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Executives

Michael Monahan - Vice President of External Relations

Douglas M. Baker - Chairman of The Board and Chief Executive Officer

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Dmitry Silversteyn - Longbow Research LLC

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

David Ridley-Lane - BofA Merrill Lynch, Research Division

Lucy Watson - Jefferies & Company, Inc., Research Division

Mark R. Gulley - Gulley & Associates LLC

John E. Roberts - The Buckingham Research Group Incorporated

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Brian Maguire - Goldman Sachs Group Inc., Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Unknown Analyst

Ecolab (ECL) Q1 2012 Earnings Call May 1, 2012 1:00 PM ET

Operator

Welcome to the Ecolab First Quarter 2012 Earnings Release Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to Mr. Michael Monahan, Senior Vice President, External Relations. Sir, you may begin.

Michael Monahan

Thank you. Hello, everyone, and welcome to Ecolab's first quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO. A copy of our earnings release and accompanying slides referenced in this teleconference are available in Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements on Slide 2 stating that this teleconference and the slides include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are discussed in the section of our most recent Form 10-K under Item 1A, Risk Factors, in our first quarter earnings release and on Slide 2. We also refer you to the supplemental diluted earnings per share information in the release.

Also, please note that in order to provide a meaningful comparison of our results of operations, where applicable, actual results for the first quarter of 2012 are compared against pro forma results for the first quarter of 2011. The pro forma results are based on historical consolidated financial statements of Ecolab and Nalco and were prepared to illustrate the effects of our merger with Nalco. These pro forma statements are available on our website at ecolab.com/investor, as well as our Form 8-K filed April 27, 2012, and selected portions are contained in the slides and press release.

Starting with an overview in Slide 3, we delivered strong results in the first quarter, our initial period including all of Nalco's operations, as we beat our forecast. We leveraged our sales volume growth and pricing, as well as our synergy and cost efficiency work, to offset significantly higher delivered product cost and produced yet another solid double-digit increase in our adjusted earnings per share.

Looking ahead, we expect to continue to outperform our combined markets and show good earnings gains in the second quarter and stronger EPS growth in the second half and the full year as strong sales growth, appropriate pricing, innovation, synergies and margin leverage more than offset expected moderate increases in delivered product cost as well as offset the impact of higher depreciation and amortization charges from the merger. Further, we expect 2012 will be our 10th year of double-digit adjusted EPS growth in the last 11, and we will do so while setting up strong growth for the years ahead.

Moving to some highlights from the quarter and as discussed in our press release, reported first quarter earnings per share were $0.17. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, first quarter 2012 earnings per share increased 11% to $0.50, which beat the top end of our $0.46 to $0.49 forecasted range. The adjusted earnings per share growth was driven by strong volume and pricing gains, new products and new accounts, which, along with synergy and cost savings actions, more than offset higher delivered product costs.

We enjoyed very strong sales growth in our Global Energy and Latin America operations, as well as solid growth from Global Water, worldwide Food & Beverage and our U.S. Institutional business.

We continue to be aggressive, focusing on accelerating our top line growth as we emphasize our innovative product and service strengths to help drive increased market share in our core businesses, as well as new account acquisition across all of our customer segments. We also continue to implement appropriate price increases to help offset higher delivered product cost.

We remain focused on expanding our margins, emphasizing productivity and efficiency improvements, to help increase profitability as well as drive merger synergies.

We also continue to make investments in key growth businesses, as well as bolt-on acquisitions, to build future growth. Our work to integrate Ecolab and Nalco is going very well. The combination is working smoothly, and we have not experienced any significant surprises since we closed the merger.

We continue to be focused on our business and excited about the opportunities the combined company offers our customers, as well as our position as the leader in additional high-growth markets that leverage our mutual core strengths in product technology and sales and service execution. We look for the second quarter to show solid sales growth and further margin improvement. This strong business performance will continue to be impacted by the much higher depreciation and amortization expense from our merger.

Second quarter adjusted EPS is expected to increase 8% to 13% to the $0.69 to $0.72 range and compare with adjusted EPS of $0.64 earned by legacy Ecolab in the second quarter 2011. We expect the quarterly earnings growth rate to accelerate in the second half as the higher fixed depreciation and amortization and interest expense are offset by business growth, the increasing benefits from synergies and cost reductions and by seasonally higher revenues. We continue to look for our full year earnings per share to rise 16% to 20% to the $2.95 to $3.05 range.

In summary, we expect 2012 to reflect another strong performance by Ecolab as we show accelerating quarterly earnings gains to once again deliver very attractive growth and shareholder returns this year and set the stage for improved results in the years ahead.

Slide 4 shows our first quarter results, both as reported and pro forma, with adjustments for special gains and charges, while Slide 5 shows our sales growth detail. Ecolab's reported consolidated sales for the first quarter increased 85% compared with last year's reported results and reflected the merger with Nalco. When compared with first quarter 2011 pro forma sales, including the impact of Nalco, fixed currency sales rose a very strong 9%.

Looking at the pro forma fixed currency growth components, volume and mix increased 6%, pricing rose almost 3%, acquisitions and divestitures did not have a significant impact and currency decreased sales by nearly 1%, rounding accounts for the difference in the total.

Reported sales for the U.S. Cleaning & Sanitizing operations rose 4%. Adjusted for the transfer of water treatment-related businesses to the Global Water segment, U.S. Cleaning & Sanitizing sales increased 7%. Excluding acquisitions, these sales grew 6%.

Institutional sales grew 6% in the first quarter. Sales initiatives targeting new accounts and effective product and service programs continue to lead our results and outperform mixed end markets. First quarter sales also benefited by an estimated 1 percentage point from distributor inventory building. Lodging room demand continues to show good growth, while Foodservice foot traffic remains soft. To drive our growth and improve on our industry leadership, we're introducing more new products that deliver increased value and reduce labor, water and energy cost for customers in our warewashing, laundry and housekeeping markets. We will showcase a number of these innovations at the upcoming National Restaurant Show in May.

We also continue to increase our customer focus and service intimacy through sales force investments, simplified structures, marketing initiatives and improved field [ph] technology. Institutional continues to show very good fundamental trends, leveraging improving markets and market share gains, while the second quarter is expected to show a more modest sales increase than the first quarter, reflecting the expected impact of the first quarter inventory build on second quarter shipments. In comparison to the rollout of new products and programs in the year-ago period, we expect our growth drivers will deliver improved gains in the balance of the year for Institutional and will once again outperform its markets in 2012.

Kay's first quarter sales increased 1%. As mentioned in our last conference call, first quarter 2012 Kay sales reflected the timing of shipments to major quick service accounts that benefited the fourth quarter but hurt the first quarter. We continue to look for our full year Kay sales to rise in the mid- to upper single digits, similar to the past several years, which have also seen quarterly growth rate variations for similar reasons.

The Food Retail business rose modestly in the quarter, but it has booked significant new business, which should benefit future periods. We look for the second quarter to show a much better growth and expect continued good new account gains in food retail, along with quick service sales, to drive another solid year of growth for Kay in 2012.

Healthcare sales increased 24%. Excluding the acquisition of O.R. Solutions, sales increased 5% as good growth from hand hygiene, environmental hygiene and surgical drapes offset continuing soft U.S. healthcare industry market trends. We continue to see steady new account gains from our product innovation and investments in new sales productivity tools. Further, O.R. Solutions continues to show strong growth. Looking ahead, second quarter sales are expected to show steady organic sales gains.

Food & Beverage sales grew 7%. Sales increased in all segments, led by corporate account wins, pricing and product penetration. Food & Beverage will continue to focus on new account acquisition, pricing and new product sales to show good growth in the second quarter of 2012.

Sales for our U.S. Other Services rose 4% in the first quarter. Pest Elimination sales continue to improve, rising 4%. Growth was led by stronger gains in Food Processing and Hospitality, improved results in the Foodservice segment and robust growth in add-on service sales.

We continue to drive new product and program solutions to better meet our customer needs and differentiate our offerings. Recent new program launches like Guardian Plus for full-service restaurants and bed bug treatments for the non-hospitality markets, such as long-term care, retail and restaurants, are showing good results. We're also preparing to launch new offerings for hospitality, bed bugs and large fly services in 2012. We expect our new products and programs, along with aggressive selling and improved service levels, to yield continued sales gains in 2012.

Sales for GCS increased 4% in the quarter, and profitability once again improved. New account wins and appropriate pricing helped to drive the sales gain. We're seeing good results from the chain account relationships as we drive sales to the regional and franchise organizations. We expect GCS to show stronger sales growth and continued profit improvement in the second quarter and in 2012.

Measured in fixed currencies, sales for International Cleaning, Sanitizing and Other Services increased 3%. Adjusted for the transfer of water treatment to the Global Water segment, sales increased 5%. Europe, Middle East and Africa fixed currency sales rose 2% in the first quarter. Europe's Institutional first quarter sales showed a modest increase. The business -- new business gains among regional and local customers leveraged new product introductions but were offset by weak demand, primarily in the Mediterranean and in Ireland.

Food & Beverage sales increased moderately, reflecting market share gains. Food & Beverage continues to focus on corporate accounts and emphasizing the cost savings benefits of our innovative products.

Fixed Healthcare sales declined in the first quarter, reflecting very weak markets. We are using new products and technology like lower-temperature washing to offset these market trends. Europe Healthcare sales showed good gains, led by contamination control and infection prevention sales.

Pest Europe sales showed a modest increase as the continued focus on corporate accounts and new programs, along with continued operational improvements, yielded the gain. Our work to improve operating efficiency in our Europe business continues to show good progress. Recent projects underway include consolidating offices and facilities in several countries to improve productivity and reduce costs, consolidation and realignment of manufacturing and distribution centers and a further consolidation of raw material suppliers in order to reduce complexity and leverage purchasing. More projects will be launched in future quarters.

Looking ahead, we expect Europe's second quarter to show continued modest fixed currency sales growth as it works through the softening and very challenging European business environment.

Asia-Pacific sales grew 6% in fixed currencies on a pro forma basis. Accelerated growth in mature markets more than offset the moderate deceleration in emerging market growth. Institutional sales showed good growth. New programs and a focus on restaurant and lodging expansion in the emerging Asian markets benefited sales. Food & Beverage sales also enjoyed good organic growth. New account sales and improved product penetration led the increase. Looking ahead, Asia-Pacific expects continued strong sales growth in the second quarter.

First quarter sales for Ecolab's Canadian operations increased 10% at fixed currency rates as strong growth in the core businesses drove results. Latin America reported strong sales gains, growing 18%. Adjusted for the Brazil Pest acquisition, Latin America grew 15% in fixed currencies as Institutional, Food & Beverage and Pest Elimination each grew at double digit rates. Institutional growth was driven by new accounts and continued success with global and regional customers. Food & Beverage sales reflected continued strong demand in the beverage and brewing markets, as well as the benefits of new accounts and investments in key sales areas. Pest Elimination showed double-digit sales gain and strengthened its growth opportunities through the acquisition in Brazil. Looking ahead, Latin America expects continued double-digit growth in the second quarter.

Fixed currency Global Water sales increased 6% in the first quarter compared with 2011 pro forma results. This includes certain water treatment-related sales transferred from the U.S. and international segments. Adjusted for acquisitions and divestitures, fixed currency water sales increased 8%. Sales growth was led by double-digit gains in Mining, Power, Food & Beverage and Primary Metals, reflecting strong emerging markets growth, market share gains and differentiated technologies.

Regionally, we saw double-digit growth in Latin America and Asia Pacific, with strong growth in North America and a modest increase in Europe. We expect lower growth in the second quarter as market share gains and steady growth elsewhere are tempered by somewhat slower primary metals worldwide and light manufacturing in Europe and Asia and as the business compares with a strong period last year, which also included a large onetime wastewater project sale. We look for sales growth to pick up again in the second half.

First quarter fixed currency global sales for Paper grew 2%, with price more than offsetting a slight volume decline. Further penetration with differentiated technology offset generally lackluster customer plant utilization rates outside the U.S. Good growth in North America was partially offset by sales declines in Asia-Pacific, which was primarily impacted by packaging customer downtime, and in Latin America, which compared against a very strong period last year. We expect second quarter sales to be flat against the strong quarter last year as new business growth and generally stable market conditions offset slow conditions in Asia.

Measuring fixed currencies, pro forma Global Energy sales grew an outstanding 29%, reflecting continued strong volume growth in upstream and market share gains in downstream. The very strong double-digit growth in our upstream business was a result of robust markets and share gains with deepwater accounts and continued strong sales to oil sands, the Middle East and Africa. Strong double-digit growth in our downstream business reflected share gains in the Middle East and Asia.

We expect Energy segment to be in the high teens for the second quarter as continued strength in the conventional business is partially offset by the temporary impact of unconventional drilling, shifting its focus in drilling assets to oil and away from natural gas, and as downstream growth returns to more typical mid- to high single digits, reflecting moderated global refinery demand. We expect conventional markets to remain very attractive and that Energy will show strong growth over the balance of the year.

Slide 6 of our presentation shows selective income statement items comparing reported 2012 with pro forma 2011 information to allow more meaningful comparisons. Reported first quarter gross margins were 42.6%. Adjusted for the impact of special gains and charges, 2012 gross margins were 45.3%. When compared with first quarter 2011 adjusted pro forma results, 2012 gross margins decreased 90 basis points. The decrease in the adjusted gross margin primarily reflected the impact of higher delivered product cost, which more than offset the impact of volume and pricing gains from a gross margin perspective.

In absolute dollar terms, pricing exceeded the higher delivered product cost in the first quarter. Reported SG&A expenses represented 35.2% of sales. When compared with 2011 pro forma results, 2012 SG&A expenses declined 180 basis points below last year. Leverage from the sales gains and cost savings efforts led the improvement.

Reported operating income for Ecolab's U.S. Cleaning & Sanitizing segment grew 15%. Adjusted for the transfer of water treatment to the Global Water segment, operating income increased 11% compared with first quarter 2011 pro forma operating income.

Excluding acquisitions, U.S. Cleaning & Sanitizing segment operating income rose 6%. Volume and pricing gains more than offset higher delivered product cost in the quarter. Operating income for U.S. Other Services declined 6% as continued improvement in our GCS business profitability was offset by investments made in the EcoSure quality assurance field sales organization.

International fixed currency operating income increased 10% versus last year. Adjusted for the transfer of water treatment to the Global Water segment, operating income increased 12%. Margins improved as volume and pricing gains and improved cost efficiencies more than offset higher delivered product cost. Global Water operating income grew 11% in fixed currencies compared to pro forma results. Excluding acquisitions and divestitures, Water's operating income grew 27%, led by higher volumes and pricing, which more than offset higher delivered product cost.

Global Paper operating income declined 9% in fixed currencies as pricing was more than offset by higher delivered product and other costs.

Global Energy operating income grew a remarkable 53% in fixed currencies, led by the strong volume gain, operating leverage and pricing, which more than offset higher delivered product cost.

The Corporate segment and tax rate are discussed in the press release. We repurchased 1.4 million shares during the first quarter. The net of this performance is that Ecolab has reported first quarter diluted earnings per share of $0.17 compared with $0.40 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 11% to $0.50 when compared with $0.45 earned a year ago.

Turning to Slide 7, Ecolab's balance sheet reflected the impacts of the Nalco merger. Total debt-to-total capital of 52% at March 31 compared with 35% reported a year ago. Our net debt was 50%.

In April, we made a $150 million voluntary contribution to the U.S. pension plan. Looking ahead and as outlined in Slide 8, we continue to take aggressive actions to drive both our top and bottom lines. Expanding our market share and customer penetration as one company, among major accounts, leveraging our leadership positions in key growth markets in Food, Water, Energy and Healthcare. We are using innovation and pricing to benefit margins and expect to more than offset delivered product cost throughout 2012.

Our merger synergies, along with Europe's transformation work, continues to go well, and we expect to deliver on these aggressive goals while building growth for the future. As also described in our press release, we look for the second quarter results to show mid- to upper-single-digit sales gains led by Global Energy and our Latin America operations. This solid business performance will again be impacted by the much higher depreciation and amortization and interest expense, as well as increased share count from our merger. Adjusted second quarter earnings per share are forecast to increase to the $0.69 to $0.72 range, up 18% (sic) [18%] to 13% compared with the adjusted earnings per share of $0.64 earned last year. However, we expect the quarterly earnings growth rate to accelerate through the balance of 2012 as the higher fixed depreciation and amortization and interest expense and shares are offset by the benefits of growth from the underlying business, seasonally higher revenues, the moderating impact from higher delivered product cost and increasing synergies and cost reductions. As a result, we continue to look for 2012 full year adjusted EPS to increase 16% to 20% to the $2.95 to $3.05 range.

In summary, as noted on Slide 9, we once again delivered on our forecast in the first quarter while offsetting higher-than-expected delivered product costs and while still investing in our future. We look for sales and profit growth to accelerate to 2012's quarter and produce another strong year and make it our 10th year of adjusted double-digit EPS growth of the last 11 years.

That concludes our formal comments. As a final note before Q&A, we plan to hold our annual tour of our booth at the National Restaurant Association Show in Chicago next week on May 7. If you have any questions, please contact me or Nicole at my office.

And now here's Doug Baker with some comments.

Douglas M. Baker

Good afternoon. Look, I'll make this short, and then we'll open it up for Q&A. I just wanted to add a couple of thoughts. So clearly, we feel good about the start we've had to the year. And as you can see from the forecast, we continue to forecast a very strong year.

Integration is going very well either on a quantitative or qualitative basis. The teams are coming together well. We are on track on our synergy targets, et cetera. So almost on any metric, we feel good about the progress there.

Just as importantly, I could even argue more importantly, our team has absolutely kept its eye on the business, with a very good Q1 result, particularly when you look at growth. We had excellent new business results, which you don't see, which really bodes quite well for the remainder of the year and for next year, considerably higher than last year both on legacy Ecolab and legacy Nalco basis, so excellent pace.

We're also on pace for a record new program launches this year and have a number of large initiatives going out, which also is an important driver, as you all know, for gross profit improvement.

So as a result, we feel very good about our ability to deliver on the year. Our forecast for the year is 16% to 20% EPS growth. And in spite of troubled economies and raw material headwinds, I think we are again on pace to have an excellent year.

So with that as a backdrop, I'll open it up for questions and turn it back to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Doug, just on your 2012 guidance, you didn't raise the low end despite beating Q1. Just comment on your thinking about the guidance for the full year given some of the macro headwinds you're seeing in Europe.

Douglas M. Baker

Yes. Dave, I guess I would call it -- I wouldn't try to read much into this. We have aggressive guidance out there in terms of 16% to 20%. And there's certainly a lot of uncertainty and a lot of time left to play in the year. We feel very confident in our ability to hit, or we would have moved it the other way. We don't raise guidance frequently in this call, and so I really would just say given the nature of the economic situation in parts, raw materials and the rest, we thought discretion was probably the smart play. We are committed to driving this business forward, and we have got a team all over the key issues. So we feel good about the position we're in and what we're going to do this year.

David L. Begleiter - Deutsche Bank AG, Research Division

But just on the Paper business, as you get to know that business and the results are pretty weak, is this a long-term keeper in the portfolio in your mind?

Douglas M. Baker

Yes, David. The only thing is we don't get into big M&A. I think we have a lot of questions about this post-announcement of the deal and pre-close, and I would say 2 things. One, the reason that we felt Nalco was such a fit was really the real strength in water technologies, and as we all shared, we came to really appreciate and understand the strategic value that Nalco brought historically, and in the future, to energy. Paper is a good business, and we always said that we weren't going to get to evaluating Paper at the onset. Our real focus right now is make sure we continue to drive forward. Get integration right, which I think we're doing a great job on, and making sure we focus on driving the fundamentals in the business: new customers, new innovation, taking care of the team, and all those metrics look good. That's the focus for this year.

David L. Begleiter - Deutsche Bank AG, Research Division

And just lastly, Energy. I know these results aren't sustainable at these levels, but how much stronger can this business be than it was the last couple of years?

Douglas M. Baker

Energy has been -- if you go back, and we spent a lot of time understanding the history, some 5, 6 years ago, they embarked on a strategy, which has proven to be one, very smart and extremely well-executed. That's a good combo. It was really going after, for lack of a better term, the new oil for a couple of reasons, right? It's easier to get the business at the onset versus trying to kick somebody out of an already drilled well. And number two, new oil is going to command much more of the technology that Nalco sells. So in terms of a smart strategy in driving share, it was exactly on, and that team delivered against it excellently. That story is not over. And so I don't care if it's tar sands or other unconventional oil, right? These areas and this kind of development is going to require more of the technology that Nalco sells. If you look at year-on-year growth last year, they clearly accelerated throughout the year. And as you look at it, the base is going to get more challenging as we go through the year. First quarter last year, organic was around 15%, and the fourth quarter last year for them was around 24%. So clearly, you're going to be climbing a bit of a base. So that business, we expect to continue to perform very well. We do not expect to regularly put up 29% growth there. We never talked about 29% as the target growth rate, and so we don't expect it. But we do expect a long period of double-digit growth, right? And a very, very good growth in the following quarters this year.

Operator

Nate Brochmann with William Blair.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

I wanted to talk a little bit -- you guys recently announced some -- what felt like more aggressive pricing actions to combat the raw material price runup. I was wondering if you could talk about the dynamics there and how that's going in terms of acceptance and kind of flow through to the customers?

Douglas M. Baker

Yes, Nate. This is, I guess, a strategy that the Water businesses deployed for a while, which is make sure that the broad customer base understands the raw material implications and the rest. And so it's not new for the Water business, whereas it may be viewed as something unique for Ecolab. But if people have plays that work well, we're not going to get in the way. I'd say it's too early to tell, but pricing in general has been a focus. It was a focus for the Water and Energy businesses last year. They successfully implemented pricing, which is why you're starting to see the margins come back in those businesses and you see the outsized earnings performance. It's exactly what we thought was going on in that business when we talked to the market post-announcement, so we feel good about that. So yes, Water is on pricing. Energy is on pricing. Institution is on pricing. F&B is on pricing. We do not have a business that's not out there, making sure that they are regularly pushing price as they must in this environment. We do not expect raw material inflation to abate long term. We think we are in an inflationary environment raw materials for the rest of our careers. That's our assumption. It's not a bad thing because if you look at our ability, we have grown OI margin in this inflationary period, I think, every year in the last 5, 6 years. So we don't mind the environment. We just have to continue to execute in it. We think the Energy and Water execution last year was quite good, and all they're doing is looking at continuing that execution.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay. And then just one quick kind of follow-up here. Minus kind of the pull forward end of the first quarter from the second quarter on some of the distributor levels, how do you feel in general about those inventory levels currently minus that issue at the distribution level? And then I'll turn it over.

Douglas M. Baker

Yes, I don't think there's any major issue there. It's kind of this quarter-to-quarter stuff. Institutional had a very good first quarter, and I would say if you look at 2 things, importantly, as we've talked, we really focus on the field sales, i.e. consumption. Consumption is continuing to improve there. We had a quarter where the reported was marginally above field sales because there's a little inventory build, but Institutional has gotten itself back in organic 6% to 8% growth range, and we'll continue to see it. Kay has some noise sometimes quarter to quarter. We are not worried about Kay. Kay had an unbelievable first quarter result in terms of new business. And so we know that's exactly what Kay needs to do. They hunt elephants, so you will start seeing that reflected in Kay's results as they go out and install these customers.

Operator

Gary Bisbee with Barclays Capital.

Gary E. Bisbee - Barclays Capital, Research Division

I guess the first question, just any update on the European margin outlook and growth for the legacy Ecolab? Are the targets you've laid out in the past still sustainable? Is the weaker economic activity going to make that more challenging to get this year?

Douglas M. Baker

Yes, I would. So Gary, we talked about we needed at least 2% growth, right, to see the types of OI margin improvement that we committed to last year in January, when we rolled out what we call internally the Renaissance [ph] program. And that's what we're still seeing. And we still believe that that's the right expectation for the balance of the year is in that range. And so if you look around, not many people had volume increase in the first quarter. I mean, ours is nominal admittedly, but we continue to see some strength, or at least we're holding on the top line. Our expectation for the year is absolutely, we will see year-on-year improvement in operating income margins. Our team there is absolutely committed and continues to forecast in line with our previous commitment of 200 basis points. If I were going to hedge it all, I would say I'm pretty confident the team has got 100 in hand and is fighting up from there. So we aren't really backing off from our commitment. We are going to go drive for 200. I'm absolutely confident we're going to see sizable increases. We hope it's 200.

Gary E. Bisbee - Barclays Capital, Research Division

And how does integrating the Nalco businesses -- I know they're run sort of globally at each of the level. But how does integrating that in Europe help the ability to do this? Are there a lot of synergies there within the total synergies you're talking about for the total transaction?

Douglas M. Baker

Yes, there are. They're not going to be -- we also said -- I would say this is more probably next year and the follow-on years. But absolutely, look, you've got office buildings in every major European capital for both businesses. We don't need to -- I mean, it doesn't sound like a lot, but this stuff starts adding up sizably. You got back-office support for both businesses. We're already developing both of these independently, the ability to consolidate these operations, so now we can probably accelerate that. There will be some manufacturing and we already are seeing some purchasing synergies. You've got 2 principal companies in Switzerland, which will go down to one and a bunch of expats in both. So there are real synergy opportunities there that is not in the 100, 200 basis points I just talked about. That would be over and above. But realistically, that's going to be more a story next year, not this year.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And then just the last question for me. I wanted to get a sense how you're thinking about returns these days. I know you've always been proud of the decades-long 20% return on beginning equity, and it seems to me that's probably unlikely this year given what the acquisition did to the shareholders' equity. Is there another metric you'll look to? Any sense on how quickly you'd get back to that level or any other return measure that you're using to gauge your success in 2012 or '13?

Douglas M. Baker

Yes. I'd say a couple of things, Gary. I mean, certainly, we've got a new base, and it reflects a number of accounting charges that we're recognizing, which are noncash. But it's a base, nonetheless. And our expectation is you're going to start seeing year-on-year increases in our returns even from this base. I would say the base certainly isn't reflective of cash returns on the business, which everyone here fully understands. And I think in our disclosure, people are interested in those calculations. They'll have the information from us to go calculate them. Now that's preference. We are going to look at both internally and making sure we're doing what we need to do to get the cash return on these investment as well as, long term, the public return numbers.

Operator

Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

A couple of questions, if I may. First of all, can you talk about the profit improvement at the GLS business -- or GCS business, I should say, whether you want to bracket it off of last quarter or a year ago quarter? Can you give us an idea of where the profitability in that business lies on now?

Douglas M. Baker

I'll be real quick, Dmitry. We lost about $150,000 in that nature first quarter. I think we had signaled, or I had, that first quarter is always, because of the low volume, right, we're going to be right around 0, which is where it ended up. It was considerably better than last year first quarter. And I would say certainly can be in business. It'll make money this year.

Dmitry Silversteyn - Longbow Research LLC

Okay. So you would expect that to kind of get back up, profitability-wise, to where you start comping positive or continue to comp positive year-over-year at least?

Douglas M. Baker

Oh, yes, I mean, it comped positive even in this quarter versus last quarter. It's just a low-volume quarter, so you're down at the water level, right, basically. Now we fully expect Q2, 3 and 4 all to be profitable and profitable for the year.

Dmitry Silversteyn - Longbow Research LLC

Got it. Okay. Secondly, can you talk about the foreign exchange impact by region for the International operations? You provided the ex-FX revenue number. Can you give us the consolidated revenue number or growth, however you want to present it?

Douglas M. Baker

Yes. Why don't we do this, if you want real details, negative in Europe, positive in the balance, but pretty minor when you get down to it. And if you want some specific detail, Mike would be happy to provide it.

Dmitry Silversteyn - Longbow Research LLC

Fair enough. Your corporate exchange rate -- or I'm sorry, not your exchange rate, your corporate expenses, what sort of a magnitude number should we think about quarterly? I mean, is what you did in the first quarter pretty characteristic, or is there a lot of fluctuation in that number? I'm just not that familiar with the seasonality of Nalco's corporate expense portion.

Douglas M. Baker

Yes, about what you saw in the first quarter is what you're going to see for the year. I think the forecast for the year is 230, in that range.

Dmitry Silversteyn - Longbow Research LLC

Okay. So it's basically kind of sort of mid-double digit in terms of millions of dollars?

Michael Monahan

Well, we're saying it'd be around the same level here, around the $50 million, $55 million.

Dmitry Silversteyn - Longbow Research LLC

Right, so mid-double digits?

Michael Monahan

Right.

Dmitry Silversteyn - Longbow Research LLC

Got it. And then just can you refresh my memory? I must have been -- I don't know what happened why I missed it. But you're no longer reporting the Textile Care and the Vehicle Care performance. Has that been folded into other divisions? Should we be keeping track of it within other businesses now?

Douglas M. Baker

Yes, it's in the total. I think it was just frankly how -- we're running out of space on the page. What we're trying to do is make sure we don't knock off businesses, which are, we think, of most interest to our investors...

Dmitry Silversteyn - Longbow Research LLC

Sure, sure, I understand that.

Douglas M. Baker

And everything, but nothing else there. I mean, Vehicle Care business was down in the quarter, but we expect it was really mostly temporary. Here is where good weather hurts. Vehicle Care needs the perfect weather pattern, but we didn't have it. But for the year, the Vehicle Care business is fine. Textile was roughly flat.

Operator

Edward Yang with Oppenheimer.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

The first -- did you buy back any shares in the quarter, and what was the dollar amount?

Douglas M. Baker

Yes, we bought back 1.4 million shares.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. And the inventory build that you saw in the first quarter in Institutional, was there anything that -- why was the customer doing that? Was that in response to any promotions, or were they anticipating price increases?

Douglas M. Baker

Yes, I would say when they reduce inventory, we don't have terrific answers for you because it's not our decision and I don't have any great ones. It wasn't inducement. I would just say some of this is just kind of year-on-year noise in a quarter. It's a 13-week period. Their measurement of periods don't always coincide with ours, so you get some of this. But we want to call it out when it helps us, when it's favorable as well as unfavorable. The Institutional business underneath has strengthened, like, 5 quarters in a row. We feel very good about the momentum that that business has built, and so we're going to have some of these optic things here and there. But I would say the fundamentals there have improved and are improving, and a lot of it is great work by the Institutional team.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. And along that vein, Doug, Pest also continues its improvement 3 straight quarters of acceleration there. Now it's growing 4% again. Historically, it's growing faster than that, so what do you expect out of Pest this year?

Douglas M. Baker

Yes. No, I appreciate that. Pest has been, as we've said, one of our frustration points because it took us too long to rekindle top line growth. And we stated a couple of times last year that was the real focus. I think the good news is the team's efforts are starting to show up in top line performance. So I'd say we would expect for the year mid-type of single digit-type growth from them. But I think the fundamentals underneath, they are also improving in terms of lost business ratios versus new business ratios. And so that business, we feel, is starting to get traction and feel better about it. Ultimately, we don't have any reason to believe that it's not still upper-single-digit, low-double-digit type growth business. And we aim to get it back there.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. And finally, I know Nalco, in the past, had some issues -- timing issues with propylene and raw materials versus their pricing. That was up -- propylene was up a lot in the first quarter. It looks like it's starting to get back down. Is there a way to quantify the sort of tailwinds from an earnings standpoint that you would see with some of your pricing catching up to the raws and maybe even some benefit from a decline in some of the raw materials sequentially?

Douglas M. Baker

Yes. I guess what I would say, we go pick on any raw. Propylene is maybe 2% of what we buy in total as a corporation. So you just got a much bigger pool here in terms of raw material purchase. I think if you really want to go in the broad basket, if you look at what we forecast and expectations, by and large, our forecast matches pretty much with what we had planned for the year. We had stated last year that we were going to relook at methodology for forecasting, either we're getting lucky, but really, as we go through the year, we feel we got a pretty good handle on where this is going to be, and we don't expect it to be a real broadcast story.

Operator

David Ridley-Lane with Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

I wanted to follow up on the revenue synergy that you're getting from the integration with Nalco. Can you guys provide an update on the cross-selling results?

Douglas M. Baker

We had a very bullish forecast this year of 0, which we've been called a few times probably for good reasons. I guess the point was the gestation period of this type of work is longer, clearly, than cost synergies, so we will be 0. We already have quite a number of wins. They certainly didn't impact first quarter, but we are on this, I would say we have very favorable reception. We are learning how to put these together in a way that makes the most sense for our customer and drives the most value, what a lot of this early sales work is. And I would say that's where we're concentrating right now on is how do you drive maximum value with the combo, and there's great benefit here. And I would say early work is quite positive, but I don't think this is going to determine or have a real bearing on our year. It is going to be important for '13, '14, '15.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Sure. And then given the operating leverage at Nalco and the strong revenue growth there, I'm just wondering, what does capacity utilization look like for Nalco?

Douglas M. Baker

Well, I would say -- meaning, is there a bunch of upside increased utilization? I'm sorry, I'm not tracking.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Sure, sure. I wasn't clear there. I'm wondering if you're running out of capacity utilization because that division has definitely delivered in the first quarter. And so I'm wondering how much you're running it. Are you running third shifts, or do you still have a little leeway?

Douglas M. Baker

I got it. I understand the question. I'm sorry. Yes, it's a very fair question. I would say we have already approved in February board meeting a new plant for the Energy business as a result of this. And it was a plant that was foreseen for a while. We had talked about it even when we announced the deal that this was capacity that was needed. So the first board meeting we had as a combined company, we approved it, and so it's already underway. I would say we've got, we think, adequate plans in hand to meet the demand needs and capacity needs of that business. There is capacity. The manufacturing teams on both sides have done a good job finding more capacity near term. But long term, we think we're okay.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay. And just one last one, if I could. The pricing momentum we've seen here in the first quarter results appears to me to be pretty sustainable for the balance of the year. Would you kind of agree, or do you see things that would cause pricing to slow in the back half?

Douglas M. Baker

Yes, I think we expect that we will continue to have success gaining new pricing from customers as we go throughout the year. You start running into a higher base when you start doing percentage comparisons, but aside from that, I would agree. We anticipate and we will continue to build pricing throughout the year.

Operator

Laurence Alexander with Jefferies.

Lucy Watson - Jefferies & Company, Inc., Research Division

This is Lucy on for Laurence today. You got into 200-plus basis point sequential improvement in the SG&A to sales metric for Q2. I'm just wondering, I guess, how much of that improvement you would attribute to restructuring efforts in your core business versus synergies or price or maybe other factors that I've not included there.

Douglas M. Baker

Yes, you get -- when you got this macro number, you have a number of businesses, regions, all adding up into this number. So we don't have a simple build for you as we go through this. Certainly, you're starting to see some synergies, particularly on the corporate G&A side, no doubt are having an impact here. But we have not stopped driving productivity in our core businesses in any of them, the Water, Energy, Institutional or F&B. In long term, that's the work that's most fundamental to driving improved SG&A ratios. So that is still underway, growing technology, rolling out. If anything, there's going to be real synergies and leveraging each other's technologies to drive further improvement in productivity long term.

Lucy Watson - Jefferies & Company, Inc., Research Division

Okay. And going back to the U.S. Institutional business quickly, do you expect to continue to benefit from the distributor inventory restocking that you noted into Q2, or was the lumpiness that you discussed earlier meant to imply that, that was just a Q1 benefit?

Douglas M. Baker

If anything, our guess is that it flips the other way in Q2 and probably gets offset there. It's a guess, it's an educated one, but that's our -- that's what our belief is.

Lucy Watson - Jefferies & Company, Inc., Research Division

Okay. And one last one, if I may. Your appetite for paying down debt?

Douglas M. Baker

Yes, what we've said our focus is right now is make sure we operate the businesses. We still have bolt-on acquisitions. The biggest way we're going to improve the debt ratio long term is by improving EBITDA, and that's going to be the primary focus. Well, we will end up doing some debt paydown. It'll become a focus next year, in '13.

Operator

Mark Gulley with Gulley & Associates.

Mark R. Gulley - Gulley & Associates LLC

My question regards something which may be a little bit in the future with respect to Nalco Energy, which -- it looks like it's hitting on all cylinders, and I'm referring now to ways to play natural gas frac-ing. It involves water. Water is right up your power alley for both sides of the company. And there's a lot of talk now that recycling is going to be a much better solution than reinjection. Can you talk a bit about, Doug, about what work Nalco might be doing there and whether or not what I'm talking about seems real to you?

Douglas M. Baker

Yes, we would agree. And I think that's true, certainly, in energy and frac-ing, the example you used. But that is also true in the industrial space broadly that the big initiatives in Water need to be how do you create processes which reduce water use to start and then how do you recycle and reuse the water that's still coming out the back end of whatever process you are, whether it's frac-ing, whether it's an industrial process, across the board. So that is a focus area. The frac-ing, specifically, we agree. I mean, there's a number of things that are being worked on along that line, which is -- a lot of the water is coming back out. How do you manage it and handle it? Most of the frac-ing-related contamination concerns you have are really related to post-use water. It becomes groundwater and seeps down 200 feet. It's not the frac-ing water 5,000 feet down, moving up 40, 800 feet, if you will. And so that's an important area, I think, broadly, for that industry because it addresses a key concern and enables them, frankly, to reduce costs in their frac-ing operations because otherwise, you're trucking water in mostly to these operations, which is quite expensive, and neighbors don't like it. It's a big production.

Mark R. Gulley - Gulley & Associates LLC

As kind of a follow-up, I seem to recall that Nalco had headquartered it's energy operations in the Middle East on the assumption that's where the growth was, and I'm wondering if given what I just talked about here and other factors, whether or not it makes sense to, perhaps, reverse that decision going forward.

Douglas M. Baker

Yes, I mean, look, Steve Taylor and the management team there are excellent, a broad team. And I would say that's really for that team to go figure out. Steve is the guy on airplanes, and those kind of calls, I mean, we work with them, but really, to me, that's the Energy team's call.

Operator

John Roberts with Buckingham Research.

John E. Roberts - The Buckingham Research Group Incorporated

The TRASAR monitoring system at Nalco is one of the key synergy things. Will you feature that at the NRA next week? Is that maybe your first opportunity to try to pitch that to your Institutional clients?

Douglas M. Baker

Yes, the immediate benefit that we see leveraging TRASAR in what I'll call historic Ecolab businesses is really much more in the F&B space. Then next would be in the Textile Care and some of the other. And so that's the immediate focus, and there's a lot of work being done around that specifically. And so when I was asked earlier about growth synergies, it's really how do you best tie in the technology, leverage the technology and put the service elements together to bring maximum benefit to customers. And TRASAR is at the center of that. It is excellent technology.

John E. Roberts - The Buckingham Research Group Incorporated

So you don't see it for your large hotel customers and so forth who might be at NRA?

Douglas M. Baker

We have it, but it's not -- there are more specific shows. So that is not what we'll be showing there, but we have a number of innovations. Ultimately, we think TRASAR, as we learn how to do it, will benefit Institutional. But that's down the road. Our immediate focus is F&B.

Michael Monahan

And John, the NRA Show is more about the kitchen area than it would be about the boiler and cooling tower. So as you know, 3D TRASAR is already at hotels or in hotels for the boiler and cooling tower, but the NRA focus is much more on the kitchen side.

Douglas M. Baker

Buyers for that are not at the NRA.

John E. Roberts - The Buckingham Research Group Incorporated

You called out the EcoSure investment. I imagine it's a small step up in the total scheme of Ecolab. But could you maybe talk about what's going on there since you called it out?

Douglas M. Baker

It's really just simple. We're going through a transition in that business, where previously, it's the only business where we conducted service with what you call contracted folks, not our won employees. The business has such a scale, and to move forward, we're moving that into our own employees. And so how you handle these expenses is quite different, and it shows up in SG&A. And it's just as really as much a geography issue on the P&L as anything else. But it's several hundred people migrating over. That's what's going on.

Operator

Mike Harrison with First Analysis.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

I was hoping to ask a question on Energy. What were enhanced oil recovery sales in the first quarter and how much growth are you seeing there? Are we at a time where EOR's time is going to finally come that we might start seeing the hockey stick-type growth with the shift to oil shales in North America and presumably, decent oil prices going forward?

Douglas M. Baker

Well, the EOR had big growth rates, but it's a relatively small business in total for us. So it was up probably 50%, but it's the law of small base. EOR and everything else, we expect that to be a very good business long term. It is not dictating the fortunes of the Energy business or Ecolab in total right now.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

And then, it's been a little while since you discussed new account adds in the Institutional business. How much improvement have we seen on that metric in the last couple of quarters?

Douglas M. Baker

Yes, Institutional had a huge first quarter in terms of new account wins. Legacy Ecolab was up almost 50%. Institutional is leading the pack. So I don't know if I have year-on-year. These are large corporate accounts. They had a very good quarter, which is a lot of work that's been going on for a while. But I would say on a number of metrics, Institutional looks healthy. It is a big business. It's doesn't jump up or down quickly. But you can see strong sequential improvement over the last 5 quarters, and we expect it to have a very good year.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

And then kind of a similar question on Kay, you categorize that as a little bit elephant hunting, and it sounds like you bagged an elephant this quarter. Can you maybe give some more details on that?

Douglas M. Baker

Yes, we don't throw a list of new account wins with specifics, but most of the new business wins, and it was several, were in the FRS business. Suffice it to say where Kay's growth is right now, it's Fast Food internationally, outside U.S. U.S. is doing fine, but really, where the high growth is, strong double digit, outside the U.S. And food retail still is gaining share at a very, very fast clip, frankly, everywhere.

Operator

Shlomo Rosenbaum with Stifel, Nicolaus.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Can you just walk me through a little bit about the puts and takes on the Global Paper services division? It seems like you guys are doing a good job in getting pricing. And in this division, it's just not catching up in terms of offsetting the headwinds that you're getting from the raws. Can you talk about that? Is that an end market issue primarily vis-à-vis the other businesses that you've got?

Douglas M. Baker

Yes, price in Paper was pretty strong. Honestly, in the quarter, it was up 4% year-on-year. On a dollar basis, it did offset its raw materials, not to the point where it offset it on a margin basis. But the story, as we always said, was really the Paper, Water and Energy businesses is very similar to the Institutional and Food & Beverage businesses, which is year one, typically, you're trying to neutralize, on a dollar basis, raw materials via price, and you'd catch up in subsequent years on margin. That pattern has played out for Ecolab for a while, and as we said, the execution on Energy and Water this last year were excellent, and so we see the same pattern moving there as well. So Paper had pretty strong price performance. Paper's real challenge was volume. That was in 2 regions. It was in China, where we had pretty sizable slowdown in manufacturing, which stops corrugated temporarily. We don't think China is a perma problem. So that's probably a pothole that we're going to get out of. And then you have Europe, which has been much more long-term, secular, and we all know Europe's challenges. And Europe's not going to come back nearly as fast. In other parts of the world, Paper was fine, really, when you look at it. So those are really -- that will be the landscape of the Paper business.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

So should we expect that the margins will start improving at the end part of this year on a growth perspective, or are we looking towards 2013 for that?

Douglas M. Baker

I'd say on gross profit across the business, we are going to be showing year-on-year gross margin improvement on every business by Q3 and in most businesses, Q2, right, including Paper. So midyear is where we'll all have this crossing point, where you start seeing year-on-year gross margin spread versus last year. In some businesses, it's a few months earlier. In some, a few months late. But that -- pick July 1 as kind of your demarcation point, you're going to be more or less right.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Then just going back to the cross-sell opportunities and the cross-sell synergies, last quarter, you were particularly enthusiastic about where you were after being -- having the business for a couple months. I know it's a long sales cycle. Has anything changed upwards, downwards or you're basically the same? You thought it was strong last time, and you're at the same point as you were a quarter ago.

Douglas M. Baker

Yes. No, I still like it. I mean, I would say we feel very good about conversations. We've closed business already in every region, in fact. So yes, no, I think we remain quite confident in our ability to go drive continued growth across legacy businesses but also get after the synergy number that we've talked about.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

And then lastly, what's the free cash flow expectation for this year? And afterwards, what's a good normalized number to think about?

Douglas M. Baker

Yes, EBITDA this year, $2.3 billion. CapEx, in the 1.7 -- yes, CapEx is $600 million, sorry. So you can do the math.

Operator

Andrew Wittmann with Robert W. Baird.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Hey guys, I just wanted to ask a couple more on Nalco here. I know this isn't particularly fair, but there was a large contract that was won that's clearly contributing to your growth rate. But excluding that one large contract, can you talk about what the organic growth rate in Nalco's Energy business would be?

Douglas M. Baker

Yes. You know what, that contract really wasn't that material to this growth rate yet. It's a long-term contract and is really just starting to come on and so was not that material at all. I'll call it almost immaterial to the quarter. So that business is in front of us. We're not in the middle of it.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

So then the fact that you're looking at high-teens growth kind of going forward, is that assuming that the contract kicks in for second quarter, or is that contract even further out?

Douglas M. Baker

Yes, more second half. Probably where we start seeing benefits, that would start registering. I think one, it's kind of funny to be apologizing about high-teens growth, so I'll try not to become apologetic. I think the high-teens growth is excellent expectation, and it's fundamentally that, as I mentioned earlier, you start out with your base last year around 15 organic and end up at 24 organic. So you're simply going against a larger base. If you compare it against 2010, you can still see very strong improvement in terms of overall growth.

Michael Monahan

And Andy, that growth in Energy is across all the segments of it. So it's a strong overall business, not led by any one particular contract or piece.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Okay. Just to hit more broadly on Nalco, I think before you guys reclassified some of your earnings, you were talking about hopefully delivering around 14% operating margin for that business. Under the new classification, what do you think is a reasonable bogey for the Nalco segment in total?

Douglas M. Baker

All right. OI trivia for 100. I'm getting there. I'm trying to look at the 2 because some of the landscape has changed. It's going to be in the middle teens-type range as a starting point. And obviously, in every one of our businesses, we expect to be able to generate operating income margin leverage going forward. It's the #1 driver for improved returns on capital, right? I mean, it's the happiest part of the equation, and so we would expect -- so that's going to be about the base that we expect to be able to build those margins here on out from here.

Operator

John McNulty with Credit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Just a quick question. On the new business that you -- that it looks like you're picking up, particularly for the old legacy Ecolab, is this coming largely from the Diversey business. I know you're starting to see some real share leakage there now that they've changed ownership.

Douglas M. Baker

Yes, I would say the new business -- I mean, look. Certainly, Diversey is our largest single global competitor in our Food & Beverage and Institutional space. And so certainly, some of the new business success came from a nonexclusive way. And we really don't get into where exactly it came from, but I would say it came from a variety of competitors.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, fair enough. And then just for the quarter, what were the European margins for core Ecolab?

Douglas M. Baker

In this quarter, they were negative. I think it was less than negative 1 point. And in our expectation, obviously -- the first quarter for Europe is a very small volume quarter. So it's always the one that's really bouncing around in terms of plus, minus. For the year and each quarter going forward, we expect, one, to make money and, two, to have daylight on a margin basis between this year and last year.

Operator

Bob Koort with Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

This is Brian Maguire on for Bob this morning. Just a question on the Global Energy results. Obviously, very impressive. We're just curious how those compare to what you were expecting when you laid out the first quarter guidance. And then just maybe a broader question on that. It's been a long time since we've seen any business at Ecolab grow anywhere near 53% year-over-year. Do you anticipate any additional challenges from forecasting this business going forward?

Douglas M. Baker

Yes, I would say if you got into -- Energy, it depends what forecast we're going to look at. Energy was stronger in the quarter than forecast. But I would say I wouldn't consider a surprise by how the quarter came in. We had a few positives. Institutional ended up -- a business we've been forecasting for, I think, since 1923 was a little stronger in the quarter as well. I mean, it's an aggregate, and I think the process that we're going through as we do this to make sure that we have a handle on the business. And so we had a little bit better than we forecast in total, which we think is more positive than negative. But I don't think it's a sign that we're having difficulties forecasting.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And then another just kind of broad question about the integration. It doesn't seem like you're seeing any signs of strain on the organization based on the results. But just curious below the surface if you're under-resourced in any area? Do you see any kind of potential stumbling blocks down the road from the way the reorganization is coming together?

Douglas M. Baker

Well, first, all I'll say that we never had a team report to me that doesn't think they're under-resourced in every region of the world, so that's like a truth no matter what the situation is. But the straight answer is, look, we're running regular surveys of team, how we're doing, where are we. We're capturing the hearts as well as the minds as we go through this. The surveys have been quite positive about the work that's out there. I think these are important things to understand, and so that part is, right now, quite positive. And I always say right now because we don't take it for granted going forward. We need to continue to earn trust and make sure that we're doing the right things as we go through this. I think the team has done a great job. And the #1 focus for us is don't lose sight of what is important, which is driving organic sales growth. And we can't use integration as an excuse. And if there's a strength in this culture, it is we do not believe in excuses. We have to understand challenges, but we are going to find a way to overcome them and deliver them. And that is core to our culture. And I think the team, all teams, WPS, Energy, Institutional, F&B, have really done a good job keeping their teams focused on customers and growth, while we have a dedicated team and many of the G&A functions are very busy doing very good integration work. And so the division has worked, and we plan to continue to go that way. We got big integration work to do. It is not going to distract us, and I think the first quarter is a good indication of that.

Operator

P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc, Research Division

Your global operating margins in Water are about 8.6%, and these are even below that of Paper. So are you happy with these margins? And what's your long-term goal in Global Water margins?

Douglas M. Baker

Yes, our expectation on Water -- you know what, first, the quarter is the quarter, and the first quarter is always the droopiest quarter on margin comparisons for us because of the volume, including in Water and the rest. Our expectation and Water forecast is Water will see year-on-year margin expansion this year on OI, as well, I think, virtually every one of our businesses as we go through this. I would say we aren't satisfied with anybody's margin if you really get down to it because we think they all can be improved over time. And so I think coming into it, if you would talk to Erik and Dave last year, they would have said we believe margin in Waters can be improved over time. We share that. We believe the plan they've been following, and we are helping execute now, along those lines, will bear fruit. And we think Water margins, over time, will show improvement, starting with this year.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And then just quickly, on Healthcare, there wasn't a whole lot of discussion on Healthcare, which was expected to be a long-term growth driver. But it seems that the growth has slowed down due to these pressures on Healthcare costs. So I'm just wondering maybe you can share some more light on Healthcare?

Douglas M. Baker

Yes. No, we are still -- we like our Healthcare business. And I think the moves that we've made in the last 18 months or so have been very positive. Healthcare profit, if you start looking at the global enterprise, is now quite attractive. We've made some very smart acquisitions. We've integrated quite successfully. We had ambitious plans, and we're beating them. Our Healthcare team is absolutely all over organic growth and starting to show trend improvement in those areas, too. So I think there's a lot of natural interest in the "new part of Ecolab," but it's not because Healthcare isn't important to us. Now you talked about temporary challenges. Yes, no doubt, you've seen the numbers. Surgeries are down recently and everything else. There's a number of uninsured folks, but long term, we think the trends of aging population trump, right, any near-term trend you have on healthcare costs kind of abating. If we're wrong, Healthcare won't grow as fast. It will just grow a little slower, but we will have peak savings in our healthcare costs. So I know we'll be okay.

Operator

Rosemarie Morbelli with Gabelli & Company.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Could you give us a feel for the timing in terms of Pest returning to the 10% to 12% type of growth rate? Do you have a feel for it, or do you need -- what more do you need to do than what you have been doing over the past couple of years trying to fix it?

Douglas M. Baker

Yes. I think, Rosemarie, I mean, it's going to take a while. I mean, this business doesn't just jump. I mean, it's a business -- it's a contract business that you sell customer by customer. So we expect it to take -- honestly, I mean, I don't expect we're going to be there, at the earliest, until 2014. With that said, we expect to see continued improvement in sales, and that's going to also drive continued improvement in operating income. So it's not like there's going to be any sad news between here and there. It's just going to need to build sequentially over time. What do we need? I mean, they're on it. It's going to be driven by innovation and execution. It's the same 2 fundamentals that drive all the rest of the businesses. It's what the team is on. And with the innovation they're starting to drive, it will start enabling them to go command share gains. And without that, you can't sustain growth. And so that's why we put so much emphasis on our product pipelines, what we're doing, what we share, when we're doing well there because we think it is at the heart of our success. And Pest is now on it. They got a good pipeline. They have to go execute.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And then if I may, you talked about the slow demand for Paper in Asia. But Asia is actually the area of the world where you have new paper mills and where the demand for paper overall is growing from almost nothing. So could it be that Nalco does not have enough business in Asia and that most of the bulk of their paper business is in Europe and in North America and therefore, coming down?

Douglas M. Baker

No. Well, as I indicated, we don't expect the issue, and it was specifically China, that the issue in China is -- we don't believe it's a long-term issue. So we agree with you. Is that -- would we like more share there? Well, sure. I mean, absolutely. But the issue was -- there was a temporary issue in China manufacturing. We didn't make this up, right? This is pretty widely discussed across the board, and I think if you start looking at probably results of other places, you'll see some of the same thing. But we do not expect it to be a long-term story.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And then I have to ask, did you see any change in the morale of the Nalco people since Erik left?

Douglas M. Baker

Well, I mean, one, he hasn't left yet. I think it's tomorrow, technically.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

When the announcement was made, I correct.

Douglas M. Baker

Yes, I mean -- I would say broadly, I don't think this was a huge surprise to the Nalco team. So Erik had huge respect in the team, but the team has been adjusting to this and understands this for months now, right? We announced in July of last year. So while the date was probably a surprise, because nobody could predict exactly that, I don't think the staff was surprised.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

So you are saying before we learned about it maybe a month ago, he had already made it known just about at the time of the acquisition or thereabouts?

Douglas M. Baker

Oh, no. I would just say I think the team -- I think there was a broad expectation. Look, this is one of the likely outcomes. We learned the day before quite officially that we announced. We had a legal obligation to announce something like that. No, I'm just saying that, look, we're both of same age. We end up not having co-CEOs in many organizations. We certainly weren't going to have one here. And so I don't think this is a surprise to the Energy or WPS team, so they had months to adjust to this. And so I don't think this is really new news with -- the date was news but not the fact that Erik was more likely not to be here long term. Erik did a great job. I will have to say and I would like to share it in an announcement. He really handled this incredibly well. And so we worked very hard -- we worked a lot together last year, particularly post announcement. He was hugely helpful. One of the reasons I think we're off to a very strong start is the work that Erik's done. And so I appreciate what he's done. So I'll miss him, and I think everybody will miss him, but I don't think it was a real surprise.

Operator

Jeff Zekauskas with JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

What was adjusted EBITDA in the quarter?

Michael Monahan

Jeff, you've got the EBIT number in the corporate segment and the D&A in the slide.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

I can add them up. I was wondering whether it was a total. That was different than when you add the items. Is it $460.4 million?

Michael Monahan

It's $343 million. Jeff?

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Yes?

Michael Monahan

It's $343 million.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Okay. In your adjustments for last year in the Institutional business, your sales went down $20 million, but your operating income went up a little bit more than $3 million. And in your FX, your year-over-year sales went down a little bit more than $10 million, but you don't really see that in the FX change. Are there some FX gains? And why was the operating income in Institutional restated upward last year?

Douglas M. Baker

Jeff, are you looking at the global or international number?

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

I'm looking at your domestic number.

Douglas M. Baker

Okay, I'll tell you what. Why don't we follow up offline because it's more of a technical question. I'd have to take a look at the numbers with you. So let's take -- I'll call you back.

Operator

Richard O'Reilly [ph] with Revere Associates [ph].

Unknown Analyst

Can you give us the worldwide Food & Beverage sales growth. I mean, you referred to it a couple times, but I don't know if you actually quantified it.

Douglas M. Baker

It's 6%.

Unknown Analyst

6%, okay. And then second, on the corporate line, corporate expense line, the $54 million, how much of that is purchase accounting or the fixed expense related to the merger?

Douglas M. Baker

$46 million of it.

Unknown Analyst

$26 million, okay.

Michael Monahan

$46 million.

Unknown Analyst

$46 million, okay, fine.

Michael Monahan

Richard, look at the slides on Slide 6. It breaks it out there.

Unknown Analyst

It shows it as $54 million as the corporate expense.

Michael Monahan

Yes, look to the right. There's a comment, I think, that gives the...

Unknown Analyst

Okay, fine. So the real cash cost is not $8 million. Okay, fine.

Operator

And at this time, I'm showing no further questions.

Michael Monahan

All right, everybody, thank you very much. And there are no further questions, so thanks, everyone, for your participation. If you have any questions, please follow up with us. Have a good day.

Operator

Thank you for participating on today's conference call. You may disconnect at this time.

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