Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Douglas Baker - Chairman, Chief Executive Officer and President

Michael Monahan - VP of External Relations

Analysts

Jeffrey Zekauskas - JP Morgan Chase & Co

Rosemarie Morbelli - Ingalls & Snyder LLC

David Ridley-Lane - BofA Merrill Lynch

John McNulty - Crédit Suisse AG

Michael Harrison - First Analysis

Edward Yang - Oppenheimer & Co. Inc.

John Roberts - Buckingham Research Associations

Laurence Alexander - Jefferies & Company, Inc.

Justin Hauke

Nathan Brochmann - William Blair & Company L.L.C.

Gary Bisbee - Barclays Capital

Dmitry Silversteyn - Longbow Research LLC

P.J. Juvekar - Citigroup Inc

Ecolab (ECL) Q3 2010 Earnings Call October 26, 2010 1:00 PM ET

Operator

Welcome to the Ecolab Third Quarter 2010 Earnings Release Conference Call. [Operator Instructions] I would like to turn the call over to Mr. Michael Monahan, Senior Vice President, External Relations. Sir, you may begin.

Michael Monahan

Hello, everyone, and welcome to Ecolab's third quarter conference call. With me today is Doug Baker, Ecolab's Chairman, President and CEO. A copy of our earnings release and the slides referenced on 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 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 third quarter earnings release and in Slide 2. We also refer you to the supplemental diluted earnings per share information that is also in the release.

Starting with Slides 3 and 4, we continued to deliver solid earnings growth in the third quarter despite mixed conditions in our end markets. The sales increase was fueled by our aggressive actions to gain new accounts using our innovative new products, our industry-leading sales and service force. Margins improved on the better volume and cost-reduction actions. Looking ahead, we expect to continue outperforming our gradually improving markets and deliver double-digit EPS growth once again in 2010.

Starting with some highlights from the quarter. Reported third quarter earnings per share were up 23% to $0.74. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, third quarter 2010 earnings per share increased 8% to $0.66. The adjusted earnings per share growth was driven by better volume from new products and new account gains, which more than offset higher operating costs and continued investments in our business.

From an end-market perspective, we continued to see good growth across all market segments in our Asia-Pacific and Latin America businesses. Lodging room demand has increased and is showing good trends worldwide. The global Food & Beverage market is enjoying steady growth. Our U.S. and European foodservice markets remained soft but have shown modest improvement from prior periods. And the U.S. Healthcare market has seen a modest slowing.

We continue to be aggressive, focusing on top line growth, as we emphasize our innovative products and service strengths to help drive market share growth in our core businesses and deliver new account acquisition among our national, regional and independent prospects. We're also making significant investments in key growth businesses and acquisitions to build future growth. We also remain focused on cost savings, emphasizing productivity and efficiency improvements to help increase margins.

Looking ahead, we expect fourth quarter adjusted EPS to increase 7% to 11% to $0.59 to $0.61 range, compared with adjusted EPS of $0.55 in the fourth quarter 2009. We tightened our estimate range for the full year. Despite the generally slow economy, we continued to look for double-digit EPS growth with adjusted EPS of $2.22 to $2.24 per share for the full year 2010, representing a 12% to 13% gain over last year. That would represent yet another year in our decade-long performance of fixed currency sales growth, our ninth consecutive year of adjusted EPS growth and the eighth double-digit EPS gain in the last 10 years.

In summary, we expect 2010 to reflect yet another strong performance by Ecolab as we use aggressive sales efforts to gain new accounts and achieve better sales penetration, along with improved efficiency and cost savings to once again deliver attractive growth and shareholder returns.

Turning to the details as shown on Slide 5, Ecolab's reported consolidated sales for the third quarter increased 1%. Looking at the components, volume and mix increased 3%, pricing was positive but not significant and currency decreased sales by 2%. Acquisitions were negligible.

Slide 6 includes sales growth by segment and division. Sales for the U.S. Cleaning & Sanitizing operations rose 4%. Institutional sales rose 3%. New account gains, increased sales to distributors and some pipeline building for new products and programs benefited third quarter sales.

We continued to outperform mixed market trends, which showed continued soft foodservice foot traffic and strengthening Lodging room demand in the third quarter. We remain focused on driving sales growth using innovative products in warewashing, laundry and housekeeping that provides superior performance while delivering water, energy and labor savings for our customers.

We are also targeting new accounts with additional and redeployed sales people and programs. These actions have resulted in good new account gains, and we are continuing our efforts to drive more sales and margin growth. We expect these actions to enable Institutional to once again outperform its markets in the fourth quarter, though some of the third quarter distributor inventory build-up will likely soften the fourth quarter gain.

Kay's third quarter sales grew 8%, led by strong growth for both QSR and Food Retail. We enjoyed good demand from existing and new fast food chain accounts. Sales to Food Retail has improved, driven by new account wins. New products and programs like the introduction of Scrub-N-Go, the floor cleaner for QSR restaurants, bolstered Kay's results. We expect these initiatives, along with continued good new account growth, to help drive solid gains in Kay's fourth quarter.

Reported sales for Textile Care increased 19%. Adjusted for the Dober acquisition, sales were up 2%. Customer gains, new program launches and additional sales within existing customers more than offset continued challenging industry conditions. The Dober acquisition complements Ecolab's existing business very well, bringing a strong sales and service team and strong customer relationships. It also brings innovative monitoring, technology and products as well as added scale to our Textile Care business that will improve our growth and returns on investment. While the Textile Care industry conditions remain difficult, we look for better sales from our strengthened Textile Care business in the fourth quarter.

Healthcare sales increased 1% in the quarter. Gains in infection barriers and central sterile continued to more than offset comparison to the prior year's spike in demand due to H1N1 fears and slowing healthcare market trends this year, including fewer patient visits and surgical procedures. Excluding the H1N1 impact for both years, sales would have increased by approximately 4%.

During the third quarter, we continued to build our product portfolio. We launched a new line of specially patient raves for robotic procedures and launched Virasept, the first non-bleached, EPA-approved, ready-to-use disinfectant that kills C. diff [Clostridium difficile] spores. Installations of a new hand care dispenser platform and antimicrobial line of sanitizers for central sterile are going well. And our EnCompass patient room sanitation program is getting a good response. Looking ahead, fourth quarter sales are expected to continue to show modest reported sales growth as it compares to the strong H1N1-related sales recorded in the fourth quarter of last year.

Food & Beverage sales grew 4%. Sales increased in almost all segments as corporate account wins and new products offset soft results in meat and poultry. Food & Beverage will continue to focus on new account acquisition and new product sales to offset slow end markets and softer pricing. We look for our Food & Beverage sales to show similar growth again in the fourth quarter.

Vehicle Care sales decreased 4%. The division remains focused on new more sustainable products and gaining new accounts. However, these efforts were more than offset by continued weak market demand. We looked for Vehicle Care to continue to outperform its markets in the fourth quarter, but sales are expected to fall short of last year's level.

Sales for U.S. Other Services were flat in the third quarter. Pest elimination sales were also flat as gains in fast food, retail grocery stores and healthcare and Food & Beverage plants were offset by slow conditions in other major end markets. We continued to develop new product and program solutions to better serve customer needs in the current environment. Our new bed bug program that reduces room downtime for treatment cycles and thereby helps to lower customer's total costs, is doing well, and we are broadening the market applications for our bed bug programs. We also continued to work on additional new solutions that fit our sustainability profiles and goals. We expect these offers along with others help offset soft markets and yield somewhat better fourth quarter sales.

GCS sales increased 1% in the quarter. Once again, the profitability improved significantly over last year and the prior quarter. New account wins offset the impact of slow Foodservice business conditions. GCS profitability continue to improve as productivity and efficiency gains were realized throughout the business.

We remain focused on developing chain account relationships and driving sales through the regional and franchisee organizations. We had used some of the improvement in profitability to invest in regional sales force additions to deliver current and future growth. As a result, we expect GCS to show continued sales growth in the fourth quarter.

Measured in fixed currencies, international sales increased 3%. Europe, Middle East and Africa sales were flat in the third quarter at fixed currency rates. Adjusted for divestiture, sales would have increased 1%. Europe's institutional third quarter sales declined slightly. New account gains were offset by soft market conditions in Central and Southern Europe.

Food & Beverage sales improved. The business continues to focus on winning new customers by emphasizing the cost savings benefits of our leading products like DryExx, Inspexx and Water Care.

Textile Care sales showed modest growth as new accounts offset reduced central laundry volumes. Europe's healthcare sales declined, as gains in equipments, drapes and strength in Eastern Europe did not offset last year's surge in H1N1-related sales.

Pest Europe sales increased nicely as we continue to improve operations and profitability. We are starting to work with Europe's new business information systems platform to unlock costs and complexity in our operations to drive faster sales growth and higher margins. We continue to expect significant improvements starting next year as the range of growth and profitability actions we will implement begin to take effect. We look for Europe's fourth quarter fixed currency sales to be similar to last year.

Asia-Pacific sales grew 8% in fixed currencies, as the region shows good recovery from last year's low level of the business travel and tourism. Institutional sales were solid as occupancy levels improve and economies recover. Food & Beverage sales showed strong growth. Both the beverage and brewing sectors continue to increase, benefiting from improved product penetration and account gains.

Last month, we announced that we agree to acquire Cleantec. The business provides products, sales and service for the Food & Beverage, Foodservice and Textile Care industries in Australia and New Zealand. They have sales of about USD $55 million. We are awaiting clearance from the Australian anti-trust authorities and expect to close before year end. Cleantec will help us expand our Australian customer base, improve our positions in Food & Beverage processing, hospitality and Textile Care and create opportunities to offer additional services to customers. Looking ahead, Asia-Pacific expects continued good sales growth in the fourth quarter, reflecting recent account wins and stabilization of the markets.

Third quarter sales for Ecolab's Canadian operations grew 5% when compared to last year at fixed currency rates. Food & Beverage in Kay reported strong growth. Institutional, Vehicle Care and Pest also reported sales gains in the quarter. We expect the solid sales trends to continue in the fourth quarter.

Latin America reported a strong sales gain, rising 7% in fixed currencies, as all divisions in that region increased. Institutional growth was driven by new accounts, increased product penetration and continued success with the global and regional accounts. Food & Beverage sales reflected good demand in beverage and brewing markets as well as the benefits of new accounts. Overall, we expect attractive growth trends to continue in Latin America with another solid gain in the fourth quarter.

Turning to margins on the income statement in Slide 7 of our presentation. Third quarter gross margins continued their recovery, increasing 50 basis points to 51.1%. The increase was driven by volume gains and cost savings actions. SG&A expenses represented 35.8% of sales, same ratio as last year. Leverage from sales gains and cost savings actions offset continued investments in our business, people and systems and other cost increases. Operating income for Ecolab's U.S. Cleaning & Sanitizing segment increased 5%. Margins expanded by 30 basis points. The increase was primarily driven by volume gains.

Operating income for U.S. Other Services grew 7%. Margins expanded by 120 basis points over last year, driven by pricing and cost savings actions. International fixed currency operating income increased 1% versus last year, while margins were off 20 basis points. Volume gains, pricing, favorable delivered product costs and cost savings efforts were more than offset by investments, including European systems expense as well as Asia-Pacific and Latin America investments in personnel.

The Corporate segment and tax rate are discussed in the press release. We repurchased 2.9 million shares during the third quarter. The net of this performance is that Ecolab's reported third quarter diluted earnings per share was $0.74 compared with $0.60 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, our adjusted earnings increased 8% to $0.66 when compared with $0.61 earned a year ago.

Turning to Slide 8. Ecolab's balance sheet and cash flow remained strong. Total debt to total capital was 33% at September 30 compared with 33% reported a year ago. Our net debt was 28%. Looking ahead, we expect continued mixed end market performance in the fourth quarter, but with still gradually improving trends.

As outlined in Slide 9, we continue to drive new account and market share growth using our products and services strengths that combine to help customers reduce their costs and improve their efficiency. We continued to focus our investments in growth businesses like Healthcare, China and Latin America as well as new products and acquisitions to accelerate the top line. We will also expand our sales and service force to invest in field technology to make them more productive. We expect these actions to yield sequential organic sales improvement in the fourth quarter.

The press release includes other line items forecast of our fourth quarter P&L. Net, we expect adjusted diluted earnings per share in the fourth quarter, excluding special gains and charges and discrete tax items, to increase 7% to 11% to the $0.59 to $0.61 range compared with the adjusted earnings per share of $0.55 earned a year ago. This would yield full year EPS growth of 12% to 13% into the $2.22 to $2.24 range.

In summary, as noted in Slide 10, we had a solid third quarter performance while still investing in our future. We look for a strong fourth quarter gain and expect to deliver double-digit EPS growth once again for the full year 2010, representing our ninth consecutive year of adjusted EPS growth as we continue to outperform mixed but gradually improving end markets.

On a closing note, we thought you might be interested in some recent recognition we received. We placed 26th on Newsweek's Greenest Companies in America list that was last week's issue. And during the quarter, our China business was name one of the top 21 companies for driving sustainability in China as well as one of the best human resource management companies in that country. It was great recognition for our global demand and the work they do.

That concludes our formal remarks. Operator, please begin the question-and-answer period.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from P.J. Juvekar of Citibank.

P.J. Juvekar - Citigroup Inc

Despite some recovery in the end markets like hotel occupancy rates and improved air traffic, your top line is still struggling and still quite weak. I was just wondering if you can explain the difference between the end market growth and your top line growth?

Douglas Baker

PJ, Doug. I would say, one, we've talked about expectations around one point improvement per quarter, sequentially. And that's what we've been seeing. If you talk Lodging, it's 10% of our overall sales. We have certainly seen a pickup in our sales to Lodging, but just as what Lodging was troubled, we were not saying you should be worried about our overall enterprise. I would say Lodging alone is not going to move the top line substantially. However, Lodging is performing well. And overall, our business continues to pick up momentum. And the number one focus this year is to make sure that we drove volume momentum, which is precisely what we're doing right now. And we are in a position to lead the year in a very good position in terms of volume, growth momentum.

P.J. Juvekar - Citigroup Inc

And Doug, more broadly, you think time has time to shift the Ecolab business model towards emerging markets where sanitation is likely to become even more important? The emerging market, I think, are about 15% of your sales. You see an opportunity there? Or you think, still, it's not quite right for your products?

Douglas Baker

Well, I think the question is, I agree with the premise that emerging markets' sanitation levels expectations and spending in this area is going to continue to increase, and that's exactly what we're seeing. So our expectations is that the emerging markets continue to play an increasingly large role in our growth story. I think you're seeing out now. They're outgrowing the rest of the world. We would expect that to continue for a long time, and I would also say, I think as things place out over a fairly long period of time.

Operator

Our next question is from Gary Bisbee of Barclays Capital.

Gary Bisbee - Barclays Capital

It looks like, I think, it was the third or fourth quarter in a row where you've done some share repurchases. Should we read anything into that about you feeling like you needed to do that to get to the full year guidance because something had changed in the business? Or maybe separately, is it about the availability of attractive acquisition opportunity?

Douglas Baker

Gary, Doug. I guess how we've talked about this is M&A is our number one priority for cash. And we've just announced that we've made two acquisitions. Certainly, prior to that announcement, we haven't made one in quite a while. And so we said our secondary use of cash is to use it in share buyback. So I think what you've seen is exactly that theme playing out. The truth of the matter is we generate excellent cash flow. And I don't believe we're going to be in a position where it's absolutely binary, one or the other. We like our M&A portfolio. We've made two acquisitions. We have a very robust pipeline and expect to continue to be making acquisitions moving forward. We will also continue in our model to continue to do share repurchase as well.

Gary Bisbee - Barclays Capital

And then just a follow-up question on the U.S. cleaning margin, a bit less momentum in terms of the year-to-year gain there. How should we think about that? I know the thought process has been that overtime, particularly the volume growth environment, that there remains some upside in that. But should we think about without a much more significant revenue acceleration that it's going to be somewhat difficult over the next couple of quarters to do much more than you did this quarter? Or is there anything else going on?

Douglas Baker

Yes, well, I guess, I would start by saying that our expectation is gross margins continue to improve in virtually all regions. The most significant improvement, we will see in Europe over the next several years as we fully deploy EBS [Ecolab Business Solution] and the benefits that it's going to drive for us. Certainly, ultimately, if we don't drive volume, you're going to stall in your capabilities to drive margin. However, as I mentioned earlier, we are accelerating volume at this point in time and feel very confident we can continue to do that. So our expectation is margins continue to improve.

Operator

Our next question is from Laurence Alexander of Jefferies.

Laurence Alexander - Jefferies & Company, Inc.

Have you looked at sort of the success that you've had with Apex, which is a much sort of more dramatic, much faster rollout than most other new products you've launched? Is there any other applications which you can see also getting into this, some more kind of sales run rate, three to four years into the launch?

Douglas Baker

Yes, Lawrence, Doug. What we've got, as we've talked in previous calls, we have a great innovation pipeline. And so you're right, we have a strong warewashing portfolio highlighted by Apex, but there are other initiatives as well. We've got a new breakthrough laundry program coming out, which is very much following the principles that Apex followed. We think, frankly, it's eve stronger because we learned from Apex. In F&B, we have CIP and loop programs going, four new healthcare launches underway and also expanding solids and quick serve in Food Retail. So we like our innovation pipeline. And it's one of the reasons that we're seeing volume growth even though, with the exception of Lodging, the markets really haven't, if you will, flipped to positive for us. So we are still doing this in what I will call a lousy environment. But we have a very terrific innovation pipeline.

Michael Monahan

And Lawrence, as we look down that pipeline, there are products that are all focused on reducing cost for customers, improving value relationship for with them, better results at lower use cost, labor cost. So we're taking some of the lessons from Apex and bring those to other product set as well.

Laurence Alexander - Jefferies & Company, Inc.

Does that change also -- is that leading to a change in how customers view your products and solution compared to your competitors? Or are you finding that some competitors are still able to come in with just sort of like a price point competition that they've always done?

Douglas Baker

Well, Lawrence, there are several types of buyers out there. I would say I think customers have always expected us to have leading innovation. And we continue to do that. That bar is always raised. But certainly, our goal is to continue to create distance between ourselves and regional competitors and even other global competitors. So that's really what we strive to do.

Operator

Our next question is from John McNulty of Credit Suisse.

John McNulty - Crédit Suisse AG

In the margins in the U.S. Other Category, looked like they've kind of taken noticeable turn up. I'm wondering if this is the GCS business finally hitting profitability yet? And how should we think about that business in terms of margins going forward here?

Douglas Baker

Yes, it was principally GCS. GCS loss about $400,000 in that quarter versus I think $1.6 million the prior year. So it was a substantial improvement. And as I've mentioned before, I mean, GCS has been on the positive side of adding cash to the company now for a couple of years. So it's certainly continuing to improve. I guess our expectation for GCS as we've mentioned is we are really focused on driving GCS top line. As we continue to grow the top line, GCS will flip to profit even fully loaded with corporate overhead, which is the number I gave you.

John McNulty - Crédit Suisse AG

And then just a follow-up question on the Healthcare business. I think Mike had indicated that you were seeing, I guess, a reduction in procedures being done. I mean given that healthcare doesn't normally seem to be overly cyclical, I'm wondering what's driving that? Or if there are certain end markets that you're exposed to whether it's the plastic surgery side or what have you that we should be thinking about in terms of how that business moves kind of over the long term?

Douglas Baker

Yes, I guess I would consider this year a strange year for healthcare broadly, particularly in the U.S., right? There's been a lot going on as a result of legislation and other issues. And so we really don't view this as any kind of long-term trend. But during this year, and I think there's plenty of outside third-party facts, other medical companies who have been reporting, the number of procedures overall is down this year. Doctor visits are down. A number of this has to do with people rolling off medical coverage as unemployment, right, has been sustained for a long period of time. However, what we really look at healthcare, we like our business, the launches we have are doing well. This business is improving if you to start working underneath and get out of the H1N1 noise, which is in debate from last year. We're quite confident that this business is going to start per forming like we expect it to, which is high single digit to double-digit organic growth in the near future.

John McNulty - Crédit Suisse AG

What we're seeing, I guess, across a lot of the chemicals space seems to be a lot of raw material, prices starting to move higher. We've seen costic moving, as well as some of the plastics. I'm wondering if you're starting to see some raw material pressures at all? And what we should be thinking for in terms of pricing? I know it was flat this past quarter, but how should we think about that going forward?

Douglas Baker

I would say, what's happened this year in raw materials is pretty much the story we talked about beginning in the first quarter, which was, you would see significant year-on-year improvement in the first half that will be relatively flat in the second half. And so that story has canned out. I would say, certainly, there is some pressure. I would say it's nowhere near the type of inflationary pressure we saw in '06, '07, '08. So I don't think it's going to be a headline story for us. It's certainly not going to be as favorable as it was for the second half of '09 and the first half of '10. But I don't think it's going to be our headline story.

Operator

Our next question is from Nathan Brochmann of William Blair & Company.

Nathan Brochmann - William Blair & Company L.L.C.

I was wondering if you can talk a little bit more about the investment. I know that you talked a little bit about that last quarter in terms of stepping up the opportunity, particularly with the headcount in Asia and Latin America. But I was wondering if you could help us kind of think about the balance in terms of the international margins right now? In terms of what's still coming from the training, et cetera, going on in Europe versus the new headcount additions and other developing areas?

Douglas Baker

Well, if you look at our international margins, certainly, Europe is by far the biggest piece of the International business and has the most influence. I would say what we're seeing in Europe is what we had expected sequentially; improvement in our profitability as we start transitioning from rolling out EBS, to stabilizing EBS, to leveraging EBS. And so we completed the rollout of EBS in the second quarter. We have now the full costs of the amortization in our mix, plus some stabilization costs early in the third quarter, which are starting to subside. And so we expect to continue to see improvement in profitability to a relative in the fourth quarter on. Because we are now fully on leveraging EBS. That is going to be the principal story when we look at international margins. Now aside from that, in terms of Asia-Pacific and Latin America, as we've mentioned, that is principally a volume story. We will continue to invest. We're investing in headcount. We're making outside investments in emerging markets that we think have the best near- and long-term opportunities. We're going to be building a new plant, we're adding our third plant in China, which we're underway with. We've had a number of headcount, key resources in these regions. All of which we like very much these investments and believe they're going to bear fruit as early as 2011. But that's what's going on and all. The principal story is going to be Europe for the next few years.

Nathan Brochmann - William Blair & Company L.L.C.

And so I would assume that as being the bigger part of the mix that overshadows in terms of the investment on the other side of the ocean there in terms of the opportunity for those margins to continue to creep up then?

Douglas Baker

Yes, I mean, I guess what I would expect is we think margins in all regions are going to continue to grow, but they're going to grow at a much more significant rate in Europe because of the low level we are at and the EBS story, which was they're artificially low right now as we've layered on a second, if you will, operating system on top of the old system, though we have dismantled the old system. We are just starting that process right now. So those margins are going to be moving up faster than the other regions.

Nathan Brochmann - William Blair & Company L.L.C.

Along with Pest, I was wondering if you could just give a little bit more detail in terms of kind of where that business is and where you're looking to take it? Obviously, that has continued to be a growth opportunity for you. I know the environment is kind of pushing against you right now. But just wondering if it can get a little bit more detail in terms of where that business is today and where you're looking to take it?

Douglas Baker

Yes, well, the Pest business is still a fantastic business. And I would break this into two points. Internationally, that business continues to grow. It's accelerating. It's accelerating in Europe, we're improving the profitability there. We have very, very strong momentum. In the U.S., which is obviously our largest Pest business, we are seeing the underlying trends improve. So that is account retention. We are starting to get much stronger on new contract growth, what we call one shot or onetime events, particularly bed bugs to be an obvious one that you would look at. But there's certainly more in that category than simply bed bugs. All those signs are improving. So we expect this business to turn to top line growth starting early next year and expect it to grow throughout 2011 in all regions.

Operator

Our next question is from Edward Yang of Oppenheimer.

Edward Yang - Oppenheimer & Co. Inc.

My question is doving a little bit more into pricing. Doug, as your volumes have moved up, pricing on a year-over-year basis has been steadily ticking down. It was up 0% this quarter. I would think that there's a natural level of price increase built into your business model as you introduce new products like Apex, which are priced higher than the traditional warewashing product. Your prices should go up. So are there any areas where you've been cutting price and areas where you're raising price? I would like to get some better granularity there.

Douglas Baker

Yes, well, a couple of things. One, prices were up this year versus last year. But you're right, it was not a significant rate, it was about 30 basis points. Now importantly, that does not include any technology upgrade. We have that mix, and that would be in margin. So the example you used, as we move a client from, say, SOLID POWER to Apex, and Apex would be priced at a significant premium per pound, that would not be reflected in the pricing number that we get. That would be in the overall margin. And that is historically the number one way that we drive margin. It's not through what I call naked price increases, simply moving up $50 box to $51. We will do that, and certainly in one of our inflationary environments, we'd do more than when we're in a not inflationary environment. But the number one drive is the new technology. And as I listed earlier, in response to another question, we've got a very robust portfolio of new innovation, all of which is at a margin premium versus existing programs.

Edward Yang - Oppenheimer & Co. Inc.

And on your earlier comments about some of the commodity chemicals inflation, I agree that it's nowhere near to the extent that we saw a couple of years ago. But there seems to be some echoes of that because if you look at costs of soda prices, for example, they look like there's price increases on the table that are up like 30% from current prices, similar I think with phosphate and resins. How quickly can you raise prices? I know you like to -- you don't like to shock the customer and you like to save it in overtime. But are you starting to think about the price increases in getting ahead of some of these raw material increases?

Douglas Baker

Well, we certainly pay very close attention to raw material pricing, and its projected impact on our business. And we learned a number of important lessons and persevered in a very inflationary period just in '06 through '08. And so the same team is in place. In fact, I would say if it got to that point, which we're not predicting in our business and we've been through this a number of times and I think everybody handled that, but if it did get to that point, we are in a much better shape today than we were, say in 2005, at the beginning of the last ramp-up, simply because we've changed the way we contract with customers, where we have annual provisions and much easier way to impact pricing than we did going into the old '06 through '08 period. Your I think we are in a good position here. Should all this pricing manifests itself, we'll see.

Michael Monahan

We don't buy typically on the spot target. We're buying on contracted. So we're going to have less volatile raw material from that. And for example, caustic is on a roller coaster, so that can be pretty volatile. But ours are contracted so it's pretty steady.

Edward Yang - Oppenheimer & Co. Inc.

And maybe just a final question on a longer-term focus. I know Circle the Customer's such a key element to your business strategy. Can you share some progress in terms of your efforts like cross-selling in terms of how you track those metrics? And also, as you focus more in the near term in terms of account wins, does that set you back somewhat in terms of how you calculate the number of solutions sold by customer? And in terms of the P&L impact, as you add new customers, are there customer acquisition costs associated with that? And how quickly do those new customers get to the same level of profitability as your underlying base of customers?

Douglas Baker

CTC, Circle the Customer, is absolutely a key part of our strategy. As we've said, typically during tough environments like we've been in, we shift to a larger emphasis on new customer gains, which is what we've been doing. And when you're successful as we've been, this ultimately increases the CTC opportunity going forward. What your other question was, do new customer somewhat delude your average solution sold per customer. And the answer would be, yes because typically, when we bring out a new customer, it is with the purest solutions. Then we shall see customers that have been with us for five, 10, 15, 20 years as we build out that set. So that is a natural outcome as we move forward.

Operator

Our next question is from Justin Hauke of Robert W. Baird.

Justin Hauke

I did have one quick question on the share repurchases, just revisiting that. It does look like you're getting somewhat close to the end of your authorization. I think you have about $2.6 million remaining. So I guess just any thoughts on extending that program into beyond that? And also in 2011, do you expect your cash uses to be the same, or do you have any incremental costs that are coming on or pension obligations or anything of that nature?

Douglas Baker

Yes, I think we have still 5 million, 5.5 million shares left in our authorization. It's where we are. And so regarding uses of cash for 2011 and pension, specifically, we're not obligated to make any pension contributions in 2011 or remainder of 2010. We may choose to do so, but that will be out of choice and because it's the right use of cash. In terms of other uses of cash, as I spoke to earlier, it is smart M&A number one. Share repurchase would take a backseat to that, but we are a very successful business in terms of generating cash. So my expectation is you'll see both in 2011.

Justin Hauke

On 4Q expectations for Europe. I mean, I think you're expecting volume growth to be essentially flat. Raw material costs, obviously, are your headwind now and your price contribution is lower. Can you clarify, are you expecting margins to improve in Europe year-over-year in 4Q, or really not until 2011?

Douglas Baker

The big benefit is going to be in 2011, and I would say the wildcard in Q4 right now is relatively new news. But it's baked in our forecast, and all the rest is the strike at France. And France has about 20% of our volume in Europe. And so while we're working to serve customers, you might imagine it's a little bit more challenge than it is in the normal times.

Operator

Our next question is from a David Ridley-Lane of Bank of America.

David Ridley-Lane - BofA Merrill Lynch

Can you give us a rough idea of the trend in Japanese revenue? And then maybe, how Asia-Pacific would look x Japan?

Douglas Baker

Yes, well, Japan has always been the slowest growth portion of our Asia-Pacific market. And so Japan has been growing at low single digits for quite a while. If you exclude it, somebody's currently doing the math there, so if you'd give a minute, we'd come back and give you the number.

David Ridley-Lane - BofA Merrill Lynch

Given the European transition costs falling off here in the fourth quarter, just wondering, what are some of the factors that are driving sequential increase in SG&A in dollar terms and into the fourth quarter?

Michael Monahan

Could you repeat that, David?

David Ridley-Lane - BofA Merrill Lynch

Just wondering what's driving the sequential increase in SG&A in the fourth quarter given that some of the European EBS transition costs are falling off?

Douglas Baker

Typically, in the fourth quarter, we have some onetime costs that flowed through SG&A on a lower -- as options expense flow through heavier in the fourth quarter on a lower-volume quarter. Almost considered seasonal.

Operator

Our next question is from Rosemarie Morbelli of Ingalls & Snyder.

Rosemarie Morbelli - Ingalls & Snyder LLC

I was wondering, since your total revenues were up only 1%, but I understand you also had some good, smart volume improvement which led to some stronger than I expected margin improvement, did some of the margin improvement come from maybe your slowing down your investments temporarily, given the lack of top line growth?

Douglas Baker

Rosemarie, no. I would say you've got continued impact from a Lean Six Sigma program that's been in place for four years. We have improvements on a number of efficiency ratios, which we believe are sustainable and can continue to be built on. Productivity in the field continues to improve as we roll out field technology. So all of these things, which are fundamental to our margin, continue to pay dividends for us as we go through. We continue to have a very sizable investment fund funding the business. We're funding healthcare growth, we're funding water, energy and waste technology and field capability growth. We're funding and working at a number of M&A opportunities, which now all flow through P&L at this point in time. We have EBS actually stepping up in costs because it moved from the balance sheet to the P&L when you start amortizing as you fully roll this out. So I would say, if anything, we are fully invested at this point in time and still expanding margin.

Michael Monahan

And Rosemary, just one technical point. That was 1% with the reported growth. The fixed currency growth was 3%.

Rosemarie Morbelli - Ingalls & Snyder LLC

Okay, which is still not huge. I guess I would have asked the same question. I mean, as you look at Asia-Pacific, and I understand it is much smaller, but up 8%; 3% is lower than what you normally would expect from Ecolab, I guess that's where...

Douglas Baker

Yes, well, absolutely. And we've said that our expectation is that we will get back to 6% to 8% organic growth on a global basis, but it is going to take us a number of quarters. And the expectation is that we will build sequentially about a point of growth per quarter. That's what we've been doing. Now the earlier question about what Asia-PAC looked like x Japan, it's growth is 13%. And that would include obviously Australia, New Zealand, which for us are a pretty large market. And obviously, not growing at the same rate as Asia and China.

Rosemarie Morbelli - Ingalls & Snyder LLC

You said that you expected Pest to show some growth again in the first quarter of '11. What is behind that expectation? What are you seeing that is going to be majorly different in the first quarter of '11 than it has been for this year?

Douglas Baker

Pest, we've been in the Pest business for a long time, and we have a flow of metrics which are quite predictive of what's going to happen on top line as well as margin and other places. And as I mentioned, when we start looking at account retention metrics through contract volume and onetime sales or onetime event sales, all these areas are showing improvement. And so those things tend to flow through and translate to sales growth, and that's our expectation.

Michael Monahan

Rosemarie, we've also been targeting some new markets for Pest elimination. We've been tailoring programs to better serve our end markets. So we've been doing a bunch of stuff on the top line side as well to help drive growth.

Rosemarie Morbelli - Ingalls & Snyder LLC

With infestation of bed bugs, do you think it would make sense to bring your program to the residential market as opposed to just Lodging, and I am assuming commercial buildings? Or maybe you're not even going there? I mean, they are not concentrating in the beds.

Douglas Baker

Yes, well, Rosemarie, I would say we have a number of innovation activities around bedbugs. They aren't going to go away. And we are working at what business opportunities this presents to us. At this time, there's been no decision made to move out of our core markets, but we are certainly looking at the opportunity.

Operator

Our next question is from Dmitry Silversteyn of Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

I just want to get back to maybe a little bit more granularity on the Pest Elimination business, we've seen a little bit of better results here. We talked about Pest Elimination being -- if you do a good job, then the customer really feels like you can cut it back on that for a quarter or two or three, are we still in that frame of mind where the growth now is really coming from your new programs and new customers? Or are customers returning to a bit more of a scheduled maintenance programs with you in Pest Elimination?

Douglas Baker

Yes, I would say, we have moved through. Probably the most difficult times for Pest are behind us. And so our expectation, Dmitry, is it's going to turn into a more normal environment. This isn't going to be a snapback in this business. It was down slowly and will move back up slowly. So it's not going to move from one quarter up to plus 10%. It's going to take some time. But we see the underlying metrics are moving us back into the positive territory, and we feel confident that this business is going to continue to improve in the following quarters.

Dmitry Silversteyn - Longbow Research LLC

So you have enough of a critical mass in the U.S. with the acquisitions that you made previously to build that business. Were you really not looking to acquire any white patches on your geographic map? You're really looking -- if you are looking to in this business, you're really looking more in Europe and Latin America?

Douglas Baker

Yes, I would say, I don't think there's a white-spot opportunity, a white-space opportunity in North America per se. However, I think as I've indicated broadly on M&A, that bolt-on acquisitions are more attractive to us than they have been in the past given where the market is and everything else. So we'd be open to smart bolt-on activity, but our white space activity will be in Europe, Asia and Latin America for Pest.

Dmitry Silversteyn - Longbow Research LLC

And a kind of broader M&A question beyond Pest Elimination particularly in the U.S. Is this an area where there's still growth or acquisition opportunities? Or are you basically going to be looking outside of the U.S. for most of your acquisition dollar spend?

Douglas Baker

Yes, well, our first priority is smart acquisition wherever it is. And beyond that, our priorities remain with healthcare, water and energy and waste technology. It is a global expansion in Pest. But it also does include bolt-on activity, which could happen both either in the U.S. like we've just recently done with the Dober acquisition, or outside of the U.S., like Cleantec. And I would expect to see that some of both in the future.

Dmitry Silversteyn - Longbow Research LLC

On healthcare, and particularly in North America, in the slowdown that you've seen even excluding the impact of H1N1, I think you're only talking about maybe 4% growth, if I remember correctly. Exclusive of H1N1 impact. Quite a bit slower versus what you've been delivering recently and what you hope this business can deliver. If this is a slowdown in hospital visits and in doctor visits and what-not is a function of the healthcare reform that was passed earlier in the year, wouldn't it take a year or more for the market to find that it lags and for the people to learn how to gain the new system and file new forms so they can get reimbursed for get they think they should get reimbursed? Couldn't the healthcare slowdown in the U.S. be a much longer-term issue than a quarter or two?

Douglas Baker

I don't know, Dmitry. I don't know that many people are forecasting that the new healthcare system is going to reduce costs, right? In fact, it's open up the system to a wide, a huge number of new folks coming into the system. And if anything, there is real concern that there's not going to be the capacity or the demand. Not that demand is going to shrink away long term. I think the near-term issues have been somewhat confusion and also the fact that you've got large unemployment and people rolling off. Our employment is no longer getting worse, and while it's not getting substantially better, we think that impact is going to be in debate as we move forward. So our believe is this: Population is aging in this country. Healthcare is going to be under increased demand, not decreased. We don't believe that the new healthcare legislation got after-costs in a material way. In fact, it's going to start increasing expectations in the healthcare market that bode well for what we're selling. In terms of having to measure poor performance on infections acquired in hospitals, there's a whole host of things that hospitals are going to be expected to measure, which we anticipate will help drive this business. And we'll help them do it.

Operator

Our next question is from Jeff Zekauskas of JPMorgan.

Jeffrey Zekauskas - JP Morgan Chase & Co

In the second quarter, your depreciation and amortization charges were $91.8 million. And in the third quarter, they were $81.5 million. How did you do that?

Michael Monahan

Dmitry (sic) [Jeffrey], this is Mike. There's just some differences between quarters and some of the classifications that we have for some of our stuff. And there were some currency. So it's really nothing much difference between the two.

Jeffrey Zekauskas - JP Morgan Chase & Co

So is the ongoing depreciation number and amortization $81 million, or is it $91 million?

Michael Monahan

The year-to-date average, it's running about the $86 million, $87 million. So I think that's the number you should look at.

Jeffrey Zekauskas - JP Morgan Chase & Co

So did it come out of the amortization total, or did it come out of the depreciation total?

Michael Monahan

It's more of the depreciation.

Jeffrey Zekauskas - JP Morgan Chase & Co

Secondly, your incremental gross profit margin in the second quarter was about 100% or was that 95%. How did you do that?

Michael Monahan

Well, I don't think the incremental margin would be 95%. We do have a cost of materials.

Jeffrey Zekauskas - JP Morgan Chase & Co

No, I mean if you take your sales year-over-year and your gross profit year-over-year, your incremental margin, I think, was 95%. And you didn't have any pricing. So is this cost reduction, is that what you accomplished in the quarter or is it something else?

Douglas Baker

Jeff, I have to look at the numbers to see where that was coming from. I'm a little surprised at the numbers of volume. Our research could probably answer that one. I mean, we've said that we have some good leverage coming out of our business in terms of the productivity gains we've done, the cost savings we've done, et cetera. But to give you a good answer, you want to take a look at what you're looking at.

Michael Monahan

And Jeff, in a low-volume environment, I mean, relatively low-volume growth, those aren't unheard-of numbers. If you have savings programs across the portfolio, they will slump your volume.

Operator

Our next question is from Mike Harrison of First Analysis.

Michael Harrison - First Analysis

I have a question on the F&B business. It sounds like the environment is improving for the Ecovation business. Can you give us an update on how sales for Ecovation have trended this year? And maybe provide a sense of what the backlog or pipeline of new business looks like compared to maybe where it was last year or a couple of quarters ago?

Douglas Baker

Yes, our Ecovation was up 35% in Q3. And it's been accelerating, obviously. Our expectation is that it will continue to grow at very significant rates going forward. This is really part of an overall strategy to put together a comprehensive program, Ecovation being one part of it to help in particular Food & Beverage customers deal with what we know is going to be a coming shortage of freshwater, which is going to translate into increased pressure on them, fairly or unfairly. And so this whole initiative is a very important growth initiative and is off to, I think, a terrific start. And we have a very, very good long-term game plan to drive growth in this area. And so we're starting to see that. The Ecovation growth is a piece of it but also just our underlying Water Care business. What we subtract some excess that we made in the last year is also growing quite nicely.

Michael Harrison - First Analysis

And then I was also curious on the GCS business. You've been working to get supplier approval from a lot of key chains, sort of a hunting-license approach. How is that strategy panning out since you've implemented it?

Douglas Baker

Yes, look, we have relationships with a lot of very large customers and are continuing to grow there. Our growth in the corporate account area has been very strong. What we're starting to see is firming up in what I would call the traditional street business, which is why you're seeing a little better performance than overall top line.

Michael Harrison - First Analysis

My last question is on healthcare. Despite the sort of the weak-ish growth or below-expectation growth, can you talk a little bit about EnCompass? And it sounds like that rollout is going about as planned, am I hearing that correctly?

Douglas Baker

Yes, I would say it is -- we have four key lodges in healthcare right now. EnCompass, ProTec. We've got OptiPro, which is a solid program for central sterile. It's also going very well, that one will probably be above expectation. We have a new Hand Care program as well, which is out there, which is also doing very well, too. So when you get back to ProTec and EnCompass, we've got about seven sold and we've got 50, if you will, actively in proposals and testing status right now. And we expect to bring a lion's share that goes on as well. And so that is how we expected this to move forward.

Operator

Our next question is from John Roberts of Buckingham Research.

John Roberts - Buckingham Research Associations

You have all the pieces you need for this water energy and waste strategy, or is that an area that we ought to be looking for more pieces to be added to the Ecolab offering?

Douglas Baker

Well, I would say we have all the pieces we need to start driving growth right now, which is exactly what we're doing. But as we get into this business, we see additional opportunities, and there are additional technology plays that we think would further strengthen. So our expectation is we will have activity in water energy and waste going forward. But I don't think this is a situation where if we don't get it, we won't be successful, which is belief that that's probably going to be a faster way of moving forward and building it internally. It if we need to build it internally, we will.

Operator

Our next question is from Dmitry Silversteyn from Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

I just wanted to follow up on the growth in Europe or lack thereof. Your ability to grow in markets regardless of or almost regardless of the external conditions has been running a hallmark for the company. And yet that has not been the case in Europe. Now you got the new ERP system in there, you relocated the headquarters, you have a new sales force. Should we, at some point, hopefully in 2011 begin to see you grow at faster than a market growth rate assuming that it's a flat market in Europe and actually start picking up share at the pace and as aggressively as you've been able to do it in the U.S.? Or is it the, I guess, fundamentals in the region are such that you basically are confined to market growth?

Douglas Baker

Our Europe business is going to be up for the year. But we aren't going to sit here and beat our chest about 1% to 2% growth. I would say, we've got the 1% to 2%, which is the forecast for the year and still a pretty sluggish environment in Europe. We firmly believe we will drive this business. We're having a lot of success in Europe in picking up new large-contract business. We know this ultimately translates into top line growth and our expectation is that Europe, yes, will grow the top line in 2011.

Dmitry Silversteyn - Longbow Research LLC

I understand that there's so many reasons why the margins in Europe can never get to the levels -- not actually could never, but aren't likely to get to a level you're seeing in the U.S. I'm trying to understand it, if there are fundamental regional reasons why the top line growth cannot approach what you're delivering in the U.S., business for business?

Douglas Baker

I don't think it's exactly the same. I mean, certainly, I would say the European competitive environment is challenging. But with that said, there's no reason that Europe can't recognize, say, 5% to 6% growth if our target globally is 6% to 8%, you're going to get outside growth from emerging markets. But we believe that is exactly achievable and we've done that in Europe in the past.

Dmitry Silversteyn - Longbow Research LLC

And you think you have everything in place right now that you need to be able to get that growth at some point in the near to midterm future?

Douglas Baker

Well, I mean, everything is a pretty broad statement. I would say we've got the sales talent, we've got the organization in place and we have the technology. Some of the technology has been on hold in Europe as we rolled out EPS because you have this kind of lock-down, new product introductions and so we're starting to roll out our best-in-class technology in Institutional and F&B and these other places. So we know that bodes well in terms of accelerating European growth going forward.

Michael Monahan

And also as part of the essay pieces that we did, Dmitry, we've got a number of sales and sales productivity tools that we'll be developing that will be instrumental to us achieving better growth in Europe. So in one respect, yes, we've got the SAP system. We still need to develop those tools and we'll get those in place.

Dmitry Silversteyn - Longbow Research LLC

You have to go back to second half of 2007 to see positive growth in Vehicle Care. And it seems like regardless of the market over the last two and half years. Is this business a candidate for reconsideration of as far as how attractive it is to be part of your portfolio? Or is there something that you were doing internally that we're not seeing but that's going to change the fortunes of this business, or is there something going on in the markets that we're not aware of that is going to change the fortunes of this business?

Douglas Baker

One, you're right. We do pointed this out internally that sales growth in Vehicle Care has not been strong. It has certainly been one of the most adversely impacted businesses we have in terms of economic impact. With that said, we're going to make more money this year than we did last year in Vehicle Care, and we've done a very strong job in improving margins. So Vehicle Care is, I don't know, 1/4, not even 1/2 the percent of sales, 1% of sales. I mean, it's not a huge piece, but this business provides a number of advantages somewhere inside the company. So we're happy to own the Vehicle Care business.

Dmitry Silversteyn - Longbow Research LLC

so right now, we should continue to look at this as basically a loss meter for you?.

Douglas Baker

It makes money. So this isn't a cash drag, and it's a business that returns capital and everything else. It's not a growth engine, but it would be hard to argue that a business of less than 1% is going to drag the overall growth rate down.

Dmitry Silversteyn - Longbow Research LLC

You have been very good in the past in leading out businesses that don't quite work out the way you thought they would. I'm just -- Vehicle Care is a core part of Europe's portfolio or something that you've tried, that if it doesn't work out, you may reconsider.

Douglas Baker

I would say it's -- we continue to drive margin improvement. We do believe the top line turns around in this business. That means we're good. It might have been a loss, but not very.

Michael Monahan

So I'm just going to wrap up with that. We are in position, and I'm very proud of our team to deliver a very successful 2010. Our forecast is 12% to 13% EPS growth for the year. We're building momentum where it helps most. We're accelerating volumes. We've got strong net new business result in all regions. We've shifted from rollout to leverage in Europe after a successful but long and very difficult SAP rollout. Our M&A pipeline remains very robust even after announcing our Dober and Cleantec acquisitions. And this is all done, and frankly, still along the market. And so we feel good about what we've done this year. And most importantly, how we've stepped the business up for the future. So we like our position. We'll continue to put focus on the things that matter, which is building the top line, leveraging it successfully and making sure we do smart things for not only the near term but for the future.

So I appreciate your time today. Thanks for your interest and we'll talk to you soon.

Operator

Thank you. This concludes today's presentation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ecolab CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts