Ecolab Inc ECL
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/26/2013

Operator: Welcome to the Ecolab Fourth Quarter 2012 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. 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 J. Monahan - SVP, External Relations: Thank you. Hello everyone, and welcome to Ecolab's fourth 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 2 stating this teleconference and the slides include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are discussed in the section of our most recent Form 10-Q under Item 1A Risk Factors, in our fourth quarter earnings release, and on Slide 2. We also refer you to the supplemental diluted earnings per share information in the release.

In addition as mentioned on Slide 2 of this conference call does not constitute an offer to sell or the solicitation of an offer to buy any securities. Also please note that in order to provide a meaningful comparison of our operating performance where applicable, actual results for the fourth quarter of 2012 are compared against pro forma results for the fourth quarter of 2011. The pro forma results are based on historical consolidated financial statements of Ecolab and Nalco, and were prepared to illustrate the benefits or 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 our slides and press release.

Starting with an overview in Slide 3, we delivered strong results in the fourth quarter, despite continuing economic headwinds and higher delivered product costs. We leveraged improved sales volume growth, pricing and our synergy and cost efficiency work to produce our 10th year of double-digit adjusted EPS growth out of the last 11.

Looking ahead, we expect to continue to outperform our markets and show double digit earnings gains in the first quarter and the full year, as solid sales growth, appropriate pricing, innovation, synergies, and margin leverage more than offset increased delivered product costs.

Moving to some highlights from the fourth quarter and as discussed in our press release, reported fourth quarter earnings per share were $0.77. On an adjusted basis excluding special gains and charges and discrete tax items from both years, fourth quarter 2012 earnings per share increased 27% to $0.89.

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 strong gains in Global Energy, Latin America and our worldwide Kay operations. We continue to be aggressive focusing on top line growth. We're emphasizing our innovative product and service strengths to help customers get better results and lower costs, and through these drive new account acquisition across all of our customer segments.

We also continue to implement appropriate price increases to help offset higher delivered product costs and investments in our business. 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 to sustain our technology and sales and service leadership positions.

Our work to integrate Nalco and Ecolab, have gone very well. One year into the merger, we are delivering on or ahead of plan on our costs and growth synergy targets. Our agreement to acquire Champion Technologies announced October 12 continues under review by the Department of Justice. We remain in active discussions with them and believe we are nearing a resolution and still expect to close in the first quarter, but have nothing further to report at this time.

While economic trends present ongoing challenges, we continue to look for the first quarter to show further sales gains and margin improvement. First quarter adjusted EPS is expected to increased 12% to 20% to the $0.56 to $0.60 range and compare against adjusted EPS of $0.50, as business growth and the increasing benefits from synergies and cost reductions more than offset soft economies, the higher delivered product, and pension costs, the sale of vehicle care and comparison against a strong quarter last year.

We continue to expect full year 2013 adjusted earnings per share excluding expected Champion accretion in the range of $3.38 to $3.48, representing 13% to 17% base growth, with Champion accretion improving on that. In summary, we expect the first quarter to show another solid double-digit earnings growth performance by Ecolab. As we also make the key investments to drive superior results this year as well as in the years ahead.

Slide 4 shows our fourth 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 fourth quarter increased 65%. When compared with fourth quarter 2011, adjusted pro forma sales, which include the impact of Nalco in both years, Ecolab's fixed currency sales rose 7%.

Looking at the pro forma growth components; volume and mix increased 5%, pricing rose 2%, acquisitions and divestitures did not have a significant impact and currency decreased sales by 1%, rounding accounts for the remaining difference. Reported sales for the U.S. Cleaning & Sanitizing operations rose 2%. Adjusted for the transfer of Water treatment related businesses to the Global Water segment U.S. Cleaning & Sanitizing sales increased 5%.

Institutional sales grew 5% in the fourth quarter. Sales initiatives targeting new accounts and effective product and service programs continued to lead our results outperforming mixed end markets. Lodging room demand continues to show modest growth while foodservice foot traffic remained soft. To drive our growth and improve on our industry leadership we remain focused on new products that deliver increased value and reduce labor, Water and Energy costs for our customers in our warewashing, laundry and housekeeping markets.

Programs we launched in 2012 like our next generation warewashing platform called Apex2 have gained traction and have been well received in the marketplace. In the fourth quarter we launched a new hard surface cleaning system for facilities managers. We also continued to increase our customer focus and service intimacy through sales force investments, simplified structures, national and local marketing initiatives and continuing investment in field technology to help drive efficiency and service as well as better aligned sales efforts. Though institutional will face a tough comparison against the strong sales period in first quarter 2012, we expect our new sales initiatives and product innovation will enable institutional to show steady sales improvement in the first quarter and better gains throughout the year as it once again significantly outperformed it's market in 2013.

Kay's fourth quarter sales increased 12%. Quick service sales enjoyed strong growth in the quarter from both large and small customers. The food retail business grew at strong double-digit rates benefiting from several new customer additions. We look for continued good sales growth in the first quarter as another solid performance for Kay in 2013. Healthcare sales increased 4% as good gains in our patient temperature management business led results benefiting in part, as guidelines for patient management during surgical procedures gained greater acceptance. Healthcare's growth also benefited from our environmental hygiene and surgical barrier solutions for hospitals that help prevent the transmission of hospital acquired infections. These more than offset continued softness in the overall U.S. healthcare market.

Looking ahead, first quarter sales are expected to show better growth as account gains along with new products to be launched this year, will help drive sales and offset the challenging healthcare environment.

Food and beverage sales grew 2%. Good gains in the dairy and food offset beverage or lower beverage and protein sales. Our market focus on improved customer penetration along with our drive to provide total planned assurance offering comprehensive plant-wide Cleaning & Sanitizing, Water treatment, waste Water and Pest elimination solutions has enabled us to win new business and offset slow conditions in the beverage and protein markets.

When combined with our innovative products and our focus on lowering customer Energy and Water usage, we expect to see similar sales trends in the first quarter, with better trends developing in the second half.

Sales for U.S. Other Services rose 3% in the fourth quarter. Pest elimination sales continued to show good trends, rising 3%. Growth was led by stronger gains, in food processing and healthcare, improved results in food service 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. Programs launched in 2012, like the expanded Large Fly Program and the new HotelProtect program, with Bed Bug Assurance offering have shown good results. We expect our new products and programs along with aggressive selling and improved service levels to yield continued good sales gains in 2013.

Sales for GCS increased 5% in the quarter. New account wins helped to drive strong growth in service revenues, which were partially offset by soft part sales, resulting from a system change, which is now complete. We continue to see good results from chain account relationships as we drive sales through their regional and franchise organizations. We expect GCS to continue to show improved results in the first quarter as we expect continued good service trends and improved part sales to benefit results.

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 3% in the fourth quarter. Europe's institutional fourth quarter sales declined versus last year. New business gains among regional and local customers leveraged new products, but were more than offset by soft market trends and continuing weak demand in the south. First quarter sales will also be lower than last year as the timing of distributor shipments and one-time sales last year combined with soft end markets impact the first quarter comparison.

Food and beverage sales rose modestly over the last year, reflecting market share gains, a focus on corporate accounts, and the cost savings benefits of our innovative products. These worked to offset lower customer volumes.

Textile Care sales rose modestly in the fourth quarter. New account wins, new products and technology like lower temperature washing more than offset soft market trends. These should also benefit 2013 along with a focus on improved account profitability that includes additional pricing and culling unprofitable accounts.

Healthcare sales showed solid organic growth in Europe led by new account gains and new products. Pest Europe sales showed good growth due to a continued focus on corporate accounts, new programs and operational improvements. Our work to improve operational efficiency in our Europe business continues to show good progress. We are further leveraging our shared services facility, transferring more work to Eastern Europe and offshoring. We also continue to consolidate facilities and improve procurement savings.

We delivered more than 200 basis points of structural margin improvement in 2012, though the weak economy and raw material increases in Europe offset about half of those gains at operating income. As a result EMEA's operating income margins increased by 110 basis points in 2012. We continue to expect EMEA's operating margins to improve to the low teens over the coming years rising at around 100 basis points per year as the current economic challenges faced by Europe slow the pace of our progress. For 2013 we expect further substantial gains with margins expected to rise around 100 basis points as a result of our actions. Looking ahead we expect Europe's first quarter to show flat ex-currency sales with strong profit improvement as it outperforms the continuing weak European business environment.

Asia Pacific sales grew 6% in fixed currencies. Better trends in China along with strong growth in other emerging markets served to offset slower growth in mature countries. Institutional sales showed solid sales growth led by good account gains in fast growing markets and by newer product sales. Pest elimination sales benefited from increased product penetration and account gains. Looking ahead Asia-Pacific expects continued solid sales growth in the first quarter of 2013.

Fourth quarter sales for Ecolab's Canadian operations increased 5% at fixed currency rates. Growth in the core businesses drove the solid results. Latin America reported continued strong double-digit fixed currency sales gains up 19%. Adjusted for the Brazil pest and institutional acquisitions, Latin America grew 14% in fixed currencies as institutional, food and beverage and pest elimination continue to grow at double-digit rates despite some slowing in Latin America markets.

Fixed currency Global Water sales increased 3% in the fourth quarter compared with 2011's pro forma results. Good growth in food and beverage, primary metals, power and manufacturing were offset by lower sales in mining. Regionally, we saw a moderate growth in Asia, Latin America and North America. Europe grew modestly, reflecting the continued challenging economic conditions in that region. We continue to drive market penetration with innovative solutions to optimize Water usage through technologies including 3D TRASAR for cooling towers, new commercial solutions for Water recycling and reuse, and applications for wastewater. We expect Global Water sales to be flat in the first quarter as gains in the Americas are offset by difficult markets and operating conditions in mining and Asia.

Fourth quarter 2012 fixed currency global sales for Paper declined 1%. Strong growth in Latin America and moderate growth in Asia and Europe was led by the use of innovative technology and was partially offset by the strategic reduction in low-margin business and lower customer plant utilization rates in North America. We expect first quarter Paper sales will decline modestly, as the paper market shows continued weakness primarily in North America.

Measured in fixed currencies, pro forma Energy sales grew 18%. The quarter reflected strong volume growth in upstream and market share gains in downstream. Strong double-digit growth in our upstream business was a result of healthy market conditions, share gains, and a continued focus on higher growth energy sources. We saw a very strong growth in deepwater and shale accounts, continued momentum in oil sands, as well as strong activity in the Middle East, Africa, and Latin America. Downstream business growth reflected share gains in Asia and Latin America. We expect 2013, base Energy segment growth, excluding the impact of Champion to run above our long-term expected trend of 10% to 12% sales growth, driven by shale, continued strength in the deepwater and oil sands business and steady growth in downstream. But the pace will moderate from 2012's fast pace to closer to their long-term trend. We look for first quarter 2013 sales to reflect this moderation, as well as reflect the comparison to a very strong quarter last year when sales rose 29%. Net, we expect first quarter Energy sales to rise in the upper single-digits, excluding the impact from Champion with much stronger organic sales growth in the following quarters.

Slide 6 of our presentation shows selected income statements comparing reported 2012 with pro forma 2011 information to allow more meaningful comparisons. Fourth quarter gross margins were 46%, adjusted for special charges fourth quarter gross margins were 46.4%. When compared with fourth quarter 2011 adjusted pro forma results 2012 gross margins continue to expand increasing 80 basis points.

The adjusted gross margin improvement primarily reflected the benefits of the volume and pricing gains as well as merger synergies and cost efficiencies, which more than offset higher delivered product costs and the business mix impact of higher Energy sales. Reported SG&A expenses represented 31.9% of fourth quarter sales. When compared with 2011 adjusted pro forma results, the 2012 SG&A expense ratio also continued to improve and declined 210 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 17%. Adjusted for the transfer of Water treatment to the Global Water segment operating income increased 15% with margins up 190 basis points when compared with fourth quarter of 2011 pro forma operating income. Volume and pricing gains and cost synergies efficiencies led the increase. Operating income for U.S. Other Services declined 7%, as good results from pests were offset by field investments including EcoSure and the completion in GCS of the parts distribution change.

International fixed currency operating income increased 32% versus last year. Adjusted for the transfer of Water treatment business to the Global Water segment, operating income increased 35% with EMEA operating income up 48%. International margins improved 300 basis points as pricing and volume gains and our Europe margin transformation efforts more than offset higher delivered product costs. Global Water operating income grew 37% in fixed currencies compared to pro forma results. Margins expanded 310 basis points as pricing, volume gains and cost synergies led the increase versus a soft period last year before pricing actions began to benefit results.

Global Paper operating income increased 72% in fixed currencies which compared against the depressed results and an unusually large bad debt last year. Excluding bad debt, operating income rose 57%. Pricing, synergies and the elimination of low margin business drove the increase. Similar to Water these results compared for the weak period last year before pricing actions began to benefit results.

Global Energy operating income grew 49% in fixed currencies. Margins expanded 350 basis points led by the strong volume gain, operating leverage, pricing and synergies, which more than offset delivered product costs, investments in the business in comparison to last year, which included a sharp run up in raw material costs. We expect Energy's first quarter operating income will be similar to the prior year, reflecting the first quarter's lower volume growth, significant field investments and the business mix. We expect double-digit growth in the remainder of the year.

The Corporate segment and tax rate are discussed in the press release. Reflecting the pending Champion transaction, we did not repurchase any shares during the fourth quarter. The net of this performance is that Ecolab reported fourth quarter diluted earnings per share of $0.77 compared with $0.34 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 27% to $0.89 when compared with $0.70 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 52% at December 31 compared with 57% reported a year ago. Our net debt to total capital was 47%. The large cash position reflects cash related to the pending Champion purchase.

Looking ahead, 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 among major accounts, leveraging our leadership positions in key growth markets in Food, Water, Energy, and Healthcare, as we work to offset continued generally soft global conditions. We expect to show margin expansion again in the first quarter driven by sales growth, innovation, pricing, merger synergies and better operating efficiencies 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 first quarter results to show moderate pro forma sales gains as underlying growth remains good, but as our Energy business compares against strong prior-year results. We expect Energy will return to double digit growth in the second quarter. However, we expect this first quarter comparison will result in approximately a $0.03 negative impact on first quarter EPS. Along with the previously mentioned impact from lower interest rates on our pension plan and the absence of Vehicle Care that will together cost an additional $0.03 per share in the first quarter of 2013.

Despite these very substantial headwinds many of which have an outsized impact on our seasonally smallest quarter, we still expect adjusted first quarter 2013 diluted earnings per share to increase 12% to 20% to the $0.56 to $0.60 range compared with the adjusted earnings per share of $0.50 earned last year. We look for continued double-digit growth over the balance of the year and expect full year 2013 adjusted earnings per share, excluding the expected Champion accretion in the range of $3.38 to $3.48 representing 13% to 17% base growth with Champion accretion improving upon that.

As an update regarding our pending Champion acquisition, we received clearances from all required countries except the U.S. As mentioned earlier, we remain engaged in active and ongoing discussions with the U.S. Department of Justice regarding its review. We believe that we are nearing resolution of their issues and expect to close within the first quarter. We hope to have more information soon. We continue to expect the Champion acquisitions will be $0.50 accretive to 2016 and help us to build a stronger Energy business and a stronger Ecolab with better growth opportunities to achieve continued consistent predictable above average growth.

We also want to let you know that consistent with our change to a global business management structure we will begin reporting segment sales and operating income on a global basis for the Cleaning & Sanitizing businesses, including Institutional, Food & Beverage, Kay, Healthcare and Pest elimination as outlined in Slide 9 beginning in the first quarter 2013. This will be on the same basis as Water, Paper and Energy are currently reported and we will present all of our businesses on the same global basis. This will not affect Ecolab's previously reported consolidated operating income or EPS and we will issue annual and quarterly restated information prior to the first quarter release so you can see how this change will look in prior years.

In summary we once again delivered on our forecast in the fourth quarter, while offsetting higher delivered product costs and the weaker economy while still investing in our future. We look for sales and profit growth to continue to show double-digit growth in 2013's first quarter and full year as we drive to produce yet another strong year and build for our future.

Now here is Doug Baker with a few comments on the quarter.

Douglas M. Baker, Jr. - Chairman, President and CEO: Just a couple of thoughts. First of all Q4, I guess you would have to describe as a very good end to a very good year. First we successfully drove integration all year, delivered $75 million in synergies as forecast. We had a lot of heavy lifting behind us, reorganizations, relocations, comp and benefit changes and we feel good about that, because while doing that we continued to do a very good job driving the underlying business. So, last year, our underlying business continued to perform very well. We had record new net corporate account business gains with very good customer retention metrics, sales grew and margins expanded in virtually every business. Europe was a huge net plus, particularly in the fourth quarter, up a reported 310 basis points, but if we adjust for what we consider one-time, it's still over 250 basis point improvement year-on-year. And energy, as we all know, had an amazing year. So, we exit in good shape and we expect another very good year in 2013. The formula is going to be quite familiar, i.e., new business plus new innovation plus synergies are all designed to overcome what we consider still continued lousy markets.

We expect 13% to 17% EPS growth next year, it's adjusted EPS growth, and again, a strong Energy performance in the low to mid-teen growth, both top and bottom line for the year, it's going to be one of the key drivers, but also solid performance from all of our businesses which is exactly what we realized last year. Here more in the single-digit growth but expanding margins to drive great leverage.

Now all of the above continues to exclude the impact of Champion. We do expect Champion to close in the first quarter and after it closes, we will then come back with our expected accretion impact from Champion for the year. But we will wait until we close.

So, those are my opening thoughts. I am going to pass it over to Mike to start Q&A.

Michael J. Monahan - SVP, External Relations: Operator, would you begin the Q&A process?

Transcript Call Date 02/26/2013

Operator: David Begleiter, Deutsche Bank.

David Begleiter - Deutsche Bank: On Energy, can you give a little more color on the Q1 headwinds impacting earnings and have they all reversed or be less in the back half of the year?

Douglas M. Baker, Jr. - Chairman, President and CEO: The simple answer is we had 29% growth in Q1 of last year. So it's really mostly a story at the base and a comparison with the base. Really, our expectation is -- so we even talked about that 29% as abnormal last year and not to expect that to continue in the second, third, and fourth quarter of 2012, and we expect high teens, which is exactly what we ended up delivering. This year it is more low-to-mid-teens expectation, but the first quarter because of the comparison is just going to be lower. However, if you start doing two year growth rates and everything else, it's going to be continued very good news, so we expect good things. That business is in very good shape.

David Begleiter - Deutsche Bank: Doug just on Europe, is this Q4 result a real turn to business that you've been looking and waiting for?

Douglas M. Baker, Jr. - Chairman, President and CEO: I think we always knew, we did a little over a 100 basis points last year improvement year-on-year in margin that follows 65 basis points in '11. So cumulative we're up about 175 basis points for the two years. That's below the projection we made when we announced the Renaissance restructure January of '11. However, we also didn't predict the Europe crisis and all the rest. So, I think it is a clear sign that the programs we've implemented are making headway, in spite of the sluggish economies we're reporting sales growth i.e., modest a couple of points, but that couple of points generated very sizable OI returns and growth as a result of the Renaissance work that we did. So, as Mike talked in his earlier comments, we expect another 100 basis point improvement this year and we still see in total 1,000 basis points over the life of this program. It's just going to take more years to get as a result of the Europe crisis and then what if we had a 'more normal' European economic situation. But we feel great about it.

Operator: Nate Brochmann, William Blair & Company.

Nathan Brochmann - William Blair & Company: I wanted to talk a little bit on the pricing in the raw material upfront. Obviously, you got a little bit of relief heading into the end of the year relative to the big pressures that you saw at the beginning of the year. Obviously, still getting a little pressure in the first quarter, what gives you the confidence looking out through the year that getting you catch back up and that those raw material prices kind of abate?

Douglas M. Baker, Jr. - Chairman, President and CEO: I would say, here is how we're treating it. Our best estimate is that it abates in the second half of the year. That's what we think is going to happen. Our plans assume that it won't happen. So, we are out aggressively going after pricing and doing all the things that we know we need to do to make sure we continue to manage this situation until it shows itself to be as benign as we forecast. So, you have what you're going to do and you have what's forecast. We try not to let the forecast influence us unduly. So, my guess is that it abates. If I'm wrong, we're still going to have it covered. If I'm right, I think we'll be even happier.

Nathan Brochmann - William Blair & Company: Then just a follow-up back on the kind of Europe front. You talked about your customer retention being pretty strong last year which is obviously evident in the decent – good performance there. How are you seeing the customer retention in Europe, particularly the pressures that everyone is facing and given that you're still considered a premium-type product?

Douglas M. Baker, Jr. - Chairman, President and CEO: Yeah, well, we've done well in Europe, frankly all over the world, in terms of retention this year, across our major businesses. I would say while our products are priced premium, we generally prove to be lowest in used cost because of the savings that we deliver in Water, Energy, and the rest, and the longer people are with us the more they understand the economic benefits of our programs. So, we have historically been good at retaining customers, and I would say that's continuing, and we're having good success continuing to generate new customers. And you have to in this environment, because underneath the covers, if you will, we all know that there's real softness in the economy and so our version of same-store sales aren't going to be enough to drive the type of growth that we expect from ourselves.

Operator: Gary Bisbee, Barclays Capital.

Gary Bisbee - Barclays Capital: I guess following up on that last point, Diversey was out recently mentioning a large North American hospitality customer win that they implied was from you. I wondered if you'd comment or not – or if not on that, just more broadly, how do you see with them better capitalized and we hear hiring sales people in the marketplace again? How do you see them as a competitor? Has it changed much?

Douglas M. Baker, Jr. - Chairman, President and CEO: Yeah, I guess, Gary, to answer, we have always had a great deal of respect for Diversey. The best way for us to show the respect is to likewise be in a very aggressive competitor. We don't plan to change that. I would say in all cases we track wins and losses against every major competitor that we have and all the businesses that we're in. To a competitor, we have substantially more gains and losses last year that would include Diversey and that includes the victory that they're touting. We tend not to get into a account-by-account. I think we've learned over the years that if you're going to talk about your wins you probably should talk about all your losses too. And there is 1 million accounts that we handle over a year. I think at the end we're going to work to drive performance. We feel good about how we're doing that and we feel good about the momentum we have.

Gary Bisbee - Barclays Capital: And then the follow-up, just can you give us an update on how you're feeling about potential revenue synergies from Nalco? I know you weren't expecting a whole lot this past year, but is that on track? Any wins or any commentary you can give on how that's looking?

Douglas M. Baker, Jr. - Chairman, President and CEO: Yeah, so externally we had a very low target called zero; internally we had a little more ambitious target, and I would say we are handily ahead of our internal target. We've had more early success than I think we forecast and like the prospects going forward. So, when we announced the merger, we talked about $0.5 billion by 2016 and grow synergies, and we still believe that's very achievable.

Operator: Jeff Zekauskas, JPMC.

Jeffrey Zekauskas - JPMC: Could you talk about the conditions in the Global Water business in Asia; whether your business is growing or contracting and what are the factors at work?

Douglas M. Baker, Jr. - Chairman, President and CEO: Yeah, it's growing. Didn't grow every quarter all year, but improved steadily throughout the year, and I guess that's how we view it that some of the pressures on the Water business particularly in Paper occurred in Asia first and we see Asia coming out of it in many cases led by China. So I guess we view that as a positive story as we move forward. But of course varied by end market you have got more pressure where you might expect mining and some of the others which we addressed in the upfront comments. But the Water business we expect to continue to grow next year and to continue to have very good OI performance.

Jeffrey Zekauskas - JPMC: So when that business was part of Nalco it used to rack up, years where it would grow 20%. What are the factors that have slowed that rate of growth down? What do you see as a more normal growth rate for the Asian Water business?

Douglas M. Baker, Jr. - Chairman, President and CEO: Yes. Well it grew quite quickly in 2011 as well. I mean I don’t – if we are talking Asia Jeff in particular, because that's where the Water business was growing quite quickly. It wasn’t growing 20% globally and we expect that the Asian business has capability to do that again. I don't think its news that China in particular, which was the major fuel for that growth, hit let's call it a major speed bump in its industrial production in 2012. So certainly that had a real impact and China is moving out. I think we've talked about China improving in the second half as early as second quarter and we have seen steady improvement there. So we expect Asia to continue to be a very strong part of what's going to drive Water growth long term.

Operator: Dmitry Silversteyn, Longbow Research.

Dmitry Silversteyn - Longbow Research: Just a couple of questions if I may, first of all, the higher delivered cost that you keep talking about and you expect to see in 2013. Is that raw materials related on the product side, is it packaging, is it more people, feet on the street, is it higher gasoline cost, is it all of the above, can you sort of talk about what some of the drivers of your higher costs are?

Douglas M. Baker, Jr. - Chairman, President and CEO: Yeah, propylene has gone up, I mean, I think we've talked through the years about what our raw material areas are and not dramatically different than first quarter of last year, it's just moved up from fourth quarter of this year. But we have other pressures. However, I would say my expectation since '04; we have seen fairly consistent raw material pressures in our business. We've expanded margin during that period of time and all we are saying is we all noted a little bit of lag when we see the pressure from raw materials, it typically adds upfront a little bit of compression impact on our margins. Then through pricing and other actions, we have shown that we've been able to overcome these pressures with time. All we are trying to do is say; we see a little pressure in the early part of the year. We are not saying that it's going to impact the year; we are forecasting 13% to 17% EPS growth.

Dmitry Silversteyn - Longbow Research: Switching gears to the profitability of the other division in general and GCS specifically, can you let us know what the profitability gain or loss for GCS was in the fourth quarter and what your expectations are for 2013? Just an overall comment plus observations last question, your Other division's profitability has declined for the last couple of years on year-over-year basis, I understand the pest elimination business got probably something to do with that. You are now talking about more staffing cost in that business, what's the outlook for 2013 or perhaps the inflection point is going to happen later than that in that business.

Douglas M. Baker, Jr. - Chairman, President and CEO: I would say a couple of things. So there is three businesses really in there. One is a part of Pest, and that's where the staffing increases occurred, it's in our audit side of the business. Pest has been improving steadily with the top line problem we said we had to address in 2012, team did a very good job, they got top line momentum, they're now firmly in the mid-single-digits and working on improving from there. That gives you enough room to start driving Pest profitability because we can leverage on that type of growth. EcoSure, we have had to make investments throughout 2012, we'll start lapping them in the second half, but we expect EcoSure profits to improve next year. In GCS, we had a loss in the fourth quarter, but it was fairly small and the GCS business has continued to improve year-on-year, I would expect that to continue. So for that segment, I would say that we expect it to be creative i.e. to drive OI increase in '13 versus '12 and not be down.

Operator: John McNulty, Credit Suisse.

Elena Haiken - Credit Suisse: This is actually (Elena Haiken) sitting in for John. Quick question on the Champion acquisition. Can you talk about what's holding up the DOJ and where their real sticking point is?

Douglas M. Baker, Jr. - Chairman, President and CEO: No I can't. What I guess I can say is we continue to expect to be able to close in the first quarter and we continue to expect this to be a very, very good deal for us.

Elena Haiken - Credit Suisse: Then also when just thinking about headcount for 2013 versus 2012 globally, how do you think about maybe adding sales force on a global basis.

Douglas M. Baker, Jr. - Chairman, President and CEO: Yeah, this year organically we were up just north of 1%, but part of that is because we had opportunities when we were merging the Water businesses et cetera. Next year we'd probably be a little north of that in terms of expanding sales force a couple of percent is what I would expect.

Operator: David Ridley-Lane, Bank of America Merrill Lynch.

David Ridley-Lane - Bank of America Merrill Lynch: U.S. Cleaning & Sanitizing, which didn't have a project Renaissance, saw operating margin expand by 180 basis points for the full year. What is sort of the – if there are any things that you'd like to call out that are helping drive that other than just revenue leverage in that segment.

Douglas M. Baker, Jr. - Chairman, President and CEO: First of all, the way synergies were applied to the businesses, they impacted all segments to one degree or another because basically a lot of the synergy effort was on shared G&A and corporate costs as we discussed early. That was the first year's pressure as well as purchasing and purchasing again, you had shared raw material supplier that's going to affect all businesses. So, we are up in total for the business about 160 basis points, not just – I am talking about for the corporation. Year-on-year if you do pro forma margin increase at OI level and about 60 of that would be from synergies and 100 would be from what I would call just normal efforts. So, these normal efforts apply to many businesses, but they apply in particular to the U.S. Cleaning & Sanitizing. U.S. has been doing a great job in innovation. They've been driving new platforms in both ware washing, now on laundry, these commands substantially price per pound or kilo that the products that they're replacing, but they delivered 3 to 4x, if you will, in the premium, in terms of value to customers in Energy and Water reduction. So, those are great margin and enhancers as we continue to drive them. It's continue to be on pricing as we continue to see raw material pressure, so that needs to be a constant push. Then of course they work on fuel productivity and we've rolled our technology over the years that we've discussed in the field which enables our field to spend less time on paper work, more time selling, which means they can handle a few more accounts than they could pre-technology.

David Ridley-Lane - Bank of America Merrill Lynch: Then just curious, because I know you plan on finishing off the share repurchase authority. I think it's about $280 million or so. Are you waiting to do that until after the Champion acquisition closes and would that be something that happened relatively quickly or would you sort of measure that out over the course of the year?

Douglas M. Baker, Jr. - Chairman, President and CEO: We wouldn't need to wait until after the Champion business closes. Part of the Champion deal includes stock. I can't commit to an exact timetable, but once the Champion deal is closed, we have the ability to restart share repurchases.

Operator: Laurence Alexander, Jefferies.

Robert Walker - Jefferies: This is Rob Walker on for Laurence. I guess first on International, given the strong Q4 margins, what are your expectations for 2013 for that segment margins?

Douglas M. Baker, Jr. - Chairman, President and CEO: Well, we already discussed Europe, where we expect Europe margins to increase by another 100 basis points. That's by far in a way the biggest part of this segment. Latin American and Asia Pacific margins will also improve as we improve, if you will, scale their sales. Sales volume will translate into margin improvement because it's over pretty much a fix in existing infrastructure base. So, we'd expect both margins continue to improve mainly driven by Europe.

Robert Walker - Jefferies: And in terms of cash flow, what are your expectations for 2013 in terms of CapEx, working capital, pension funding, and I guess, should we assume cash restructuring charges of around $100 million or so?

Michael J. Monahan - SVP, External Relations: Rob, this is Mike. Really for free cash flow to about equal net income again in 2013, we haven't given a formal CapEx forecast. We were around $600 million in 2012. We'll probably be at the same ratio to sales going forward; maybe a little not on the same ratio to sales.

Operator: Mike Harrison, First Analysis.

Michael Harrison - First Analysis: A couple of questions for you. First on food and beverage, you've had a couple of weak revenue quarters there. Is that mostly market weakness or are you seeing some competitive pressures there? And maybe if you could talk about how you're responding to that weakness in an area that we've kind of come to expect above market growth rates?

Douglas M. Baker, Jr. - Chairman, President and CEO: Yeah. No, we feel very good about our prospects with our food and beverage business. A couple of things; I mean, there's been some softness in the protein segment which is been widely reported, but at the end of the day it's really just timing of when new businesses come on both in the base and coming on in the current year. We expect that business to be mid-single-digit performer going forward and continuing to drive very good (line) leverage.

Michael Harrison - First Analysis: And while you're speaking about timing Doug, I know that Kay business can be somewhat lumpy just looking at the strength in Q4. Was that more of a normal period, or did we kind of see an up-lump that might be unusually strong and was also hoping you could talk about what you are seeing on the food retail side? It sounded like that was not significantly stronger than what you were seeing in QSR.

Douglas M. Baker, Jr. - Chairman, President and CEO: Yes. The Kay business is I had say performing very well. I think it has since we acquired it and its driven by new business no doubt about it. We have had new business on both the QSR side and the food retail side. Food retail side has had outsized new business gains. Prospects here look good. But it will always be I guess lumpy in the sense of lumpy growth rate, but it just grows faster in some periods and in others it's – I don't want to start characterize it's cyclical to all because it's never shrunk that I know of in any quarter. it just keeps building on its past success and we see plenty of run rate for that business to continue to do that.

Michael Harrison - First Analysis: Then the last one's just on the Global Paper business, can you talk in a little greater detail about the strength you are seeing in the margins there, how sustainable that might be and specifically around this elimination of low margin business what was – can you quantify the sales drag associated with that? Kind of what customers – what kind of customers are they and how much further we have to go in those low margin elimination efforts?

Douglas M. Baker, Jr. - Chairman, President and CEO: I would say we are mostly through the pairing low margin customers. It was in won in a single part of the Paper industry we really – we do this regularly. We look at the top 10 worst contracts that we have. We determine how we are going to fix them. What do we need to do, in some cases you have to exit them particularly and we really judge a contract based on its gross profit, not necessarily on its operating income. Simply if you have a lousy gross profit, it's unfixable even with volume or growth of the customer over time. So we've done some of that work. I think the Paper team has managed in a difficult environment very well. They had a very strong year in terms of profit. The drag, I guess I would simply say has certainly impacted the business, but it's not like we would have chest pounding results on the top line if we hadn't undergone this. That business has been impacted by the economy. We will expect it to improve through 2013, but in either case we expect to have another strong year in terms of OI.

Operator: Mike Ritzenthaler, Piper Jaffray.

Michael Ritzenthaler - Piper Jaffray: My first question is around the Global Energy segment and you'd called out a couple of pockets of particular strength, Latin America, Middle East, Asia, we've heard that from a couple of others in this that participate in this space. Is there any aspect of Nalco that is a beneficiary of exposure in those regions and is there a competitive – any sort of competitive response that you need to make to ensure that that continues in '13?

Douglas M. Baker, Jr. - Chairman, President and CEO: I would say, one, several years ago, that business made a strategic move to go after if you will, the new oil in the new finds; and much of those during that period were in emerging markets or Africa, Latin America, et cetera, Russia. That move proved to be very wise. So we have a good position there, and it's a position that's been building, not shrinking. We have very, very high retention rates in that business and to sustain the business over the long-term we've got to continue to do what's gotten that business to where it is, be the innovation leader, continue to be aggressive in terms of going after new business, as it comes on and continue to hold on to it. I would say the business wins itself to high retention if you continue to do a good job because there is high risk in changing midstream. So, once you're on a platform or you're on the oil field you tend to keep that business as long as you perform. So, there is nothing about this business we really don't like. We're going to continue invest in it. Obviously our move in Champion indicates that it's an area that we like quite a bit mostly because it's a very similar model, much more or so than I think we imagined the first day we started looking at this merger possibility and we came to appreciate it through due diligence and have appreciated more as we want it.

Michael Ritzenthaler - Piper Jaffray: On Latin America I guess more broadly, is that, should we be thinking about Latin America as kind of a high single low double digit volume growth region as you look at all the various businesses that are exposed there, and as you continue to do share gains. I guess how much run rate do you feel is left there. It seems like it's a multiyear platform, but I think any other additional color you can give there would be helpful.

Douglas M. Baker, Jr. - Chairman, President and CEO: No, I think the Latin America market has a lot of runway. So we consider that a double-digit growth opportunity for the foreseeable future. We have great opportunities in virtually every business we're in. I think we've got a very strong team in Latin America running that business. It's a team that's been enhanced recently with additional manpower in both management and now in corporate accounts, so we like the Latin America business, I don't care if it's Energy, Water, Institutional, F&B, Kay, healthcare even. So, we've got plenty of opportunities.

Operator: P.J. Juvekar, Citi.

Eric Petrie - Citigroup: This is Eric Petrie standing in for P.J. Just first on healthcare. Is that growing slower than your expectations and are you looking into any bolt-ons to bolster growth?

Douglas M. Baker, Jr. - Chairman, President and CEO: Well, I would say the healthcare business last year as we annualized against some big acquisitions, it was double-digit globally, single digits in the U.S. I think it was about 4% or 5% in the U.S. and we expect that business that to continue to progress. I guess we expect more on the high-single-digit type growth rate on a global basis. It's going to flip back and forth year-on-year between Europe, which is our other big platform for that business. So, now, I would say, we feel very good about the healthcare business and its prospects and we expect it to continue to be a major contributor.

Eric Petrie - Citigroup: Then how long do you expect the Nalco related deal charges to continue? I know you called out $0.35 next year.

Douglas M. Baker, Jr. - Chairman, President and CEO: We're going to still have charges through 2014.

Eric Petrie - Citigroup: Any color on how to divide that $0.35 between like Champion and Nalco?

Douglas M. Baker, Jr. - Chairman, President and CEO: The $0.35 did not include – well, I mean, it's all Champion. It did not include the Champion numbers. It only include like the deal costs that we've swallowed to-date on Champion but none of the costs related synergies et cetera in Champion.

Operator: Robert Koort, Goldman Sachs.

Angel Castillo - Goldman Sachs: This is Angel Castillo on for Bob. Most of my questions have been answered, but I just wanted to expand a little bit more on Latin America. You mentioned – you've been pretty bullish. Today you mentioned you've been seeing some slowing in certain Latin American markets. So I was wondering if you could expand a little bit more on that.

Douglas M. Baker, Jr. - Chairman, President and CEO: I think the reference really wasn't our business per se. It was really to the underlying economic conditions in Brazil would probably be the prime example that there's been some slowing in Brazil. To date, we've been overcoming the slow down if you will by very big successes with new accounts.

Angel Castillo - Goldman Sachs: Then just to kind of expand on that as well, just you said – how much of that I guess would be market share versus pricing in Latin America, in the growth success we had there?

Douglas M. Baker, Jr. - Chairman, President and CEO: Our pricing is, depends by country, but obviously we've got some very high inflation countries like Argentina et cetera. In total around that region it's in the 3% to 4% range.

Operator: Shlomo Rosenbaum, Stifel Nicolaus.

Shlomo Rosenbaum - Stifel Nicolaus: Most of my questions have been answered. I just wanted probe a little bit more in Europe. You guys are doing I'd say a pretty good job in terms of moving the margins up there. I was wondering all things considered, are you seeing any stability in the end markets, in other words, have you seen the decline kind of abating over there? Can you just give us a little bit more color?

Douglas M. Baker, Jr. - Chairman, President and CEO: Well I would say steady would be a hard work to use in a sentence with Europe. So, I'll just describe Europe as – it's a very mixed story, but you've got – I guess my expectation on Europe is going to be much more the same this year as last year. We do not see significant degradation, but you still see real softness in countries I think you would expect, and particularly, Italy, Greece, Spain, and some of the other countries, and we expect to see that continue through this year. We think we will offset it, hence our forecast of growth. Now, we did it last year. I think our plan is right, and we expect to have nominal growth again in 2013. But Europe, I don't think it'd be fair to call it steady state right now.

Shlomo Rosenbaum - Stifel Nicolaus: And the synergies with Nalco are primarily going to come through the Global Water unit, is that correct – in terms of the sales synergies I'm talking?

Douglas M. Baker, Jr. - Chairman, President and CEO: What was that, Shlomo, we didn't catch up?

Shlomo Rosenbaum - Stifel Nicolaus: The sales synergies that you're expecting with Nalco, is that going to be shown primarily in the Global Water unit or in the food and beverage unit?

Douglas M. Baker, Jr. - Chairman, President and CEO: (indiscernible) in part will be – I think the new business activity with – call it, new customers selling this program and an existing customer, principally going to hit Water. We are seeing some F&B dragged into historic Water accounts which we'd also expect they've got some food business that F&B had not yet penetrated the plan. In technology, I think you're going to see the technology plays in Energy and in Institutional and in Water and F&B more spread.

Operator: Rosemarie Morbelli, Gabelli Company.

Rosemarie Morbelli - Gabelli & Company: Doug, when we talked about the Paper in Asia, you mentioned it was rather weak, but yet there is quite a lot of growth in that particular industry in Asia with paper mills expanding and new ones coming on stream. Is Nalco participating in those?

Douglas M. Baker, Jr. - Chairman, President and CEO: Yes. We are participating in a number of them. But I would say a number of the greenfield openings were delayed two to three quarters and those that were planned to open in the first half of '12 are now going to open in the first half of '13. So there were significant plant takedowns, greenfield delay openings and the rest in the Paper industry throughout Asia.

Rosemarie Morbelli - Gabelli & Company: If I could ask about healthcare. What is the size of that business currently and it seems to me as though it is not growing as you anticipated? Any help from insurance companies forcing hospitals to operate more in a more Sanitizing fashion?

Douglas M. Baker, Jr. - Chairman, President and CEO: Well the healthcare business globally is $600 million and it grew a little over 10% last year, 8% organic. So I guess as a – look we have high expectations. Would I like more out of that business, sure and if I told it grew at 15% in '12 I'd still say the same thing. But the business is performing quite well. It expanded margins and had very significant OI improvement as well during that period. So we like the healthcare business quite a bit. Still believe it's going to be and continue to be a major contributor to the corporation's growth.

Michael J. Monahan - SVP, External Relations: Thank you very much. It completes our call. So if you have any further questions please give Lisa or myself a call, otherwise have a great day. Thank you.

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