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Executives

Michael Monahan - Senior 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

John P. McNulty - Crédit Suisse AG, Research Division

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

Gary E. Bisbee - Barclays Capital, Research Division

Dmitry Silversteyn - Longbow Research LLC

David Ridley-Lane - BofA Merrill Lynch, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

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

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

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

Rosemarie J. Morbelli - Gabelli & Company, Inc.

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

Ecolab (ECL) Q2 2012 Earnings Call July 31, 2012 1:00 PM ET

Operator

Welcome to the Ecolab Second 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 second quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO. A copy of our earnings release and the accompanying slides referenced in this teleconference are available on Ecolab's website at ecolab.com/investor.

Please take a moment to read the cautionary statements on Slide 12 -- or Slide 2, stating that this teleconference and the slides include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent Form 10-K under Item 1A, Risk Factors, and our second 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 second quarter of 2012 are compared against pro forma results for the second quarter of 2011. The pro forma results are based on the historical consolidated financial statements of Ecolab and Nalco and were prepared to illustrate the benefits or the effects of our merger with Nalco. Those -- 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 our slides and press release.

Starting with an overview on Slide 3. We delivered strong results at the top end of our earnings forecast in the second quarter despite currency and economic headwinds. We leveraged our sales and volume growth, pricing, as well as our synergy and cost efficiency work to offset significantly higher delivered product cost and produced yet another strong double-digit increase in our adjusted earnings per share.

Looking ahead, we expect to continue to outperform our markets and show good earnings gains in the third quarter and for the full year as solid sales growth, appropriate pricing, innovation, synergies and margin leverage more than offset expected moderating increases in delivered product costs, 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 second quarter earnings per share were $0.62. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, second quarter 2012 earnings per share increased 13% to $0.72. The adjusted earnings per share growth was driven by volume and pricing gains, new products and new accounts, which along with synergies and cost savings actions, more than offset higher delivered product costs.

We enjoyed very strong sales growth in our Global Energy and Latin American operations, as well as solid growth from Kay and Healthcare. We continue to be aggressive, focusing on top line growth. We are emphasizing our innovative product and service strengths to help customers get better results at lower cost and, through these, 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 costs. 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, and we are delivering on our cost and growth synergies. We continue to be focused on growing our business and excited by 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.

While economic trends and currencies present increasing challenges, we continue to look for the second half 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. Third quarter adjusted EPS is expected to increase 11% to 16% to the $0.83 to $0.87 range and compare with adjusted EPS of $0.75 earned by legacy Ecolab in the third quarter 2011 as business growth, the increasing benefits from synergies and cost reductions and seasonally higher revenues more than offset the higher fixed depreciation and amortization interest expense from the merger. We narrowed our forecast range for 2012, recognizing exchange has cost us $0.05 per share since the last forecast while our efforts to gain share and improve efficiency will be used to offset weakening economies. We expect full year 2012 earnings per share to rise 16% to 19%, the $2.95 to $3.02 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 second 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 second quarter increased 74%. When compared with second quarter 2011 pro forma sales, which include the impact of Nalco in both years, fixed currency sales rose a strong 6%. Looking at the pro forma fixed currency growth component, volume and mix increased 3%, pricing rose 2%, acquisitions and divestitures did not have a significant impact, and currency decreased sales by 3%. Rounding accounts for the difference in the total.

Reported sales for the U.S. Cleaning & Sanitizing operations rose 1%. Adjusted for the transfer of the water treatment related businesses to the Global Water segment, U.S. Cleaning & Sanitizing sales increased 5%. Institutional sales grew 3% in the second quarter. Sales initiatives targeting new accounts and effective product and service programs continue to lead our results and outperform mixed end markets. As expected and mentioned in our May teleconference, second quarter sales growth moderated from the first quarter rate, reflecting the impact of an inventory build by distributors in the first quarter, as well as by comparison to the rollout of new products and programs in the year ago second quarter period. Total shipments, meaning direct plus distributor shipments to our end use customers which we closely track, showed a consistent trend as in the first quarter, growing around 5%. Looking at our end markets, lodging room demand continued to show steady gains, while foodservice foot traffic remained soft. To drive our growth and improve on our industry leadership, we're introducing more new products that deliver increased value and reduced labor, water and energy costs for our customers in our warewashing, laundry and housekeeping markets. We launched our next-generation warewashing platform called Apex2 and showcased a number of other innovations at the National Restaurant Show in May. We also continue to increase our customer focus and service intimacy through sales force investment, simplified structures, marketing initiatives and improved field technology.

Institutional continued to show very good fundamental trends and share gains. We expect Institutional to continue to deliver solid growth over the balance of the year and once again outperform its markets in 2012.

Kay's second quarter sales increased 10%. Quick service sales enjoyed strong growth in the quarter from both large and small customers. The food retail business grew double digits, benefiting from several new customer additions. We look for continued good sales growth in the third quarter and another strong performance for Kay in 2012.

Healthcare sales increased 7% as good growth from hand hygiene, environmental hygiene and surgical drapes were offset by continuing soft U.S. health care industry market trends. We continue to see steady new account gains from our product innovation and investments in new sales productivity tools. Looking ahead, third quarter sales are expected to show solid growth.

Food & Beverage sales grew 6%. 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 though we expect third quarter sales growth to moderate due to slower industry trends and the annualization of recent customer wins.

Sales for U.S. Other Services rose 4% in the second quarter. Pest Elimination sales continued to show good trends, rising 4%. Growth was led by stronger gains in food processing and hospitality, improved results in foodservice segments 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 the Expanded Large Fly Program and a new HotelProtect program with bedbug assurance offering are showing good initial results. 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 improved once again against the year ago period. New account wins and appropriate pricing helped to drive strong growth in service revenues, which were partially offset by soft part sales. We are seeing good results from chain account relationships as we drive sales through their regional and franchise organizations. We expect GCS to show stronger sales growth and continued profit improvement in the third quarter.

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, fixed currency sales increased 5%.

Europe, Middle East and Africa fixed currency sales rose 2% in the second quarter. Europe's institutional second quarter sales were flat versus last year. New business gains among regional and local customers leveraged new products but were offset by weak demand primarily in the Mediterranean and Ireland. Food & Beverage sales rose modestly over last year, reflecting market share gains, a focus on corporate accounts and an emphasis on the cost savings benefits of our innovative products, which work to offset slower customer volumes. Textile Care sales declined in the second quarter, reflecting very weak end markets. We're using new products and technology, like lower temperature washing, to offset these market trends. Reported Healthcare sales in Europe was strong, reflecting the Esoform acquisition. Excluding the acquisition, Healthcare sales showed good organic gains. Pest in Europe sales showed good progress, reflecting a continued focus on corporate accounts, new programs and continued operational improvements. Our work to improve operating efficiency in our Europe business continues to show good progress. We're on track to deliver more than 200 basis points of structural margin improvement in 2012 though the weak economic environment and raw material increases in Europe will offset about half of those gains and operating income. We continue to expect to improve margins to the lower teens in Europe over the coming years though the current turmoil there is slowing the pace of our progress. Looking ahead, we expect Europe's third quarter to show continued modest fixed currency sales growth with good profit improvement as it outperforms the weak European business environment.

Asia Pacific sales grew 5% in fixed currencies on a pro forma basis as sales recovery in Japan helped to offset moderate growth in China. Institutional sales showed good growth. New programs and a focus on restaurant and lodging expansion in the emerging Asian markets, along with a recovery in Japan from last year's devastating tsunami, benefited sales. Food & Beverage sales also performed well. New account gains and recovering sales in mature markets led the increase. Looking ahead, Asia Pacific expects continued good growth in the third quarter.

Second quarter sales for Ecolab's Canadian operations increased 6% at fixed currency rates. Strong growth in core businesses drove the solid results.

Latin America reported continued strong fixed currency sales gains up 20%. Adjusted for the Brazil Pest and Institutional acquisitions, Latin America grew 14% in fixed currencies as Institutional, Food & Beverage and Pest Elimination continue to grow at double-digit rates. Institutional growth was driven by continued success with global and regional customers and new growth opportunities in Brazil. Food & Beverage sales reflect 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 continued to deliver double-digit gains. Looking ahead, Latin America expects continued double-digit growth in the third quarter.

Fixed currency water sales increased 1% in the second quarter compared with 2011 pro forma results. Both periods include certain water treatment-related sales transferred from the U.S. and international segments. In addition, 2012 compared with the year ago period when sales grew a very strong 12%. Second quarter 2012 saw a good growth in food and beverage, power, manufacturing and mining. These were offset by lower sales in wastewater, where we compared against a large onetime sale last year, and in heavy industry including primary metals where destocking, especially in Asia, hurt results. Regionally, we saw a strong growth in Latin America and a modest increase in North America and Asia. These are partially offset by lower sales in Europe, reflecting the weak economic conditions in that region. We expect sales growth to improve in the third quarter, led by North America and Latin America, as new account wins resulting from our differentiated technologies and appropriate pricing more than offset lower volume gains, lower volume trends at existing customers.

Global Paper also compared against a strong period last year. Second quarter 2012 fixed currency global sales for paper declined 2%, compared with a very strong 11% increase in the year ago period. Growth in Latin America and EMEA was more than offset by sales declines in North America and Asia Pacific. Lower customer plant utilization rates, especially in Asia Pacific packaging, and a strategic elimination of certain low-margin business in North America more than offset the use of innovative technology to drive sales. Excluding the elimination of that low-margin business, paper sales would have grown slightly. We expect third quarter paper sales to be flat as the paper market stabilizes.

Measured in fixed currencies, pro forma Global Energy sales grew an outstanding 19%, reflecting continued strong volume growth in upstream and market share gains in downstream. Very strong double-digit growth in our upstream business was the result of robust markets, share gains and continued focus on higher growth energy sources. We saw a strong growth with deepwater accounts, as well as continued strong sales to oil sands, the Middle East and Africa. High-single digit growth in our downstream business reflected share gains in the Middle East and Asia. We expect the energy segment to grow -- to remain very strong in the third quarter as continued strength in the conventional offshore businesses and upper-single digit growth in downstream largely offsets the temporary impact of unconventional drilling shifting its focus and drilling assets to oil and away from natural gas.

Slide 6 of our presentation shows selected income statement items, comparing reported 2012 with pro forma 2011 information to allow more meaningful comparisons. Reported second quarter gross margins were 45.6%. Adjusted for the impact of special charges, 2012 adjusted gross margins were 45.7%. When compared with second quarter 2011 adjusted pro forma results, 2012 gross margins decreased 20 basis points. The decrease in the adjusted gross margin primarily reflected the impact of the business mix impact of higher energy sales and exchange, which more than offset volume and pricing gains from a gross margin perspective. In absolute dollar terms, pricing once again exceeded a higher delivered product cost in the second quarter, and we expect third quarter gross margins to exceed prior year levels.

Reported SG&A expenses represents 33.2% of sales. When compared with 2011 pro forma results, 2012 SG&A expenses declined 140 basis points. Leverage from the sales gains and cost savings efforts, including merger synergies and Europe restructuring savings, led the improvement.

Reported operating income for Ecolab's U.S. Cleaning & Sanitizing segment rose 19%. Adjusted for the transfer of water treatment to the Global Water segment, operating income increased 17% compared with second quarter 2011 pro forma operating income. Volume and pricing gains and cost innovation more than offset higher delivered product costs in the quarter.

Operating income for U.S. Other Services increased 16%, benefiting from sales leverage and improved efficiency. International fixed currency operating income increased 19% versus last year. Adjusted for the transfer of water treatment to the Global Water segment, operating income increased 21%, with EMEA operating income up 33%. Margins improved as volume and pricing gains, our European margin transformation efforts and improved cost efficiencies more than offset higher delivered product costs.

Global Water operating income grew 5% in fixed currencies compared to pro forma results. Pricing more than offset higher delivered product costs. Excluding a large project sale in last year's second quarter, profits would have risen 8%.

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

Global Energy operating income grew 18% in fixed currencies led by the strong volume gain, operating leverage and pricing, which offset higher delivered product costs, investments in the business and product mix.

The Corporate segment and tax rate are discussed in the press release. We repurchased 1.3 million shares during the second quarter. The net of this performance is that Ecolab's reported second quarter diluted earnings per share of $0.62 compared with $0.53 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 13% to $0.72 when compared with $0.64 earned a year ago.

Turning to Slide 7. Ecolab's balance sheet reflected the impact of the Nalco merger. Total debt to total capital was 53% at June 30, compared with 32% reported a year ago. Our net debt was 51%.

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 through 2012. Our merger synergies, along with Europe's transformation work, continues to go well and meet or exceed expectations. 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 our third quarter results to show mid-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 third quarter diluted earnings per share are forecast to increase 11% to 16% to the $0.83 to $0.87 range compared with the adjusted earnings per share of $0.75 earned last year. We expect the benefits of growth from the underlying business, seasonally higher revenues and moderating impact from delivered product costs and increasing synergies and cost reductions to more than offset the weakening global economies, unfavorable currency and higher fixed depreciation, amortization, interest expense and shares from the merger. As a result, we continue to look for 2012 full year adjusted EPS to increase 16% to 19% to the $2.95 to $3.02 range.

In summary, we once again delivered on our forecast in the second quarter while offsetting higher than expected delivered product cost in the weakening economy while still investing in our future. We look for sales and profit growth to accelerate through 2012 second half to produce another strong year and make it our 10th year of adjusted double-digit EPS growth out of the last 11 years.

And now here's Doug Baker with his comments.

Douglas M. Baker

Thank you, Mike. Good afternoon. Well, I just want to offer a couple of thoughts and also talk a little bit about the pattern in the second half.

So overall, I feel very good about the progress we've made as a company and the position that we're in. The integration work that we've undertaken has gone quite well. Our cost synergies are tracking above plan. We're already seeing effective transfer of technology from business-to-business, and it's already making an impact in our ability to serve customers. Growth synergies are ahead of target, and our people are onboard. The integration also, while it's going quite well, is not getting in the way of growth. So our underlying business continues to move ahead.

Our second quarter new business results and corporate accounts were again ahead of last year by double digit. So the first half corporate account new business gains are up over 25% versus last year. That is a huge metric for us and very important. New product launches, one of the key drivers for gross margin recovery and expansion, are also on target this year. And our Europe renaissance project, the restructuring project, is delivering improved margins, as Mike outlined. So the legacy Ecolab EMEA sales are up 2.5%, OI was up 34%, 120 basis point improvement versus second quarter last year. So we are on track for 100-plus basis point improvement for the full year. As a result, we remain on our path to deliver very, very good EPS growth for the year. Forecast indicates 16% to 19% growth for the year. And importantly, we will exit the year with real momentum.

The last point I'd like to touch on is the pattern of our EPS growth in the second half, which is different than our pre-merger pattern. Specifically, Q3 was typically a larger absolute EPS quarter than the fourth. And this year, post merger, we are forecasting a $0.06 to $0.07 higher Q4 than Q3. So what drives this is the following: First, our seasonality as a combined entity has changed particularly between Q3 and Q4. So while it used to be lower in Q4, now Q3 and Q4 in a typical year are going to generate roughly equivalent absolute EPS earnings. So the base is changed when you look at the quarters sequentially. Number two, we anticipate a significant and continued ramp-up in quarter-to-quarter synergy savings and renaissance restructure savings in Europe. In total, these will be $0.05 or even better, higher if you will, in Q4 versus Q3. And finally, we also get roughly a $0.01 boost in tax in Q4 versus Q3 this year due to the U.S. R&D tax credit, which, since it hasn't passed, all falls in Q4 versus in typical years when we smooth it out over 4 quarters.

So importantly, our expectations around our sales, pricing and raws are very consistent with current trends, meaning there is no expected hockey stick ramp-up in either markets or underlying performance trends in our business. Net, we think we have a very good handle on the forecast and on the business. Our expectation this year is for a very good performance for the full year, 16% to 19%. Importantly, it's accelerating double-digit EPS growth every quarter, all driven by excellent integration work, outside synergies and continued excellent underlying business performance, driven by great new business gains. Most importantly, not only does this set up for a very good year in '12 but means we are building momentum leaving the year, which bodes well for 2013 as well.

So with that as an opening, let me now open it up for questions. And so I turn it back to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Just on the same track, energy, how do you expect the back half of the year to look versus the first half of the year on an EBIT basis?

Douglas M. Baker

For energy specifically?

David L. Begleiter - Deutsche Bank AG, Research Division

Yes, for energy.

Douglas M. Baker

Yes, I think our call was pretty much as it was at the end of Q1, which is our expected rest of the year performance at that time and this, is high teens sales growth and I would say improved EBIT margin. If you look at Q1 and Q2 EBIT margins in energy, they look like they're different. If you really understand some one-timers between the 2 of them, they're very smooth and around 15% for those 2 quarters. We expect that they will be greater than 15% in the back half.

David L. Begleiter - Deutsche Bank AG, Research Division

Excellent. And just on the $0.05 increase in synergies Q4 versus Q3, can you provide some more detail on what's driving that $0.05?

Douglas M. Baker

It's a whole host of initiatives, David, but it's getting down to fundamentals around indirect procurement savings, a number of which are contracts which we've been renegotiating or just going into place mid third quarter. So they haven't delivered any savings year-to-date. We'll get full quarter savings for these in Q4. We have continued reductions in G&A and in headcount around the world, particularly in corporate and G&A overlap positions. So those are more fully realized in Q4 than they are. We're closing offices around the world, which are taking place mid to late Q3. So you're going to see full impact of those in Q4. And I can go on, on another list of initiatives then you get into the restructure programs in Europe. There have been a number of things that have been in the works for 18 months, which are coming onboard in Q4. We'll start delivering savings there as well. So a lot of this is just natural timing, and they're quite consistent with what we said at the beginning of the year that we wanted the majority of this work done the first year, which really means that it's going to be back half weighted.

David L. Begleiter - Deutsche Bank AG, Research Division

And just lastly, would you expect the price versus the materials gap to increase in the back half of the year as raws come off?

Douglas M. Baker

Yes. I think, always, we had anticipated -- first of all, the base gets easier in a sense because last year, the raws really increased, ramped up in the second half. And we've had consistently, I think, pretty good performance on pricing. So as we just mentioned in Q2, pricing overtook raws. In Q3 and Q4, we're going to have a greater gap as we move on.

Operator

The next question comes from Nate Brochmann with William Blair.

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

Doug, just to follow up on that last question a little bit. Obviously, we've all seen the decrease in fuel and I know that the raws don't necessarily always 100% follow that. But could you talk to us about the direction there in terms of whether you are seeing some sequential relief? And as you said then, as you put forward their pricing, we should see, as you mentioned, an even greater gap there?

Douglas M. Baker

Yes, I mean, I think we have said -- I mean, no doubt that we are going to have improved gross profit year-on-year in the second half. It's going to be much greater than we saw in the first half, right? We were behind in Q1. We're about even in Q2. Q2 with a gross profit issue was really a mix issue. And we will have improved, and you'll see daylight in 3 and 4. Certainly, some of that is continued pricing. And then also, raws have abated. So our forecast for raws has come down from Q1, where we looked at the year to be quite over our plan to more in line with our plan quite frankly, but it has lowered over the course of the year.

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

Okay, and then just kind of a follow-up to that, Doug, I mean, whether it's correctly perceived or not. And I know that during like kind of the roadshows and in terms of the acquisition with Nalco that you did the kind of chart where the earnings with Ecolab and Nalco were actually pretty close in terms of volatility. So it might be a little bit of a misperception. But I was wondering, like in terms of the raw material impact and volatility, do you feel like you have your hands around that now a little bit better on the Nalco side than maybe they did before?

Douglas M. Baker

I don't know. I guess we are comfortable we have good visibility and understand what's driving the ultimate business performance. And certainly, our understanding of the energy and WPS business is expanding as time goes on, but I think we're comfortable that we've got a handle on how raws impact that business. It's not dramatically different how we see raws impact our business either in size of impact, timing of impact, how long it takes any of these businesses to recover, big raw moves in terms of pricing activity. I think the story we've told historically is Year 1, we recover absolute dollar impact. Year 2, we recover margin. And I think that formula works quite nicely as you start thinking about WPS and ES [ph] as well. And I think that's what's played out. They have executed in both energy and water and paper quite well in terms of pricing to recover the raws. And so you've got some abatement on the raw materials on that side. I think we've got a handle on what that means and how it impacts the business. Certainly, that's going to bode well, and that's in our forecast for Q3 and Q4. But we had some $60 million in negative raw year-on-year in the first half, and it's going to be modestly positive, i.e. we'll pay less for raws in the second half than we did a year ago. So that's in the forecast, and I think we've got a good handle on it.

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

And then just one last quick one on the sales side, just in terms of what you're seeing in Europe. Obviously, you have a pretty high recurring revenue stream and I know the majority of the mix is to countries that are still doing okay. But can you talk a little bit in terms of what you're seeing there in terms of just trends and any significant deceleration?

Douglas M. Baker

Yes, I mean, actually, we had modest -- I guess Q2 hung in there quite well. Our anticipation is we are going to hang in there in Q3 and Q4. I think we've got good reason to believe that. I think the pain is where you would expect it, that you go down to Italy, Greece and Spain, and we have negative year-on-year sales growth in those markets. And it is fully offset by growth, albeit modest growth in the balance of Europe. I think we're somewhat favorably disposed given that our big weight is in Germany, France and some other countries which aren't in great shape, but they're not nearly as adversely impacted by the crisis as, say, Greece, Italy or Spain, where we have relatively smaller shares.

Operator

The next question comes from John McNulty with Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Just a couple of quick questions. First of all, on the business that was transferred out of Institutional into, I guess, the Nalco businesses, the water piece, was that about $35 million? And on that, can you walk us through what the margin impact would have been to either help or hurt Institutional and the water businesses?

Douglas M. Baker

Yes, the business came out. It was our water business. It was in U.S. Cleaning & Sanitizing, and some of it was in our AP reporting to a business in Australia. It wouldn't impact in Institutional at all. It was moving out of -- it didn't have any impact there. I would say in total, as we look at it, it had a modestly negative impact on Nalco in Q2 because there is a big onetime sale in Q2 last year in that business. So the WPS business results would have been modestly better without it if you exclude it like a point higher in sales and a couple points in OI.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, great. And then on the -- with regard to some of your businesses, whether it's F&B or some of the Nalco businesses, is the drought having any impact on those businesses either positively or negatively at this point that you can tell?

Douglas M. Baker

Yes, it wouldn't -- not yet. We've been through many of these cycles in the past. This clearly is going to increase feedstock. It will ultimately increase protein prices, then we will have the typical switching among protein sources. We're fairly well represented across protein segments, but I don't think this is going to make our future conference calls -- I don't think it's going to be worthy of a mention. We'll just probably move through the cycle. It's a bigger impact on other people.

John P. McNulty - Crédit Suisse AG, Research Division

Okay. And then just one last question. With regard to Europe and the margin improvement, it sounds like it's going to be coming in maybe a little bit lighter, which I guess is a little bit surprising given that you're still seeing growth there. So I guess what are some of the things that are really holding back the potential for margin improvement there this year?

Douglas M. Baker

Yes. I think, John, what I would say is what we signaled -- or I worked hard to signal into the first quarter was that we would not see 200 basis points this year of margin improvement mostly because the underlying market isn't as healthy as we anticipated. But with that said, we expected 100-plus basis point improvement. I would say we still believe that's the right forecast one more quarter into the year. And I think the fact that we had a very strong performance in Q2 indicates that, that forecast is pretty good. The real change, if you will, from 18 months ago when we first gave it is, obviously, we anticipated modestly better underlying economic conditions in Europe than we're seeing now. I think we're performing quite well given the European conditions. I mean, OI is going to improve dramatically this year. We're going to make more money in Europe in spite of the economic crisis. We're offsetting this. We're doing a good job on new business gains, getting pricing, doing a bunch of stuff that I think bodes well for not only this year but for next.

Operator

The next question comes from Ed Yang with Oppenheimer.

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

Doug, just following up on the European renaissance again, you're looking for 2% margin expansion this year, now 1% with the economy. How confident are you that the 1% will hold? Or what would -- how much would growth have to slow further or deteriorate to see that change? And the outlook for 2013, I believe you were looking for, long term, another 100 basis points per year going out. Does the slow growth this year entail that you have to trim those out of your expectations as well?

Douglas M. Baker

Yes. So look, I'm confident we're going to do 100-plus basis points this year. I think we're on track. Certainly, it's sensitive to sales. So sales fell off or occurred differently than we are forecasting, but we're not expecting a big ramp-up by any stretch. That would be negatively impacted. I think though, we've got a good handle on sales expectations. So we feel good about the forecast for the year. In terms of outlook for '13 and '14, we would expect to continue to increase margin performance. We expect to have our highest margin in Q4 this year, which gives us very good momentum going into next year, leaving the year. So, yes, at least 100-plus again next year would be our expectation, and I think that's probably what we'll be forecasting when we get down to it.

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

Okay. And on the energy side of the business, you spoke about the margin comparisons between the first and second quarter and it sounded like there were some one-offs as well, but did you see any -- I expected somewhat of a bigger boost from raw material relief, for propylene relief in the second quarter. Did that help -- was that helpful at all in the second quarter for energy?

Douglas M. Baker

Yes, it doesn't flow through immediately, right? Usually you've got inventory and other stuff you've got to get through. And of course, that convention is different by different geographies. Certainly, it was welcome news. And as I -- I think the best thing to hang your hat on is we feel good about the margin progression. And if we look at any more normalized time period, the second half could be better margin than the first half on -- I would call it very good growth, high teens growth in the third and fourth quarter. But that business, we feel, is quite healthy.

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

Okay. And maybe a question for Mike. How much revenue was eliminated in the paper business?

Michael Monahan

It's about $5 million.

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

Okay. And are there any other businesses as you've gone through with the integration that make sense to take another look at as well?

Douglas M. Baker

Yes. I'd say we're kind of constantly purging. One of the things we like our businesses to look at is, we won't use the word we use, their worst 10 contracts and maybe the worst performing parts of their business, and just make sure we have a handle on -- things change when we do these contracts. We want to stay up on them. There are still contracts out there that we don't love, that we are on and after not only in, say, the W, the paper business or the water business, but some of the businesses, the legacy Ecolab businesses, too.

Operator

The next question comes from Gary Bisbee with Barclays Capital.

Gary E. Bisbee - Barclays Capital, Research Division

You've talked a lot about the risk to Europe and how you're doing there, but can you just give a comment on the legacy Nalco businesses in Europe? I know those sell off quite substantially in 2009. Are you seeing pressure there? Are they doing about what you expected? How should we think they'll trend in the back half?

Douglas M. Baker

We're trying to get a sheet to pull out because it's got a breakout by even specific region. All in all, the WPS business for total Europe is performing. I would say it's in the 3% range, and the energy is in 30% range. Total, if you combine all of our businesses, Europe growth would step up to the 4% range. So they're growing at a faster rate and have better margin than the legacy Ecolab business. One of the reasons we have the whole renaissance restructure was that we were not satisfied with the legacy Ecolab business margin performance and wanted to move that into the double-digit range, which is why all the conversation around it. I would basically say in terms of how we view Europe, it certainly isn't going to be a bright spot in terms of sales performance for us. We believe it will continue to grow. We do believe it's going to be a fairly bright spot in terms of operating income performance as we continue to drive margin in spite of all the bad news coming out of Europe. So the fact that we started this restructure 18 months ago is frankly quite good news for us because it's enabling us to manage through a tough situation in a pretty effective way.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And then I wonder, are you still planning to do the billion dollars of buybacks that you mentioned at the time you announced the Nalco deal or shortly thereafter. I think you did $0.5 billion in Q4, but it seems like first half of this year, you're well below the pace to do that second $0.5 billion.

Douglas M. Baker

Yes, we're actually almost 3/4 of the way through the buyback. If anything, we feel like we've made very good progress there. We did put it on what I'll call a hiatus as a result of the European crisis noise just to make sure we understand how the financial system is or isn't impacted as we go through that, because we've made such significant progress in a pretty short order.

Gary E. Bisbee - Barclays Capital, Research Division

Okay, and then I guess just a last one. What about the growth outlook in Asia? I know China is still fairly small, but things seem to be decelerating there and some other places. Are you still confident that, that business is positioned to get solid growth in the back half of the year?

Douglas M. Baker

Yes, I would say in total, in Asia, yes, we think we will be building momentum as we exit the year going this year. And China is probably one of the major stories there. And our China business, not surprisingly, like everybody else's, has slowed as the year's gone on -- slowed down. And we do expect to start seeing sequential improvement in Q3 and Q4 as we exit the year in China, which has a fairly significant impact on the overall Asia business.

Operator

The next question comes from Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

A couple of my questions have been answered, but I still want to get back and talk about the European business. You've talked about Europe profits, I think you made a comment, were up north of 30% year-over-year in operating income but the overall international operations were only up about 16%. So was this a currency headwind that we're seeing here or the profitability of some other operations in Europe declined to offset the international piece?

Douglas M. Baker

Yes, so around the international reporting segment for Ecolab?

Dmitry Silversteyn - Longbow Research LLC

Right. So my question is your overall international cleaning and sanitizing operating income was up about 16% if my calcs are correct. And I think you mentioned in your comments that European profits in dollars, your operating income, was up north of 30%. So since this is the biggest part of international, I'm just wondering where the offset is. Is it foreign exchange or did profitability deteriorate in some other geographies?

Douglas M. Baker

Yes. We're talking -- typically, when we're giving, say, the European 34% number, that's in fixed currency. And so you got it right. In fixed currency, we had very good performance across our international operating segments. And that report out is legacy Ecolab international operations. And it's -- then currency is the major, right, negative as you go through this on a reported basis.

Dmitry Silversteyn - Longbow Research LLC

So currency was negative 2% for international operations for Ecolab legacy?

Michael Monahan

What's that, Dmitry? It didn't come through.

Dmitry Silversteyn - Longbow Research LLC

Was currency a negative 2% contributor to top line in international operations for the legacy Ecolab business?

Michael Monahan

Well, it's 3% total for consolidated Ecolab, and so international is about half of that, so it's been bigger impact on international.

Dmitry Silversteyn - Longbow Research LLC

Okay, I'll have to get back to you on that offline then.

Michael Monahan

We'll get you the numbers from the public to the fixed because as you know, we always report and manage to a fixed currency. So I'll have to check on what the public dollar was.

Dmitry Silversteyn - Longbow Research LLC

Right. No problem. Can you talk a little bit about the GCS business progression in terms of profitability? I know you lost a little bit of money in the first quarter of this year. Had that -- was that business slightly profitable or still losing money in the second quarter?

Douglas M. Baker

Second quarter -- we lost about $0.5 million in the second quarter. We anticipate that we will more than recover Q1, Q2 losses and make money for the year Q3, Q4.

Dmitry Silversteyn - Longbow Research LLC

Okay, very good. And then was there an acquisition component in your Healthcare reported results up 7%? Or is that -- have all the acquisitions in Healthcare anniversary-ied by now?

Douglas M. Baker

Yes, they've anniversary-ied in the second quarter in the U.S. There was an acquisition in the European Healthcare, which we called out, which was Esoform, but not in the U.S. number.

Dmitry Silversteyn - Longbow Research LLC

And what was the contribution of that in the quarter if you just look at the European business?

Michael Monahan

It was a few million dollars, Dmitry. I can get you the number after the call.

Dmitry Silversteyn - Longbow Research LLC

About 1% or so, nothing super major. Okay, and then final question, just to get back on the European margin growth story. You talked about 200 basis points-plus in conversations that we've had. The issue of growth in Europe was supposed to be impactful of the magnitude of the plus but not necessarily the 200 basis points initially, which were just cost removals, if I remember correctly. Now you're talking about offsets because of slower economy and yet you are growing in Europe. So your business is not seeing volume declines. Can you sort of reconcile your progression and your thinking about profit improvement in Europe 12 months ago versus today?

Douglas M. Baker

Dmitry, I think consistent with the conversation we had at the end of the first quarter that -- or even when we announced the restructure program in Europe, we basically said, "Look, it's predicated on modest growth, not a huge ramp-up in growth, but modest growth. And the other underlying assumption was probably a fairly favorable raw material environment." What we've -- and so with that underlying assumption, we basically said we would expect to see 200, 200 and 100, 100 and ultimately get to double-digit margins in Europe. What's changed probably since we initially went out in January of 2011 is the fact that one, we had significant ramp-up in raws, which we're now catching up to with pricing. The pricing catch-up is probably a little slower than our normal 1 year 1 year formula I articulated earlier because the economic conditions there are so dire. And growth is a little worse than we anticipated when we announced it. Not terribly worse, but look, it's a combination of those 2 that basically have gotten us to say we still expect to get to double-digit margins but it's probably going to take a year or 2 longer than we initially forecast simply because the ramp-up's going to be a little slower. We are coming off the fact that we think this business ought to be a 12%, 13%-type margin business. And we still believe we see a clear road to get there. It's just a little longer road than we anticipated in January of 2011. So the forecast this year of 100-plus is certainly lighter than the 200 we went out initially. But I think given the environment, I feel the team's doing a very good job offsetting the raws and maintaining some sales momentum in a very difficult environment. So we think we will end up the year much improved in Europe and most importantly, I think, with good momentum going into '13 so we can see continued margin improvement as we go into '13 and '14.

Michael Monahan

And just to be clear, Dmitry, the work that we're doing, the cost takeout, I mean, that is coming along as expected and we're well ahead on that. Simply, the other costs are the issue.

Dmitry Silversteyn - Longbow Research LLC

I understand that. So it sounds like you're being maybe a little bit less proactive on pricing given the soft economic environment. Perhaps, it's costing you a little bit more to get the incremental sales than you thought it would and then plus the raw materials, which, at least for the first half of the year, are comping negatively even though in the second half of the year, we'll keep our fingers crossed that you're going to get a little bit of relief.

Douglas M. Baker

Our pricing has been improving in Europe, but there is no doubt that pricing is a negotiation with a customer. And we've got to make some trade-off decisions based on where people are economically. It is always much more difficult to get pricing in a very difficult economic situation. Certainly, I would consider Europe right now a difficult economic situation. With that said, pricing has been accelerating there for us, but not at the pace that the raws would have dictated in what I will call normal economic times.

Operator

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

David Ridley-Lane - BofA Merrill Lynch, Research Division

On a constant currency basis, did SG&A decline from the first quarter '12? And then in your guidance, do you forecast a similar constant currency decline in the third quarter?

Michael Monahan

We're taking a look.

Douglas M. Baker

Yes. Certainly, the part that we got to go look at is a variable component to our SG&A, which is commission and some bonus which are based on growth. I would say -- certainly, I can say confidently that the G&A component is coming down sequentially quarter by quarter by quarter as we go through this. There is no variability there. So we're doing a little math on the S part as we go through this. So give us a second to come back.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay. And then any numbers you can put on the Nalco synergy savings in the second quarter as you're progressing towards your run rate target of $250 million a year?

Douglas M. Baker

Yes, we had $21.5 million of synergy savings in Q2.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Perfect. And then just a final question, how did the Nalco revenue trend as you went through the quarter?

Douglas M. Baker

I don't have day by day. Here's what I would say. We believe if you want to go -- what's our expected business trend? So we basically already said energy. We expect continued high teen sales growth consistent with what we saw in Q2. We expect the water side of the business to show sequential improvement from 2 to 3 and 3 to 4. And we expect the same on the paper business. So strength and through the year, not weakened.

Operator

The next question comes from Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc., Research Division

Two quick questions. First, with the acceleration in the synergies, should we be thinking about -- are you pulling forward synergies from 2013? Or should we be thinking of a widening gap over the quarters versus your prior trajectory?

Douglas M. Baker

Yes -- no, most of the -- there aren't a lot of onetime synergies. I mean, I will say we are getting to maximum synergies on a faster path than we originally forecasted when we announced the deal last July. But with that said, I think there is going to still be, as the path unfolds, sizable synergy increase '13 to '12. We raised the number, but we're also working hard to move along this path quickly.

Laurence Alexander - Jefferies & Company, Inc., Research Division

Okay. And secondly, can you talk a little bit about what's going on in the free cash flow? I mean, Nalco was usually a fairly robust free cash flow generator. And can you just walk through a little bit what's happening there?

Douglas M. Baker

Yes, I'd say the free cash flow is in line with what our expectations are. So it referred nicely to the last question you asked. Part is we certainly are spending more and at a slower [ph] rate on our restructure effort, which is one of the reasons that we're forecasting higher numbers than originally stated when we announced the merger and at a faster pace. So that takes more restructure money early. So you've got that coming out. We made a fairly large pension contribution. And then you naturally have working capital expansion. But working capital, if you compare it to Ecolab numbers, right, a year ago simply because we've got a bigger business, the pro forma working capital that we're operating with now is quite consistent with what the business was utilizing last year, if you will, on a pro forma basis. But those are the big moves. We've got share buyback and some of the other things that we've talked about. But mostly, it's going to be pension and the restructure.

Laurence Alexander - Jefferies & Company, Inc., Research Division

And I realize this will be in the Q, but do you have a rough sense for how much is just restructuring so we can back out what normalized free cash flow is looking like?

Michael Monahan

Lawrence, I'd have to get back to you with that number.

Operator

The next question comes from Shlomo Rosenbaum with Stifel, Nicolaus.

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

I thought I heard -- Doug, I thought I heard you talk about some outperformance in the growth synergies, and I was wondering if you can talk about that a little bit more, where you're seeing that and what specifically are you pointing to.

Douglas M. Baker

Well, I'll take a shot at myself. Since we had this very ambitious goal of 0 for the year, it wasn't hard to have outperformance. But with that said, I would say we feel very good about the uptake and the real focus initially has been on marrying the water technology and the Food & Beverage opportunity. And so there's work along 2 fronts: One, obviously, selling the existing water technology and also developing, if you will, enhanced capabilities as a result of leveraging the 3D TRASAR technology and applying it in some traditional F&B arenas in the F&B space. And both of those efforts are going quite well. The one I'm most excited about is the latter, the technology marriage, because of what it means long term for the business and our ability to meet customer needs. So we've had very good progress in the quarters. We've already -- we're in the 20 plus million. We expect to be much greater than that. We've got a lot of prospects and think we'll make very good progress here.

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

Okay, great. Then the top end of the EPS guidance came down by $0.03. Is that all currency? Or is there anything else that's in there? Is there some macro in there? Can you just give us a breakdown?

Douglas M. Baker

Well, I guess the simplest math would be we mentioned earlier that currency since last quarter impacted us a negative $0.05 and we took the top down by $0.03, so currency mostly. I mean, there's a lot of moving parts in the business, but currency would have been the outsize impact.

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

Okay. That's what I was looking for. And then from a high level, when do you expect to be finished with a lot of the acquisition noise so that this business can really exhibit the free cash flow potential that it has? In other words, are we looking at mid 2013, 2014, when should I think about that?

Douglas M. Baker

Yes. I would say I think by and large, it will be behind us by the end of '13.

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

So 2014 should be where we start to see a breakout?

Douglas M. Baker

Yes. From a cash flow standpoint, I think we'll have very good EPS results through this integration period. But obviously, cash flow is going to be negatively impacted with restructure expense. And that's really a '12 and '13 impact.

Operator

The next question comes from Andrew Wittmann with Robert W. Baird.

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

I just wanted to get a little bit more clarity on the guidance as well. It looks like the assumption underpinning the share count change from last quarter from this quarter looks like it actually went up a bit. Is that -- by my calculations, that's about 3 more cents that were impacted there. If we've got $0.05 of a change in the FX, maybe $0.03 in the share count, I guess operationally, what are you looking at? What are you seeing in the business which is helping you get back there? What segments in particular do you think are going to help you get there? It sounds like energy is one of them, a little more optimistic there. But is there anything else, operation, is helping you get these offsets?

Douglas M. Baker

Yes. Well, I would say, one, the share impact is not a couple of pennies. It would be $0.01. That's just given timing of shares and other -- the work that we've already done there. So it's not as dramatic as it might look otherwise. I would say the pluses -- certainly, we've talked. I mentioned raws abated from first quarter in terms of what we forecast for the year to some degree. But then we've got continued improvement in synergies, other cost savings and the underlying business is hanging in there and doing quite well. So I'd say it's a combination of those things that allow us to have confidence in what we're forecasting, which is a very good year.

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

And then just in volumes, it looks like there's a sequential downtick a little bit in the volume side. Can you just talk about -- I mean, you mentioned tough comps in some of the business, but how much of that is tough comps versus macro? If you could just help us get a little bit of color into how the volume's been trending here.

Douglas M. Baker

Yes, I guess the way -- looking at it over the last -- I've been looking at these numbers for a while. The simple thing, if you're talking about your 9% in Q1 to 6% in Q2, it really breaks down into probably 3 distinct pieces. One certainly is energy growing at 19% versus 29%. That's about a point of growth. That was expected. And we expect energy to continue in the high teens. So that point, if you will, should be kind of built into how we think about the business going forward. The second piece was -- I'll characterize it as somewhat inventory. There was year-on-year comparisons on inventory. And just basically, as the industrial businesses slowed down, there is always inventory takeout first. So they get hit pretty hard and then have a little bit of a recovery. Call that a point. And then there's just, I think, economic slowdown, which is probably worth another point. So 2 of those points are going to be with us. So while we went 9 to 6, I think as we looked at the second half, we think we're 6-plus going through, so better than second quarter, not at first quarter run rate, if that helps.

Operator

The next question comes from Mike Harrison with First Analysis.

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

You guys have talked in the past about -- or you talked a little bit about Southern Europe being weaker. In the past, Q3 has been very important in terms of the vacation season. Do you have any early read on how that season is shaping up in Southern Europe?

Douglas M. Baker

Yes. It's not great, but we don't think it's going to be a material driver in Q3. So I think we've got a good handle on what the expectations are, particularly in Italy, as we go through it. It's not a monster piece of our European business. So I think we're in good shape even with the lousy holiday period in Italy.

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

All right. And then within the energy business, you mentioned that mix was something that hurt, I think, both the quarter-on-quarter and year-on-year margin comparison. What's hurting you in mix? And maybe as we look forward, do you see anything that reverses the mix or changes the mix? I'm thinking maybe deepwater Gulf of Mexico. Any thoughts on that?

Douglas M. Baker

Yes. I would basically say the first half performance of energy in terms of margin, we think, is a very good indicator of how the business performed. I would probably say there is some favorable stuff in the first quarter worth maybe 50 basis points and some unfavorable in the second. And so we think 50 is probably the best proxy for how that business performed in the first half, which was the first half cumulative number. So it wasn't huge swings in either one. It just happens on these 13-week periods, right? Energy's got some big shipments and big deliveries that occur. And so you're going to have some impact in 13-week periods. But all in all, we think that business is fine and moving in the right direction.

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

And then last question is on the paper business. Can you talk a little bit about the dynamics that you're seeing, such that North America was soft in Europe and showing growth? And then maybe just quickly, on Asia, is that mostly packaging that you're seeing contribute to softness there?

Douglas M. Baker

Yes, packaging, where we had the softness. Europe somewhat was -- it went into the swamp earlier. And we've been fighting through in Europe a little longer. So I would just say it hit the low point earlier and it's starting to move back, right? I mean, North America, I think you saw the slowdown in this quarter from an industrial output standpoint. And China is fairly clear, too.

Operator

The next question comes from Rosemarie Morbelli with Gabelli & Company.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Just following up on the paper business a little bit, I am surprised at your expectations of growth in the second half as both in North America and in Europe, you actually have paper mills shutting down. What are you doing that is not affected by that particular factor?

Douglas M. Baker

Yes. Rosemarie, some of it was the businesses, I'd say, impacted by destocking, which is somewhat behind us now in these other places. I guess I'd underscore the word modest expectations in terms of growth. So we're using the most liberal definition. We don't expect a big bounce back in paper in Q3, but we expect it to improve, and so be positive in Q3 but quite modestly, flattish to positive, and then better than that in Q4.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And then looking at the share buyback, usually, you actually buy enough to offset the dilution. Based on the number you are giving us, there will be dilution in the third quarter. So have you stopped the buyback program altogether until next year when you have a better picture of the global economy and what you are doing?

Douglas M. Baker

Yes -- no. I don't want -- we don't want to signal that. I think what we have said is once I think the Europe crisis showed its full hand and the fact that we had made such significant progress in a fairly short period of time, we thought discretion called for what I'd call kind of a hiatus period. We haven't put a set timetable when that would end. But certainly, we would like to understand what, if any, financial impact in the financial system we may see as we come through this as we also went and talked about the remaining shares have a somewhat a negative impact if they're not executed this year. But we think it's a manageable impact as we go through. So we think the plan that we have in place is a smart plan for shareholders and for the business.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

By negative impact, are you only talking about the higher number of shares translating into maybe your lower EPS? Or is it another negative impact that you are referring to and that I am missing?

Douglas M. Baker

No, it's that impact. A little higher share count has a little negative impact on EPS. But we think the smart play right now is make sure we understand the situation before we continue to move forward.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay, so not because there would be some kind of a penalty if you don't go through the full program.

Douglas M. Baker

No. There's no penalty.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And then lastly, if I may, were you disappointed or happily -- or unhappily surprised by some of the Nalco results and, of course, this addresses predictability of the Nalco business, which everyone was worried about at the onset?

Douglas M. Baker

Yes, I think the only way we're going to ever answer the predictability question is, are we able to continue to forecast successfully and continue to drive earnings growth. I would say we feel like we are positioned to demonstrate that as we move forward. And I think that's going to be the ultimate answer to this question. And I think it's the only fair answer to the question. As we look at the business in total, I would say like the businesses that we've been managing for a long period of time, there are always pluses and minuses in all these businesses. I don't think that we've been "surprised" by the Nalco businesses. If there have been surprises, they have been as many positives as anything else. I mean, certainly, energy has been a business we liked very much moving into this and performed quite well. We knew that paper was more cyclical than the other businesses. We knew Nalco in total was slightly more cyclical than Ecolab, but we always said that was a very high bar because we are very uncyclical. And we think this is manageable as we go through. When you take the total weight of the business, we think we would still characterize the total business as certainly manageable in terms of any cyclical nature and feel quite predictable, which is, I think, really what the hallmark of our business was as we work hard to deliver against the forecast we give so that there can be confidence in what we say going forward. We think that's important.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And lastly, if I may, what is -- can you remind me of the total synergy dollar amount that you're expecting for 2012?

Douglas M. Baker

Yes. Our original forecast for cost synergies -- and so these would include tax. For cost synergies, our original forecast was $150 million at the time of announcement, July 20, 2011. We, in January, upped that to $250 million on cost synergies. And again, that excludes tax.

Operator

The last question comes from Jeff Zekauskas with JPMorgan.

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

Doug, when I look at your returns, the -- if you add up all the Nalco operating profit, I think it was up $10 million year-over-year roughly in the quarter. And your synergies were $21 million that you captured. So there's a question there. It seems that in the quarter, all the returns or the 80% of the returns came out of the Ecolab business and that the incremental margins in your U.S. Cleaning & Sanitizing were close to 70%, and in your international business, maybe they were close to 40%. So did the synergies in fact come out of the Ecolab side? And did Ecolab capture it? Or why is there such disproportionate operating profit growth on the Ecolab side and so little on the Nalco side given the synergy total?

Douglas M. Baker

Yes, well, I would say 2 things: One, allocations and how we allocate dollars. The synergies are going to show up on not only the energy and WPS businesses, but also the Institutional, F&B, Kay, et cetera businesses, the way that we allocate, so that they're not going to flow specifically or only to WPS and to energy as we go through that. So I don't think you can look at it that way and expect that they're only going to be there. With that said, if you look at the energy and WPS businesses together, their first half performance was quite strong. I would say our business was quite strong. And so year-to-date, they're up 16% NOI if you exclude the business that we transferred to them. So the underlying business performance has been very solid there. The synergies were built considerably quarter by quarter. So you take the $20 million run rate at $80 million, it's nowhere near the $250 million that we're forecasting. So we know that's going to get better over time. And you'd also have to look at tax over time, where we've had sizable cash impacts as well as we've already brought down the combined rate to Ecolab's historic rate of around $30 million, right? They were running, at I think, at about $34 million. And so we've already brought that down considerably. So I think you'll see sizable cash benefits as the story unfolds as well.

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

So if you took your $20 million in synergies or $21.5 million in synergies, how would you allocate them across the divisions in the quarter?

Douglas M. Baker

I don't have the specific allocation here. We're talking 20 businesses in a bunch of countries. But that's how we set up the P&L.

Operator

There are no other questions at this time. I'll turn it over now for closing comments.

Michael Monahan

Well, that's it for us. Thanks, everyone, for your time. And if there's any questions, please give me a call to follow up. Have a great day.

Operator

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

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