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Ecolab Inc. (NYSE:ECL)

Q3 FY08 Earnings Call

October 23, 2008, 1:00 PM ET

Executives

Michael Monahan - VP of External Relations

Douglas M. Baker - Chairman, President and CEO

Analysts

Laurence Alexander - Jefferies

Michel Morin - Merrill Lynch

Chris Shaw - UBS

Andrea Wirth - Robert W. Baird

Mike Harrison - First Analysis

Robert A. Koort - Goldman Sachs

P.J. Juvekar - Citigroup

John McNulty - Credit Suisse

Gary Bisbee - Barclays Capital

Dmitry Silverstein - Longbow Research

Rosemarie Morbelli - Ingalls & Snyder

John Roberts - Buckingham Research

Robert Felice - Gabelli & Company

Operator

Welcome to the Ecolab Third Quarter 2008 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded. If you have any objections you may disconnect at this time.

Now, I would now like to turn the call over to Mr. Michael Monahan, Vice President, External Relations. Sir, you may begin.

Michael Monahan - Vice President of External Relations

Thank you. Hello everyone and welcome to the Ecolab's third quarter conference call. With me today is Doug Baker, Ecolab's Chairman, President, and CEO, who will join us for the Q&A session following the review of the quarter's results. A copy of our earnings release and the 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 two, stating this teleconference and the slides included… including 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 third quarter earnings release and on slide two.

Starting wit slide three, in the third quarter, we achieved another strong performance despite challenging market conditions and major increases in delivered product costs. As we continued our efforts to aggressively drive new account gains product penetration, new products, pricing and cost reductions to deliver double-digit earnings growth, while still making the key investments to continue our growth for the future.

We expect to continue to outperform our markets and deliver superior growth for the fourth quarter and a full year 2008. Starting with highlights from the quarter, as we move on to slide four. Reported third quarter 2008, EPS increased 9% reaching $0.50. Proforma earnings per share which exclude special gains and charges and discrete tax items, rose 12% to $0.55.

We also note that the third quarter earnings include delusion from our recent acquisitions of approximately $0.02 per share. We once again enjoyed strong organic earnings growth. Organic growth more than offset higher delivered product costs while exchange in tax also benefited earnings.

This overall strength helped fund our investments in Europe and acquisitions. In US, we continued to show strong sales trends from our Kay, Institutional and Food & Beverage businesses. With good trends in most of our other US businesses, as we worked hard to offset slowdowns in our full service restaurant and lodging markets.

International also showed good sales gains as Latin America and Asia Pacific both rose double-digits. Canada was strong and Europe reported moderate growth. Looking ahead, our full service restaurant and lodging markets has softened in the US and Europe, while quick-service restaurant, food processing, healthcare, government and education markets remain steady.

In response, we continue to drive aggressive sales efforts, emphasizing our innovative products and provide customers with labor, energy and water savings and using them to deliver new account acquisition among our national, regional and independent prospects. In addition, we have undertaken productivity and efficiency improvements, cost reduction actions and increased pricing to recover significantly increased raw material costs and to continue to drive our bottom line performance.

Despite the challenges, we continue to expect the strong performance in 2008. We trim the top end of our full year range by a penny, reflecting unfavorable exchange rate trends and uncertain economy. We now look for full year pro forma diluted earnings per share which excludes special gains and charges and discrete tax items to be in a $1.85 to $1.87 range.

For the fourth quarter, we expect pro forma EPS to be in the $0.44 to $0.46 range. In summary, we continue to expect yet another superior performance for Ecolab, in a very challenging environment ahead, as we leverage our markets with aggressive, new account and better penetration sales efforts, appropriate pricing and cost efficiency actions to deliver steady growth and shelter returns while continuing to build for future growth.

Turning to the details as shown on slide five, Ecolab's reported consolidated sales for the third quarter rose 15%. Looking at the components, volume and mix were up 4%, pricing was up 3%, currency added 5% and the impact of acquisitions and divestitures was 3%.

Slide six includes sales growth by segment and division. Sales for the US cleaning and sanitizing operations increased 15%, excluding the Microtek and Ecovation acquisitions, sales rose 8%. Institutional sales rose 6%. Our new Apex solid warewashing line is running well ahead of plan and showing terrific momentum as heightened customer demand for energy and cost savings solutions, drives interests.

New business gains also continue to be solid, as we picked up market share against regional and local competitors. These gains are partially offset by moderating consumption among our food service and lodging customers as they experience a softening in their traffic trends.

In response to the tighter markets, we continue to drive new product and program sales focusing on the cost savings and performance improvement opportunities that our products offer customers and how well they tie into the broader 360 degrees of protection program that is designed to maximize total operational savings for customers. We have accelerated the rollout of our new Apex Warewashing System which provide customers with new standards of performance and cost savings and we are adding more new products and programs that deliver similar performance and value.

We've added additional new account incentives, we're also driving new account growth utilizing improved prospecting tools and software and targeting independent accounts and regional change with additional and redeployed sales people and programs. We expect these aggressive sales efforts along with pricing and market share gains will deliver continued good growth for institutional in the fourth quarter.

Kay's third quarter sales grew a very strong 21%, primarily reflecting new account gains and new product sales. Business trends remain strong in quick-service restaurants with very good ongoing demand from major, existing and new fast food chain accounts. The quarter benefited slightly from the timing of the shipments but even adjusting for this QSR was still up at mid-teens.

Food retail business continues to show strong growth with a double-digit gain. New products and programs like the introduction of solids for QSR along with customer wins continued to bolster Kay's results. We expect these initiatives to help drive strong gains in Kay's fourth quarter.

Textile Care sales increased 9%. New plan additions from new existing customers more than offset softer volume from existing customer. We expect more moderate growth in the fourth quarter as Textile Care brings on new business, new markets and uses new technology, as well as leveraging customer needs for operational efficiency to drive growth. in a smaller environment.

Reported third quarter sales for the healthcare division again more than tripled, reflecting the impact of the Microtek acquisition. Excluding the impact of Microtek, organic healthcare sale grow 7%. Growth reflected continued solid end-market demand for infection control products and expanded penetration within our existing base of group purchasing organizations and healthcare purchasing systems. Our skin care product led the growth for original business showing continued double-digit growth.

Microtek sales grows double-digits led by strong sales in infection barrier products across all channels. Looking ahead to fourth quarter organic healthcare sales are expected to show continued gains against strong quarter last year and be bolstered by Microtek growth. Food and Beverage delivered a strong third quarter. Reported sales were up 14%. Adjusted for acquisitions, sales rose 9%.

The quarter was led by strong gains in nearly all markets. Looking at the segments, corporate account wins better pricing and new products contributed to dairy plant sales growth.

The meat and poultry business enjoyed a very strong quarter driven by customer gains which more than offset weak market conditions. The agri market also saw strong growth reflecting new account sales and favorable agri market conditions, beverage also increased,

WaterCare sales grew nicely in the as a focus on larger F&B processor accounts helped to offset account rationalization.

As discussed last quarter, the uncertain economy has caused a number of Ecovation projects to be delayed and will not reach the very aggressive sales growth targets that were originally projected for 2008.

We have been rebuilding the project pipeline and expect to enter next year with a much better business outlook. The need for Ecovation's affluent management and energy systems, and the resulting long-term growth prospects remain strong, and we continue to be excited about its outlook in the $4 billion dollar market opportunity it addresses.

We expect continued good sales trends for food and beverage business in the fourth quarter of 2008 as we focus on new account acquisitions, pricing and continued expansion of our antimicrobial and water management platforms.

We will also focus on new account possibility and cull those that do not provide sufficient returns based on the new raw material cost realities. The EcoCare sales increased 8%.

Results continue to be influenced by higher gas prices and a softening economy, both of which more than offset better pricing and new products, including the carwash industry's first comprehensive sustainability program.

EcoCare continues to focus on new programs, investments in it's sales force and new market opportunities, to drive sales in what will be a continued challenging environment in the fourth quarter.

Sales for US other services increased 5% in the third quarter. Pest Elimination sales rose 8% . New account activity was driven by corporate account gains while non-contract services or seasonal or period work experienced slower growth.

Both we affected by increased customer caution in the food service and hospital toward spending on such additional and [inaudible] services or new initiatives. In response, we are focusing on selling the basic programs to new accounts, as well as regional and local chain accounts.

We're also keying in on growth markets like QSR and food and beverage processing, and continuing to develop programs to better target specific market needs like our Bed Bug program which is growing at double-digit rates.

We have increased sales force hires to more aggressively pursue contract business. We're enhancing field sales force effectiveness with new training and hires. We expect Pest Elimination to show steady growth in the fourth quarter as it leverages it's high quality and highly reliable service results to drive business.

GCS sales increased 3%. Pardon me, GCS sales decreased 3%. Service sales grew modestly. It's customers showed the same caution toward kitchen equipment repair that also effected our food service businesses.

The sales pipeline continues to look attractive, and we are adding new chain or customers and gaining market share, but the softer economy has resulted in deferred repairs that have slowed third quarter revenues.

Parts volume also reflected deferred repairs and was lower. GCS profitability improved as the operating loss shrank from both the second quarter and last year. New business systems are fully online and we're seeing the benefits of the new system through better business transparency, customer and market segment profitability, dispatching improvements, and better tech utilization, all of which helped our business decision making and operating efficiency and worked to improve profitability.

Productivity is continuing to increase on the new systems, and we look for new further gains for our people as our people build experience with new the new tools. Looking to the fourth quarter, we expect flattish sales as GCS actions offset decreased customer repair activity while continuing to show further profitability improvement.

Measured in fixed currencies, international sales increased 6%. Europe, Middle East and Africa sales increased 2% in the third quarter at fixed currency rates. However, excluding acquisitions and divestitures, fixed currency sales increased 4%.

Europe's Institutional sales showed modest growth. New products and progress for the sales force were partially offset by slower markets. New products include the introduction of Wash 'n Walk, a new line of floor scrubbers in the expanded Max floor care line. These new entries combined with continued gains from housekeeping to help drive sales.

Food and beverage used new products and customer wins to offset slow markets and industry consolidation. Textile Care showed a modest gain, while healthcare reported strong growth led by skincare and Cleanroom sales.

Adjusted for the divestiture of a property services business last year, Pest Europe sales increased as initiatives to build the business continued to drive profitable growth. Key metrics including customer continued to improve.

Europe's business information systems development work continues to move forward. A multiphase rollout began in September as we successfully rolled it out to two countries. We will complete the rollout for the rest of the European countries over the next 24 months.

The initial read is good, but, obviously we will need more time to see the benefits. While these improvements take time to implement, they are critical to the fundamental development that we need to make to achieve better growth and profitability in Europe.

Sales force training is going well, and we're beginning to see improvement in the sales team's performance metrics.

Lastly, we completed the bulk of our move to our new regional headquarters in Zurich as we build a Pan-European operating stricture. We look for Europe's fourth quarter fixed currency sales to continue to show moderate growth, However. we also look for better results ahead as the actions we are implementing take hold.

Asia-Pacific sales grew 10% in fixed currencies. From a divisional perspective, Institutional solid sales gains were driven by new products, including the launch of a new warewashing platform in Japan, and by growth in the MarketGuard for retail stores.

We achieved important account wins in casinos, catering, hotels and restaurants as well as food retail markets. Food and beverage sales had strong growth. Both the beverage and brewing sectors continue to show good growth in Asia. The food and beverage division benefited from increased product penetration and account gains.

Looking ahead, Asia-Pacific expects good sales growth in the fourth quarter. Third quarter sales of Ecolab's Canadian operations were up 8% at fixed exchange rates. Institutional and Pest Elimination sales were strong, benefiting from corporate account gains, accelerated street growth and a rollout of Apex. Food and beverage sales also improved.

Latin America reported yet another outstanding performance with sales rising a very strong 15% at fixed exchange rates. Sales were excellent throughout the region as all divisions again rose double digits.

Institutional growth was driven by new account gains, increased product penetration as well as continued success with global and regional accounts. Food and beverage sales reflected strong demand in the beverage and brewing markets, as well as benefits of new accounts. Pest Elimination continued its outstanding performance throughout Latin America.

Overall, we expect healthy growth trends to continue in Latin America with another double-digit gain in the fourth quarter. Turning to the margins on the income statement, slide seven of our presentation.

As we expected, fourth quarter gross margins decreased, reaching 48.7% compared with 51.2% last year. The impact of acquisitions which by their business model operate at lower gross margins than our historic business was 70 basis points of the margin decline, and along with higher delivered product costs more than offset sales leverage, pricing and cost savings initiatives from a margin perspective.

SG&A expenses were 35.6% of sales, 150 basis points below last year. The SG&A ratio reflected leverage from our healthy organic sales growth, cost controls and the impact of acquisitions, which operate at lower SG&A ratios. These more than offset investments in business processes and efficiency, R&D and information technology.

Operating income for Ecolab's US cleaning and sanitize segment increased 9%. Excluding dilution from the recent acquisitions, operating income grew 11%, as adjusted margins, excluding acquisitions expanded by 60 basis points over last year. The increase was driven by the volume of pricing gains and improved cost efficiencies, which more than offset higher delivered product costs and investments in the business.

Operating income for US other services grew 38%. GCS profitability improved compared to the year-ago period and the second quarter despite higher operating costs of the new system. Pest Elimination income also increased.

In international fixed currency, operating income decreased 9%. Latin America and Canada increased while Asia-Pacific was flat. Europe declined as the moderate sales gain and pricing were more than offset by higher delivered products and operating costs. The corporate segment included special gains and charges which are reported as a separate line item on the income statement.

Special gains and charges for the third quarter were 12 million, of which the largest portion was the cost for the move to the new regional headquarters in Zurich, as well as other nonrecurring costs to optimize our business.

Corporate segment also includes 8 million of investments primarily related to the development of business systems, structure and other corporate investments we are making as part of our ongoing efforts to improve our efficiency and returns in Europe.

Ecolab's reported third quarter consolidated tax rate was 32.0%, up from last year's reported 28.2%. Excluding discrete tax items, the tax impact of special gains and charges, the effective income tax rate for the third quarter of 2008 as expected was 30.4% and compared with 34.4% in the third quarter of 2007. The substantial decrease in the adjusted third quarter 2008 effective tax rate was primarily due to timing of our move to the new Zurich office which triggered certain one time and ongoing tax benefits that resulted from our tax planning efforts, as well as international rate reductions.

We expect the full year 2008 tax rate to approximately 31% to 32% and look for further improvements in 2009. The net of this performance is that reported diluted net income per share for the third quarter was $0.50 up 9% over the $0.46 reported a year ago.

Pro forma earnings were up 12% to $0.55 when adjusted for special gains and charges and discrete tax items. As mentioned in our opening comments, organic growth more than offset higher diluted product cost, while exchange and tax also benefited earnings. The overall strength helped fund our Europe investments and acquisitions.

Turning to slide eight, Ecolab's balance sheet and cash flow remains strong. Total debt to total capital was 32% at September 30, compared with 33% reported a year ago. Our net debt at September 30, was 29%. There were no shares repurchased during the third quarter.

Slide nine shows our forecast for the fourth quarter and full year 2008. In the fourth quarter we look for US operations to show continued solid momentum in the face of challenging conditions. We continue to emphasize product that provide unparalleled performance and energy and cost savings for customer, such as Apex, our new warewashing platform, solid sense, a new line of solids for fast food, Dryex [ph] a lubricant for food & beverage plants and many more.

We expect them to provide further differentiation and opportunity to help drive results. We look for international sales to again be led by strong growth from Latin America and Asia Pacific as the enhance moderate gains from Europe. We believe this will result in overall good, fixed currency international sales growth.

The press release includes line item forecasts of our fourth quarter P&L. As discussed in that release, we expect pro forma diluted earnings per share to for the fourth quarter, excluding special gains and charges and discrete tax items to be in the $0.44 to $0.46 range. Compared with the pro forma earnings per share of $0.40 earned a year ago.

As mentioned earlier, we now look for pro forma diluted earnings per share which excludes special gains and charges and discrete tax item, to be in the $1.85 to $1.87 range for the full year 2008.

Please note these are pro forma numbers which excludes special gains and charges and discrete tax items. Looking ahead to 2009, while we do not issue our EPS guidance for the year until February, we want to provide some overview thoughts for those making forecasts ahead of ours.

We're planning for smaller markets in 2009 and taking appropriate actions subscribe both the top and bottom line in such markets. We also see 2009 as a period in which raw materials and currency present formidable head winds in the first half as they compare against the prior year. We hope that proves to be negative but we also think its our prudent place to start our planning. At the same time, we're looking for somewhat better comparisons for both the second half.

As always you can expect us to undertake aggressive plans and significant actions to drive growth. We will begin our planning with our long term financial objectives in mind. However, with market conditions expected to be very difficult, the objectives will clearly be tougher to reach. And as we have said many times before, we'll not take actions to boost near term earnings if they would impair necessary investments to achieve our long term targets.

In summary, we approach 2009 with caution, expecting a tough first half that will give way to a more reasonable second half. We know this is an opportunity to capture market share and drive new products that help customers reduce their cost and improve their efficiency. There's also a time we will control our expenses and work harder than ever to produce attractive growth for shareholders in a very challenging environment.

In summary, we're proud of our accomplishments in the third quarter, as we delivered effectively against tough conditions and achieve double-digit pro forma EPS growth while building for a future. And despite the increased challenge from both the US food service and lodging markets and raw material costs, we continue to expect an attractive performance in 2008 and again in 2009.

We'll use our strong sales and service team to drive top line growth for aggressive selling, additional solutions for account, new services and appropriate pricing and a constant focus on efficiency and effectiveness to leverage the bottom line while at the same time making key investments to ensure growth for the future.

That concludes our remarks. This conference call and associates slides will be available for replay in our website through November 7. Operator, please began the question-and-answer period.

Question and Answer

Operator

[Operator Instructions]. [inaudible]

Unidentified Analyst

Mike, can you just comment on the raw materials, in terms of timing, why there will be a headwind in the first half of next year, as opposed to either flat or tail wind as crude comes down?

Michael Monahan - Vice President of External Relations

Well, I think that first of all if you look at what we buy David, it's probably a split between hydrocarbons and inorganic and on the inorganic side we haven't seen anything come down yet. On the hydrocarbon side, we've had sequential increases on a year-over-year basis or as much higher.

We think that we're starting to see some improvement in a few items but that hasn't rolled through yet. The last thing I'd say is that, as you remember, we tend to buy on contract not on spot, so we never saw the big increases coming up. So we won't see the big increases coming down.

Unidentified Analyst

On US demand, have you seen any signs of slowing in the lodging and or food service areas?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Dave, Doug Baker. I think as I've said earlier we wouldn't call the end markets very healthy at any time this year. And certainly, I think as we forecast going-forward we certainly don't see them getting any better and our planning on them getting worse and hoping we're wrong.

So I think you saw our institutional business. The only way for us to offset market slowdown is to be very aggressive on new business and that's exactly what we're doing.

Operator

Laurence Alexander, you may ask your question and please state your company name.

Laurence Alexander - Jefferies

Jefferies. I guess Doug, maybe it would be helpful just to revisit how Ecolab has changed from the last recession, if you think about the numbers that were available the firm to call last time around. I think we exclude obviously the shock from 9/11, if you just think structurally about the business, if you could compare, how you are position now?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, I think the last recession is '01 '02. I think there's a couple key changes, one we got very different looking healthcare business which doesn't have obviously, isn't in the same head wind that the other businesses may or may not be. The other is we're certainly more global. We were consummating the European deal, right as we entered that recession and now have that business fully under our leadership. So we have a much different profile globally, so any one segment then US food service represent a smaller percent of our overall exposure today than it did back in the earlier.

The other things, we've had a lot of investments in new products. I think we're much better positioned in terms of what our offerings are going into this period versus the last period, specifically Apex, [inaudible] the number of initiatives that we have lower water and energy.

Laurence Alexander - Jefferies

And I guess secondly, just on restructuring in Europe. How does that affect your should we call it your operating leverage European demand were to slow or its your business would approach negative sales, any difference in your operating leverage compared to the US?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Well I… you know I don't think… the restructure per say… as we've said before and I think you can starting to see the results of it. We have treated if you will some negative leverage on our OI line for even more positive leverage in our net income line that shows up in tax so we made some investments, but they're more than paying for themselves. In terms of overall leverage in Europe, I mean you know frankly, all businesses are somewhat volume sensitive and Europe is also somewhat volume sensitive. It's not a dramatically different equation than in the US.

Laurence Alexander - Jefferies

And then lastly, just very briefly. Any opportunities to repatriate cash from Europe given the changes in IRS ruling?

Douglas M. Baker - Chairman, President and Chief Executive Officer

You know what, we already have repatriated cash from Europe and I think we have very good vehicles to do that.

Laurence Alexander - Jefferies

Okay. Thank.

Operator

Michel Morin, , you may ask your question and please state your company name.

Michel Morin - Merrill Lynch

Michelle Moran from Merrill Lynch. Hi, guys. A couple things I heard for the first time here on today's call, pricing up 3%. Maybe that's rounding up but that's… that's better than what we had been seeing and then you also, I believe, Mike mentioned that in F&B in particular that you might be looking to cull certain low profit accounts. So, I'm reading here that you're becoming a lot more aggressive on price and I'm just wondering how far can you go on that?

Douglas M. Baker - Chairman, President and Chief Executive Officer

We are… you know I think we've been aggressive on price and you're starting to see the fruits of the work, and our team has done a very good job. So, yeah, we moved up to three. We expect that to continue to build as we move throughout the year, and yeah, I would say we are… I think the environment, if you are reacting by getting after margin, and looking at both, how you're going to do it from a revenue standpoint as well as reduced costs, you're missing the boat And we are going to miss it So we're all over it

Michel Morin - Merrill Lynch

And in terms of culling the accounts, I mean, how material could that be to the top lines specific to F&B?

Douglas M. Baker - Chairman, President and Chief Executive Officer

You know, our work is… we are a big believer in simply exiting businesses. We work very aggressively to move customers to a more profitable place and obviously the first priority is do it where it doesn't cost them anything but benefits us significantly.

We are not out here forecasting that our sales growth is going to be impaired because we are culling account.

Michael Monahan - Vice President of External Relations

And Michelle, it's much more a reflection of the focus on profitability that we're taking, and as we said, as the higher costs really drive us, the need to do that and looking at the accounts, as Doug said, it's trying to look at those and say, you know, we've got to be able to make money in the accounts for us to be a viable supplier to them,

Michel Morin - Merrill Lynch

Okay, and then one last one if I can. You mentioned you're accelerating the rollout of Apex. If I'm not mistaken, you had showcased both Apex and the QSR solids at the last Investor Day. Can you give us a sense of how penetrated the account base is at this point for both of those? I realize these are multiyear rollouts. Just to gauge kind of how much more room you have here for these products to drive growth?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Well Apex is very early. I think we'd have to think about Apex do a rollout over almost a four year period, so there is a lot of room. Sitting here today with probably 10,000 accounts installed, so we're by no means done pushing on Apex.

We've doubled our goal this year. We're going to come close to meeting our double expectation. If anything Apex is gaining momentum in spite of the market condition.

Regarding K [ph] solids, you know what, that program is going as well as we expected and we had very high expectations and the first customer that we're rolling it to is our largest QSR customer. You could probably figure it out, and it's doing exactly what we hoped it would and what we hoped it would. So we have plenty of room to go on K solids as well.

Michel Morin - Merrill Lynch

Great. Thanks very much.

Operator

Chris Shaw you may ask your question and please state your company name.

Chris Shaw - UBS

UBS. Hey, guys. How are you doing?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Good, Chris.

Chris Shaw - UBS

Could you guys take any stabs at quantifying what, if you know… if currency stayed where they are, what the Apex headwind [ph] would be either fourth quarter or next year? Any ideas?

Douglas M. Baker - Chairman, President and Chief Executive Officer

We haven't done any forecasts yet for 2009 so you don't have enough ex-forecast. I guess I looked backwards though Chris though Chris to see what it has meant, and typically, currency's been may be a penny or two a quarter on the way up. So, I think, you know depending on what your forecast is, you know, you could look for a similar type of thing on the way down.

Chris Shaw - UBS

Okay. That helps. Just going onto other services in terms of margins in all. I mean, the sales are down GCS, but I guess… you guys finally profitable there or is it getting really close? What have seen overall?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Well, in other services GCS is not yet profitable. I would say in spite of sales pressure we improved our OI or our loss improved sequentially, again, Q3 versus Q2. And we anticipate continuing to improve Q4 versus Q3 even in this environment. You know what I would say about GCS is, our financial engineering is working as well or even better than expected. The challenge really in GCS right now is top line.

Chris Shaw - UBS

So as the majority of the margin improving in other services is more pest related?

Douglas M. Baker - Chairman, President and Chief Executive Officer

No, clearly GCS particularly year-on-year, it's a substantial improvement.

Chris Shaw - UBS

Okay, and then lastly. On the pricing, are there any… do you factor in any sort of surcharges for delivery on, you know, for fuel?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, we do have some businesses that implemented some fuel surcharges. It was not the majority of our business but that did exist, and certainly, if fuel continues to drop, we'll lose the surcharge. But, you know, I would say, I'd rather have low fuel.

Chris Shaw - UBS

All right. Thanks Doug.

Operator

Andrea Wirth you may ask your question and please state your company name.

Andrea Wirth - Robert W. Baird

Robert Baird. Good afternoon guys. Doug, I know you're not forecasting much for 2009 yet, and you're still working on that plan. But, I just want to try to get a sense of really, I guess when you look back to 2001, it was probably the worst year at least in terms of hotel demand.

I just saw a forecast that's assuming 2009 actually is worse than what we saw in 2001. Just want to understand a little bit of your thought process. I mean, if we are in a situation where it's worse than that, do you think growth rates and at least institutional business specifically, can we see growth rates maybe not quite as bad as we saw in 2001 where they dropped down to 3% or a little bit below?

Essentially is your business a little bit different now that you can still kind of post that same kind of growth rate? Or is this a scenario where if the market comes down that hard you're still going to come down even harder?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, I guess, the simple answer is, we anticipate next year being a very difficult year. It's almost philosophical for us which is, we much rather build our plans around what we think the worst case circumstances can be, so we have a fairly pessimistic assumption. I'd say very pessimistic assumption built into our thinking around 2009.

I do believe we are in a better position to weather those types of markets than we were even in '01 for several reasons. The number of it to the technology that we have and what we're doing. The competitive situation is certainly different in the markets than it was in 2001 as well.

So when you get to the heart of your question, you know, plus or minus 3%, I can't imagine ever agreeing to a plan for institutional that had 3% growth.

Andrea Wirth - Robert W. Baird

Okay. Fair enough. And then just on the other services side. Do you think this kind of 14% margin is sustainable now at this point in time assuming since you've gotten over really the productivity side of things on GCS?

Michael Monahan - Vice President of External Relations

Andrea, this is Mike Monahan. Clearly, we've looked for the margin to improve there simply because we still got GCS losing money, so as that picks up, you look for the margins in US others to improve.

Andrea Wirth - Robert W. Baird

Okay. Great, thanks.

Operator

Mike Harrison you may ask your question and state your company name.

Mike Harrison - First Analysis

Hi, good morning. Mike Harrison with First Analysis. Sticking with the US other services operating income, can you breakout exactly what the GCS loss was in the quarter?

Michael Monahan - Vice President of External Relations

Yeah, it was just under $4 million.

Douglas M. Baker - Chairman, President and Chief Executive Officer

$3.9 million.

Mike Harrison - First Analysis

Okay, and you mentioned that in Pest, the seasonal kind of one-shot business was actually softer than you had expected. That's usually a higher margin business, so given the margin improvement that you saw year-over-year there… can you talk about the sustainability of the gains there?

Michael Monahan - Vice President of External Relations

In past or US.

Mike Harrison - First Analysis

US other services over all, but it sounds like most of the improvement was in past. The margin standpoint.

Michael Monahan - Vice President of External Relations

Yeah clearly the one-shot business is good business but I wouldn't want to hang everything on that. Because the underlying base business is good. If we look at the US OS margin as GCS improved, you'll see improvement there. I don't think we'll have any one-time or reversals in the margins.

Mike Harrison - First Analysis

Okay. And then looking at the Ecovation pipeline, it sounds like you're working to refill that. Can you talk about maybe what kind of interests you're seeing for that offering and if you can talk about what your expectations are for sales for next year, you had initially talked about exceeding 100 million this year, is that a good target for next year? Or you think uptake is still slower than that?

Douglas M. Baker - Chairman, President and Chief Executive Officer

We haven't set… this is Doug. We haven't set budgets either earlier or by division. I would say clearly Ecovation this year and we expect it to continue through next year, it's going to be slower than initially foreseen. You know a big reason for that is, these are fairly big ticket installations up front.

Clearly the credit crunch had an impact on our ability to go close these businesses and while we anticipated a lousy economy, we weren't anticipating the credit crunch that occurred. So I don't know if it's going to be… you know if I had to guess right now that's all I'm doing, I'd say it's more likely under a 100 next year, but it's going to be substantially over this year.

Mike Harrison - First Analysis

All right. And then last question in the healthcare business, the underlying or organic sales growth has been maybe a little more moderate than I think I would have expected over the last two quarters. Have you guys been contemplating any changes in the way you're going to market with the inspection control offering and healthcare offering overall? Or any concerns about the underlying growth rate there?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, you know I would say if you look there's three key pieces to our global healthcare business yes your healthcare business, Yes, Europe healthcare at double-digits, you had Microtek, year-on-year versus their sales in the mid-teens organic growth. And you have legacy healthcare which is the smallest of those three pieces and I think what was it 7%? And that gets moved around fairly dramatically by order timing.

We are pushing very aggressively and I think part of Microtek's success is cross selling efforts as well as the pipe they have laid etcetera. So we're very bullish on our healthcare business, if you look at it overall, it's doing quite well. We expect it to continue to do so.

Michael Monahan - Vice President of External Relations

And Mike, this is Mike Monahan. Just to join in on that remember the healthcare US the one you referred to is still a relatively smaller business, so you can have significant impact on percentage gains by small amounts too.

Mike Harrison - First Analysis

All right. Thanks very much.

Operator

Bob Koort, you may ask your question? And he's with Goldman Sachs.

Robert A. Koort - Goldman Sachs

Thanks, good morning.

Michael Monahan - Vice President of External Relations

Hi Bob.

Robert A. Koort - Goldman Sachs

Is there any reason guys that… and a lot of people want to make comparisons to the last recession have I guess, inspiration that you guys can keep delivering strong results. I think the last go round in '01 you were able to do… pretty much get to double-digits in Asia Pacific, Latin America it's been strong up until now. Is there something different about the scale of business or the infrastructure you've put in place from a fix cost standpoint that would make that more vulnerable this go around than last recession, if it spreads into those regions?

Douglas M. Baker - Chairman, President and Chief Executive Officer

No. Bob, this is Doug… I don't think… I think buy and large, I think that type of recession is going to be more the news than our relative position or structure. I think if anything we're structured in a better way to with and market difficulties from a competitive position, from a product line position, from a offensive, I mean I think our GM team is as strong as it's ever been.

So that… I think we are in a very good position to go through it. I think what's going to market difference if there is one, is really how does it unfold, which frankly now we're into speculation. Here's what we know, I mean we're anticipating '09 to be a lousy year from an end use market standpoint. I don't know what other forecasts would be responsible at this point in time.

And as a result we're putting great emphasis on making sure that we protect and frankly increase investments and corporate account folks, getting after healthcare growth and a number of other what I call our core growth initiatives are. And if anything were increasing our bets there. Now, all other none growth costs, we're going to work very aggressively to go look at every one of them and make sure we're in a position to protect our bottom line in a very difficult environment.

So, we're taking, I think, very strong, smart wide eyed steps going into what we think can be an adverse market to make sure that we again have a successful year next.

Robert A. Koort - Goldman Sachs

And if you might, dough. You got the European guys have a fancy new home. What can they do to get the regional performance of the year award back in the St Paul office? What are your goals there for the next year?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Well I think, the goals have been laid out for a while. We have been, like in other regions we've been expanding our corporate account, sales resources in Europe and making sure that we're aggressively targeting who we think are going to be the likely Victors in the recession and coming out of the recession, so it's going to be continued to put emphasis on selling new business.

Our top line doesn't grow because the river flows, it grows because we succeed in convincing new customers to join our roster and so that's priority one for Europe. The second priorities are to make sure that they roll out EBS or SAP programs successfully. We're off to a good start, but there's a lot of work to be done there because that's going to be key to getting after and harvesting more leverage in that business long term. Both on the G&A side as well as the cost to goods side. So those are the two primary focuses and if different people doing those things but we have every expectation that things are going to get done

Robert A. Koort - Goldman Sachs

Got it. And one last one I appreciate your time. Last recession you guys cut the workforce in Latin America a little bit Textiles, professional products. In terms… you said you weren't going to cut any muscle but maybe more other sources of costs. What do you anticipate would happen to your sales and service force going into '09? Thanks.

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah our plan is, you know… if I just take, I think it would be easier to answer we have a couple hundred operating units if I want to break it down on the most granular level. So, we'll go operating unit by operating unit, but our expectation is as we go through this, if anything, there is key part to the sales force, we want to expand and we're going to find ways to make sure that we pay for that in an intelligent way.

Operator

Our next question comes from P.J. Juvekar, you may ask your question from Citigroup.

P.J. Juvekar - Citigroup

Yes, hi. Thank you. Doug, your key growth was 21%. Are you seeing customers sort of trading down and going more to this quick-service restaurants?

Douglas M. Baker - Chairman, President and Chief Executive Officer

I think quick-service has seen customers move from family mid scale dining to quick service. If you look at McDonald's comps and some of the other fast food comps, they're certainly more favorable. Traffic patterns and QSR are more favorable than they are in other food service segments. Certainly, that's got something to do with case performance, I would also say the biggest news there is Kay is still our new business too. We're expanding share in QSR also.

P.J. Juvekar - Citigroup

If that's the case, then people go from high end restaurants, lets say quick-services, is that a net wash for you whatever you lose there, you gain in here?

Douglas M. Baker - Chairman, President and Chief Executive Officer

No. I mean P.J, if you could help me. I'd like to convince everyone to eat at white table cloth restaurants and have wine flight dinners that maximizes its consumption. No its not… that trade down for us isn't completely clean but here's what I would say. We are well penetrated and have a very good share. Frankly, we probably have the highest share in QSR of any of them, so as a trade down goes, we probably do as well there, but we are also in food retail. People are doing more takeout, so I think we're well positioned for this thing, but no, you'd rather have a consumer in a, we'll I don't know, pick it, Morton's generally creates more volume for us than a consumer in McDonald's.

P.J. Juvekar - Citigroup

Okay. Fair enough. And then just a question on your charge that you're taking, $11.8 million. How much of that is European headquarter location and what else is in there?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, roughly half is European headquarter location.

P.J. Juvekar - Citigroup

And what is the other half?

Michael Monahan - Vice President of External Relations

The other half Vijay is related to some restructuring actions we've taken in Europe as well as… you remember we sold Valby in the second quarter? We had some follow on costs of renting and shutting down the facility that were in there, so that's the other half of those two.

Douglas M. Baker - Chairman, President and Chief Executive Officer

Valby was our plant in Denmark.

P.J. Juvekar - Citigroup

Okay, thank you.

Operator

John McNulty with Credit Suisse, you may ask your question.

John McNulty - Credit Suisse

Yeah, good afternoon. Just a few quick ones. On the Kay business, the number were strong even when you pull out the pull [ph] forward that it sounds like you got. Anything there that was lumpy that may fall off looking out over the next quarter or so?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah I don't. We had some order timing which helped the 21%, but we would expect Kay's fourth quarter not to maybe have a two on it, but to be pretty darn strong.

John McNulty - Credit Suisse

Okay, great. And then, with regard to your balance sheet and your cash flow right now, I know you put your share repurchase program somewhat on hold with the kind of pending Henkel block [ph] out there. In this credit crunch type environment, how should we be thinking about your uses for cash and your balance sheet, and the flexibility that you think you have and potentially, you know, even looking at that block as well?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, John, I guess I would repeat what I said earlier which is, the one thing we're going to be very careful not to do is harm our balance sheet through any kind of share buyback, that we will work to do the right thing by our shareholder. But, that also includes making sure that we have continued flexibility moving forward particularly what we consider to be improving M&A market.

John McNulty - Credit Suisse

Okay. Understood. And then on the tax-line, I know you said or you've got a couple of benefits that were one timers and some that were going to be sustainable. I know it's a little bit early but can you give us color as to what you think… or give us at least a range of where you think the tax rate may be for 2009?

Michael Monahan - Vice President of External Relations

Well, John we said it'd 31%, 32% for the full year 2008. We expect some improvement in 2009, but until we do plans, you don't know what your geographic incomes are to really get more definitive on that, but we do expect improvement from 2008 into 2009.

John McNulty - Credit Suisse

Okay. Great And then, the last question. Just with regard to your customers, a lot of them I would imagine are starting to struggle at this point. Can you give us some color as to what you're seeing with regard to bad debt allowances and maybe what you're factoring in there?

Michael Monahan - Vice President of External Relations

Nothing significant.

Douglas M. Baker - Chairman, President and Chief Executive Officer

You know John. We are always watchful as you would expect us to be in these environments on bad debt.

Michael Monahan - Vice President of External Relations

It's right inline with the last few years though. No changes yet.

John McNulty - Credit Suisse

Okay, great. Thanks very much.

Michael Monahan - Vice President of External Relations

You bet.

Operator

Gary Bisbee with Barclays Capital you may ask your question.

Gary Bisbee - Barclays Capital

Yeah, hi guys. Good afternoon. I guess a couple questions. Fist of all, can you give us a sense, I don't know if I've ever asked what percent of your customer base is small businesses? And I'm wondering what impact the credit crunch may be the. The thing that jogged my thought of the question is my favorite burrito place in New York just went under and closed because they couldn't get a loan. So are you seeing that from the restaurant customers or more your customers, you know, the big guy?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Well, first of all, what was the name of the burrito place?

Gary Bisbee - Barclays Capital

It was called Burritoville's; eight Stores in New York.

Michael Monahan - Vice President of External Relations

We are going to be checking that right after this call. Here I guess what I would say is, a lot of our businesses with large corporate accounts who frankly also can have credit issues, and so, we watch that play carefully just like small guys. The way we approach the markets, different in the US, a number of the independents are done in partnership with customers like Cisco and others who have very good leverage to collect because of if the restaurant can't pay for food they can't open their door, right.

And I think Cisco has got a long track record of doing a very good job on collections. So, I don't know if that answers it. I think there is no doubt that there's always going to be increased credit pressure when you get into these environments. I would say we recognized it, we're on it and feel very confident we'll manage it.

Gary Bisbee - Barclays Capital

Okay. The second question you know I… just given what we've seen from a couple other companies, I went back and looked at your last 10-K to review the pension footnote, and obviously with the market coming down so much, I felt like you had reasonably aggressive assumptions for your expected returns built into that, and you had a reasonably under funded pension as if the end of '07. I assume that's worse today.

Are we likely to see a big bump in '09 in the pension expense number one? And number two, any sense what the cash flow impact of that could be in '09 versus '08, if anything?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, I would… on the expense, I would say if the return is… the assumption on returns goes down, the discount rate's is going to likely improve dramatically and there's more leverage there in terms of P&L than there is on the assumed return Okay? So we don't expect that there's going to be a big fundamental difference.

From a cash standpoint and cash use, you know we were in a very good position before the market went down. I think we're going to have to look at the pension once everything settles down, but I don't think I'd be making forecasts based on the market as it sits here today.

Gary Bisbee - Barclays Capital

Okay. So is it safe to say then, you don't think there's going to be a very large swing on either earnings or cash flow next year from what you can tell today?

Douglas M. Baker - Chairman, President and Chief Executive Officer

If you can tell me what the interest rate will be on December 31st I can tell you exactly what it would be, but, my assumption is that, I think those two are going to negate each other and there is not going to be a material difference.

Gary Bisbee - Barclays Capital

Okay, and let me try just one more time on this. Given that it looked like the funded status was almost a third under funded at the end of '07 and yet 70% of the pension assets in equities which have obviously taken it on the chin this year, I mean, is that likely to lead to you wanting to set aside a larger amount of money or larger expense? Or is that still in within a range that you don't think it's going to change that much?

Douglas M. Baker - Chairman, President and Chief Executive Officer

I'm not sure what you're looking at but at the end of… you said the end of '07?

Gary Bisbee - Barclays Capital

Yes, I don't know if it's stated?

Douglas M. Baker - Chairman, President and Chief Executive Officer

We were over on ABO and like in the 90s on PDO in terms of funding at the end of '07, so we didn't start under-funded. We've started very comfortably funded going into this. Certainly, the market declined. You're, right. Part of it is an equity and it's been impacted. But I would say we will look and understand what's going on.

Gary Bisbee - Barclays Capital

Okay. All right. And then just the last question related to the balance sheet. Can you remind us when the next big piece of the debt that you hold today mature and if there's anything coming up in the near term?

Douglas M. Baker - Chairman, President and Chief Executive Officer

The next big tranche of debt is 2011 and it's not even that big.

Gary Bisbee - Barclays Capital

Great, thanks for the color.

Operator

Dmitry Silverstein you may ask your question with Longbow Research.

Dmitry Silverstein - Longbow Research

Good afternoon. A lot of my questions have been answered but I want to follow-up on a couple things. You are continuing to see a little bit of a year-over-year deterioration in the profitability of international operations. A lot of it has to do obviously with the move to Zurich which hopefully will tail off here toward the end of the year but can you update on … you gave a pretty good summary in your prepared remarks about what you're doing with the sales force there. Can you update us on what's going on with your profit improvement initiatives in the region?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah Dmitry, Doug. I think this is going to be hard to see for a while, but there is two things. You're right. Part of the deterioration at EBIT or OI is the investment we're making not only to move but also the ongoing investment in EDS [ph] and frankly the headquarter in Zurich, but that's the investment that enables us to realize tax benefits early, also sales benefits, and then ultimately SG&A and cost of goods benefits. But as we always said you'll see the tax benefit before you see the rest. So frankly we've made a trade which is a little uglier OI for a much prettier NI and net it's a much better trade for shareholders

Dmitry Silverstein - Longbow Research

Thanks for the clarification. Second question back in the beginning of the decade, when we went through the last recessionary period and your end market, if I'm remember correctly that food service was about twice as big as lodging. Given all the changes you made to portfolio the growth in healthcare, food and beverage and growth in Europe. What's the percentage of your revenue that's exposed to food service and lodging these days?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Well, yeah globally 30% of our sales come from food service and about 10% come from lodging that's a global number. And so if you want to get down to any one region, I mean the simple math it's not exactly precise, is take that region's percent, so you US, divide it by two.

Dmitry Silverstein - Longbow Research

Okay. So it sounds like your food service component pretty much stays the same over the years but lodging percentage has declined a little bit from what I remember?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah I think as you've seen us expand QSR and some other region, we've successfully built that business

Dmitry Silverstein - Longbow Research

I got you. And then final question, if you know… assuming that you GCS will get close to breakeven and hopefully we'll start contributing to operating income next year and given that you're making it seems like progress in Europe with the economy deteriorating, with expectations of a pretty tough year next year were some challenges to volume growth. Does it make sense to take a look at your asset base and see if there's opportunities there to consolidate your asset and footprint, to maybe outsourcing production to get it into a broader restructuring program to try to maximize, how hard your selected assets are coming out of this recession?

Douglas M. Baker - Chairman, President and Chief Executive Officer

[inaudible] you know what I would say… I'll answer the spirit of the question, which is we look at '09 certainly, there's parts of '09, we would like to wish away. We wish end markets were going to be robust and all the other happy stuff everybody else is wishing for. We're planning for by any means. But I would also say '09 presents opportunities and we want to make sure that we are fully leveraging those opportunities. So when you go through these things, we're going to look at how do we get our business structure, our asset structure, our product line, in terms of positioning for green. How do we lead it down, how do we make sure we maximize its margins coming through this.

What happens in these times is, you know certainly, our ability to have conversations with our people and with our customers is much more open in these environments, open for change than it is in what I would call traditional growth environment. And we want to make sure that we fully utilize that for the benefit of our customers and the benefit of our company.

So I think we're doing and we're going to aggressively use this period to position ourselves with if already been a bigger sale coming out of '09, that doesn't mean our expectation in any year is that we're going to have a better top line and bottom line. But we also want to make sure that we capitalize in the environment too.

Dmitry Silverstein - Longbow Research

Okay. Thank you Doug.

Operator

[Operator Instructions] Rosemarie Morbelli, with Ingalls & Snyder. You may ask your question.

Rosemarie Morbelli - Ingalls & Snyder

Good afternoon, thanks for taking my question. Doug you said that you were looking at '09 and as part of your forecast you were looking at the worst case scenario. Could you share with us what your idea of the worst case scenario is?

Douglas M. Baker - Chairman, President and Chief Executive Officer

It's pretty dark. You know Rosemarie, I guess what I would say is, if you look at… my expectation, our expectation is that all of our end use markets are worse in terms of consumption than they were in '08 and given that several of our very large end use markets in '08 were frankly pretty bad. I think it's a fairly conservative estimate.

We also expect raw materials to sequentially come down, but we're certainly aren't hanging on the most optimistic order forecasts that are out there. We expect FX to be a head wind next year, as well. Now we got some built in tail winds that we've created, Mike already alluded to one which is a further rollout of tax benefits that are coming because of the investments we've made.

We've got some changes in the accretion and delusion in fact from acquisitions that we made last year. We are expecting to see continued improvement in GCS and some other businesses. And we are going to be all over growth offset markets declines both in Europe and other places. So there are a number of puts and takes next year. But it does start with a fairly, what I would call, I don't know, dark assessment of where market assumption is going to be.

Rosemarie Morbelli - Ingalls & Snyder

Okay. Thanks. And you said that in the [inaudible] in the press release that you were targeting additional market segments? Could you give us a better feel for what that is those markets? You are not currently or just entering more aggressively into existing markets?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah I think… I think the market segment comment would be… we're not going to enter a whole bunch of brand new segments next year, but it's continuing to push past into some of the new geographies that we've entered and so they'll expand, they usually start with and food and beverage and then move over to the hotel and food service phase. So its those types of moves that we're talking about.

Rosemarie Morbelli - Ingalls & Snyder

Okay. And then in the similar vain, you also talked about multiple initiatives to improve efficiencies and lower operating costs. Could you give us a better feel for what you are going to do and the benefits you expect? Both the gross margin and SG&A, assuming that you can't grow revenues next year?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Well Rosemarie, you ought to get my forecast one line at a time.

Rosemarie Morbelli - Ingalls & Snyder

Well, I'm trying.

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah I know. The number of… I would say a couple things. We're going to be aggressively looking at SG&A productivity, starting with G&A and making sure that we are positioned properly to go further improved our productivity i.e. our ratio in SG&A in businesses. Now we aren't going to have the same targeted growth in every business because you candidly, we have got some businesses that we expect to perform quite well next year and other businesses that we know are going to be under more pressure, our healthcare and vehicle care, they just two businesses that are affected quite differently from these economic circumstances, and we'll have different plans for them as a result.

The other point I would make… and we're also going to be quite aggressive in retooling our product line. We don't feel and we think '09 is the year particularly in the North America to do some very smart moves in terms of getting our raw material channels more lined up with the raw material channels we think that are going to fare better long-term.

Get out of the way of the ag business channel, weed [inaudible] in some of those other areas. We're also going to reduce substantially the number of formulas and the number of raw materials that we have to buy, because we know it's going to give us more flexibility and more leverage as we move forward, and '09 is the year to get after those things.

The last thing I'll say on your assumptions. You know, we have a pretty dark forecast. Our top line, we fully expect will grow next year, under almost any of our assumptions. It certainly grows better in better markets, but we don't foresee an issue where the top line is not expanding.

Rosemarie Morbelli - Ingalls & Snyder

Okay, That's very helpful. And if I can ask just one last quick question. In this environment can you still get price increases in order to cover your higher costs or do you find that… or do you expect that competitively speaking, it would be not suicide but painful?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, I mean, I think you get an issue. We expect that our price revenue rate will continue to expand in Q4 and on a dollar and dollar basis. But there becomes a line where we have to make sure that we're doing all we can on the cost as well, that you don't just mind pricing along to improve your margin.

So, you'll get there eventually. I don't believe we're there right now.

Rosemarie Morbelli - Ingalls & Snyder

Okay, thank you.

Operator

John Roberts, you may ask your question with Buckingham Research.

John Roberts - Buckingham Research

Good afternoon, guys.

Michael Monahan - Vice President of External Relations

Hi, John.

John Roberts - Buckingham Research

When you report the current effect of foreign currency on translation, the $3.5 million benefit in the quarter, does that all fall to the bottom line at the EPS level or have you swapped out some of your currency exposure on debt for example so that you get some interest rate offset as well, so the EPS affect is even smaller than what you show on the operating side?

Douglas M. Baker - Chairman, President and Chief Executive Officer

The $3.5 million falls down to EPS.

John Roberts - Buckingham Research

It's straightforward, the coming down. And then secondly, Henkel came off the Board a quarter or so ago. At some point if they haven't sold their interests, do they get to come back or are they forever now a passive investor if they decide to hold off on selling their interests?

Michael Monahan - Vice President of External Relations

No, we have a stockholder agreement, and so, when they stepped off the Board, if I could say, conclusively change their mind and so they're going to remain a long-term investor. By our stockholder agreement, they would have the right to Board seats again.

John Roberts - Buckingham Research

Okay, thank you.

Operator

Robert Felice with Gabelli & Company, you may ask your question.

Robert Felice - Gabelli & Company

Hi, guys. Most of my questions have been answered. Just one last one. Everyone has very high expectations for Ecolab regardless of the state of the external environment, and I guess that's the positive and negative of performing so well and constantly delivering on expectations. But given the way the world looks to you today, Doug, what level of '09 earnings growth would you say is respectable would make you look up a year from now and say that you weathered the storm and continued to invest for growth?

Douglas M. Baker - Chairman, President and Chief Executive Officer

Yeah, that's a question I would ask if I were you. And I would say this, even if we're not going to go out and establish EPS targets right now, and even if it were our practice to do so on this call, it's been our practice to do so in our February call, I would really refrain from doing it because it's such a poor environment.

You know, when we started writing this material a week ago, oil, FX, the credit markets, it was completely different and I imagine in a week it can be different again. And so, right now I think we're doing the prudent things as we move forward. I understand the spirit of your question. I guess what I would take away from this call is, we do not have rose colored glasses on. We are planning for a very difficult environment which means that, we are taking steps to ensure that we have a successful year next year.

You're going to ask, what is success defined as? I think you're going to have to allow the time to pass and allow us to get out there and do our forecasts when we think it's more prudent to do it. I apologize I can't answer it directly.

Robert Felice - Gabelli & Company

Fair enough. Thanks for taking my question.

Operator

There are no further questions at this time.

Michael Monahan - Vice President of External Relations

Well thanks everyone for your time today and have a great day.

Operator

This does conclude today's conference. You may now disconnect. .

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