institutional or was it European Paper? Or what was the weakest and what was the strongest? Was it the Global -- something in the Global Specialty looks like it would have been the strongest in some region?

Well, if I normalize for oddities in last year, which -- look, we won't talk about it anymore. Last year was our first quarter. You had all kinds of things going on, but I would say that the underlying worst business performance would have been, most likely, Institutional Europe. I mean, just foundational underlying performance. Under the most pressure, probably not a real surprise, but that would have been, if I normalize the other stuff, the red spot on our heat map.

The next question comes from Andrew Wittmann with Baird. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Maybe I missed this is in the prepared remarks, but can you just update us on how you're thinking about the share repurchase now? I know we kind of -- you had to do the Champion deal strategically. But where does the share repurchase fit in? Is that something that you're feeling highly motivated to do? Or do you want to delever a little bit more before you approach that? Can you just give us some -- the philosophy there?

Yes. No, we're committed to execute the remaining part of our share repurchase, which is roughly $280 million. And I think what we've said is we'll complete it by year-end. And we'll continue to work to be smart stewards of that money because it's shareholder money. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Okay. And just in terms of Nalco on the revenue synergy side. This year, you've got a much higher benchmark than 0. Doug, I was hoping you could give us some view on kind of what you feel like you've delivered? And how you feel you're tracking for this year.

Yes. Our target this year would be $75 million. I would say based on the stronger-than-expected start last year, I'd take the over, not the under on performance against that $75 million. I guess most importantly, we believe we are tracking to the $500 million that we talked about when we did the deal.

The next question comes from Shlomo Rosenbaum with Stifel. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: Just one question. I wanted to ask from an operational standpoint, with the delay of the Champion acquisition a number of times through the quarter, does that change anything operationally, internally with your guys in terms of impacting any of the growth rates or the way that they plan their time or the way that they're going to execute in their business?

No, not materially. I would say it's certainly -- I mean, look, we've gotten a delayed start in getting after the activity that drives, right, what we call synergies and/or OI performance. And so that's always going to be back-half loaded or it takes time to develop, which is why our original $0.12 forecast turned into a $0.07 forecast, because we lost a little over 4 months, right, or 3 months, 3-plus months. And so that's really the story there as we go through it. Otherwise, no, I would say their execution's on. We worked hard to use that time wisely. I think the teams hit the blocks running. I mean, they're doing a very good job, they're on this. We're almost done. We will be this week with the kind of kickoff opening introductory meetings around the globe. And I think we've got a very clear line of sight of what the big activity areas are to drive value.

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

This is Eric Petrie in for P.J. Just in Energy, are double-digit sales and operating income sustainable in 2014? Or would you suspect some deceleration? We would think that enhanced oil recovery and upstream investment may slow with lower oil prices.

Yes. I would -- I guess our belief, when we look at our portfolio and what we have with Champion now, we expect double-digit sales and operating income next year too.

Okay. And then you said Champion was...

On a pro forma basis assuming we own Champion for the full year here. We're not trying to capture the 3-month gain.

Okay. And then you noted Champion was on the higher end of that range. In terms of that growth, was all of that organic? Or did they also partake, historically, in M&A or bolt-on acquisition?

No. I believe that was 100% organic. I don't believe there was any M&A in there. If it was, it was so de minimis, we haven't figured it out yet.

The next question comes from Rosemarie Morbelli with Gabelli and Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: I will be quick. Just a little clarification. When you look at your estimate for 2013 and the fact that you are planning to complete the $280-million share repurchase by year-end, which amounts to about 3.4 million shares, are you calculating that estimate, Doug, with the share repurchase that you are planning to accomplish? Or is it based on the 307 million shares that you have currently?

No. The $280-million buyback is in our calculation, is in our EPS estimate. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And then if we look at the Champion contribution, so $0.07 this year. Is it fair to look at $0.15 next year, another $0.15 in '15, and then the last $0.13 in 2016 to get to the full $0.50? Is that kind of a good way of spreading it?

Yes. Why don't we redo and give our synergy targets by year. So this year, it's $25 million; '14, we expect $80 million; $125 million in '15; and then realize the full $150 million in '16. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And at this stage, of course, it is too early to know whether that $150 million is kind of the top of what you can get. Correct?

We're not changing our estimate right now, no. And I think I said when we gave the $150 million, that $150 million as a percent of the deal is a much more aggressive number than the $150 million obviously was for the overall Nalco deal. So our original estimate for Nalco was $150 million, which we quickly took up to $250 million, I mean, within months. I don't -- you're not going to see a move like that here. Whether our estimate is going to change at all, I don't know. It's 20 days.

The next question comes from Brian Lawley [ph] with Barclays.

Just quickly on the balance sheet side, could you maybe the just walk us through what the final financing for the Champion acquisition was? You did your $500-million bond issuance, but given that Slide 7 is as of the end of March, just walk us through what the balance sheet's going to look like, I guess, here at the end of April.

Yes, this is Mike Monahan. As you know, back in December, we secured $0.5 billion of 5-year debt. We took down $900 million in bank term loan, and the balance was through commercial paper.

And the total number from cash proceeds, if I'm correct, is $1.7 billion, with the rest being equity. Is that right?

That's right.

Got it. And then, again, as of March on Slide 7 or your cash balance, it looks a little bit high. Is some of that because there's commercial paper drawn, and you're going to use some of that cash balance? Just so as we think about the...

Yes. We were getting prepared to close on Champion.

Okay, great. And then just one last one for me. Could you just, I guess, talk about, again, leverage targets and then just plans for deleveraging as we move through next couple of years? Has any of that changed as we sit here today from your previous targets of single A and 2x?

Yes. They remain the same. It's to get down 2x debt to EBITDA ratio by end of 2014.

And debt repayment remains a very high priority on your kind of cash priorities at this point other than maybe your $280 million of remaining share repurchases?

Yes, I would say it's exactly in line with what we previously forecast. So, yes.

The next question comes from Jeffrey Stafford with Morningstar.

Now that the Water business and Food & Beverage are in the same segment, I was hoping you could give an update on the cross-selling opportunity between these 2 businesses? I think before the companies combined, Nalco provided water treatment services to something like 20% of Ecolab's Food & Beverage customers. Has that percentage significantly changed now that you've had Nalco for a little while? Or is that still a longer-term proposition?

Yes. I guess, actually what we said was Nalco provided to 20% of the total food & beverage universe. That wasn't a complete overlap on what Ecolab was providing in that universe. We would say it's a pretty rich target area. The reason we were ahead on synergy sales last year was principally because this marriage is as attractive to customers as we thought it would be. We are developing technologies where we do an even better job leveraging 3D TRASAR, which is a legacy Nalco technology, which we are building into our core F&B portfolio, which is going to allow, if you will, kind of a synergistic view for our customers across the CIP cleaning in place platform of F&B as it moves towards wastewater, so that we know how to repurpose water, how we can minimize water and how we can do a number of other things. So it's going to end up to be, what I will call as a single offering that gives us much better visibility for our customers. And that's exactly what we're developing. When that's out, I think we're going to see even more dramatic improvement in the synergy sales.

The next question comes from Gary Bisbee with Barclays.

Just one quick follow-up. I wanted to get from you the amortization from Champion. Is that going to be within the Energy segment? Or is that going to be broken out in Corporate like it was with the Nalco amortization?

Yes. We'll break it out in Corporate simply because we want to understand what the underlying business is doing.

I would now like to go ahead and turn the call over back over to Mr. Monahan for closing comments.

Well, that wraps up our first quarter conference call. This conference call and the associated slides will be available for replay on our website. Thanks for your time and participation, and our best wishes for the rest of the day. Thank you.

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.