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Article by DailyStocks_admin    (09-01-11 01:24 AM)


Ecolab Inc. WILLIAM H III GATES bought 1393800 shares on 08-24-2011 at $ 49.37


Food & Beverage : Our Food & Beverage Division addresses cleaning and sanitation at the beginning of the food chain to facilitate the processing of products for human consumption. The Division provides detergents, cleaners, sanitizers, lubricants and animal health products, as well as cleaning systems, electronic dispensers and chemical injectors for the application of chemical products, primarily to dairy plants, dairy farms, breweries, soft-drink bottling plants, and meat, poultry and other food processors. The Food & Beverage Division is also a leading developer and marketer of antimicrobial products used in direct contact with meat, poultry, seafood and produce during processing in order to reduce microbial contamination. The Food & Beverage Division also designs, engineers and installs CIP (“clean-in-place”) process control systems and facility cleaning systems for its customer base. Products for use on farms are sold through dealers and independent, third-party distributors, while products for use in processing facilities are sold primarily by our field sales personnel. Also within the Food & Beverage Division, our Water, Energy & Waste business offers sustainable solutions designed to reduce our customers’ operational costs. This is performed through water treatment programs for heating, cooling and filtration processes, along with customized wastewater treatment offerings.

We believe that we are one of the leading suppliers of cleaning and sanitizing products to the dairy plant, dairy farm, food, meat and poultry, and beverage/brewery processor industries in the United States.

Kay : Ecolab’s Kay business unit supplies cleaning and sanitizing chemical products and related items primarily to regional, national and international quick service restaurant (QSR) chains and to regional and national food retailers (i.e., supermarkets and grocery stores). Its products include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products and assorted cleaning tools and equipment which are primarily sold under the “Kay” and “Ecolab” brand names. Kay’s cleaning and sanitation programs are customized to meet the needs of the market segments it serves and are designed to provide highly effective cleaning performance, promote food safety, reduce labor costs and enhance user and guest safety. A number of product dispensing options are available for products in the core product range. Kay supports its product sales with employee training programs and technical support designed to meet the special needs of its customers.

Both Kay’s QSR business and its food retail business utilize a corporate account sales force which establishes relationships and negotiates contracts with customers at the corporate headquarters and regional office levels (and, in the QSR market segment, at the franchisee level) and a field sales force which provides program support at the individual restaurant or store level. Customers in the QSR market segment are primarily supplied through third party distributors while most food retail customers utilize their own distribution networks.

We believe that Kay is the leading supplier of chemical cleaning and sanitizing products to the QSR market segment and the food retail market segment in the United States. While Kay’s customer base has grown over the years, Kay’s business remains largely dependent upon a limited number of major QSR chains and franchisees and large food retail customers.

Healthcare : Our Healthcare Division provides infection prevention and other healthcare related offerings to acute care hospitals, surgery centers, dental offices and veterinary clinics. The Healthcare Division’s proprietary infection prevention products (hand hygiene, hard surface disinfectants, instrument cleaners, patient drapes, fluid control products and equipment drapes) are sold primarily under the “Ecolab” and “Microtek” brand names to various departments within the acute care environment (Infection Control, Environmental Services, Central Sterile and Operating Room). The Healthcare Division’s Microtek Medical business, is a leader in niche branded specialty surgical drapes and fluid control products. The Healthcare Division sells its products and programs primarily through company-employed field sales personnel but also sells through healthcare distributors.

Textile Care : Our Textile Care Division provides chemical laundry products and proprietary dispensing systems, as well as related programs, to large industrial and commercial laundries. Typically these customers include free-standing laundry plants used by institutions such as hotels, restaurants and healthcare facilities as well as industrial and textile rental laundries. Products and programs include laundry cleaning and specialty products, related dispensing equipment, plus water and energy management which are marketed primarily through company-employed field sales personnel and, to a lesser extent, through independent, third-party distributors. The Textile Care Division’s programs are designed to meet our customers’ needs for exceptional cleaning, while extending the useful life of linen and reducing the customers’ overall operating cost.

Vehicle Care : Our Vehicle Care Division provides vehicle appearance products which include soaps, polishes, sealants, wheel and tire treatments and air fresheners. Products are sold to vehicle rental, fleet and consumer car wash and detail operations. Brand names utilized by the Vehicle Care Division include Blue Coral Ă’ , Black Magic Ă’ and Rain-X Ă’ .

United States Other Services Segment

The “United States Other Services” segment is comprised of two business units: Pest Elimination and GCS Service. In general, these businesses provide service or equipment which can augment or extend our product offering to our business customers as a part of our “Circle the Customer” approach.

Pest Elimination : Our Pest Elimination Division provides services designed to detect, eliminate and prevent pests, such as rodents and insects, in restaurants, food and beverage processors, educational and healthcare facilities, hotels, quick service restaurant and grocery operations and other institutional and commercial customers. These services are sold and performed by company-employed field sales and service personnel. In addition, through our EcoSure Food Safety Management business, we provide customized on-site evaluations, training and quality assurance services to foodservice operations.

GCS Service : GCS Service provides equipment repair and maintenance services for the commercial food service industry. Repair services are offered for in-warranty repair, acting as the manufacturer’s authorized service agent, as well as after warranty repair. In addition, GCS Service operates as a parts distributor to repair service companies and end users.

International Segment

We conduct business in approximately 72 countries outside of the United States through wholly-owned subsidiaries or, in the case of Venezuela, through a joint venture with a local partner. In other countries, selected products are sold by our export operations to distributors, agents or licensees, although the volume of those sales is not significant in terms of our overall revenues. Our largest International operations are located in Europe, Asia Pacific, Latin America and Canada, with smaller operations in Africa and the Middle East.

In general, the businesses conducted internationally are similar to those conducted in the United States but are managed on a geographic basis. The businesses which are similar to the United States’ Institutional and Food & Beverage businesses are the largest businesses in our International operations. They are conducted in virtually all of our International locations and, compared to the United States, constitute a larger portion of the overall business. Healthcare and Textile Care are also significant businesses in our International operations, particularly in Europe. Kay has sales in a number of International locations. A significant portion of Kay’s international sales are to international units of United States-based quick service restaurant chains. Consequently, a substantial portion of Kay’s international sales are made either to domestic or internationally-located third-party distributors who serve these chains.

Our Pest Elimination business continues to expand its geographic coverage. We operate this business in various countries in Asia Pacific, Western Europe, Latin America and South Africa, with the largest operations in France and the United Kingdom.

Our other businesses are conducted less extensively in our International locations. However, in general, most of the principal businesses conducted in the United States are also operated in Canada.

International businesses are subject to the usual risks of foreign operations, including possible changes in trade and foreign investment laws, tax laws, currency exchange rates and economic and political conditions abroad. The profitability of our International operations has historically been lower than the profitability of our businesses in the United States, due to (i) the smaller scale of International operations where many operating locations are smaller in size, (ii) the additional cost of operating in numerous and diverse foreign jurisdictions and (iii) higher costs of importing certain raw materials and finished goods in some regions. Proportionately larger investments in sales, technical support and administrative personnel are also necessary in order to facilitate the growth of our International operations.

Additional Information

Competition : Our business units have two significant classes of competitors. First, each business unit competes with a small number of large companies selling directly or through distributors on a national or international scale. Second, all of our business units have numerous smaller regional or local competitors which focus on more limited geographies, product lines and/or end-user segments.

Our objective is to achieve a significant presence in each of our business markets. In general, competition is based on customer support, product performance and price. We believe we compete principally by providing superior value, premium customer support and differentiated products to help our customers protect their brand reputation. Value is provided by state-of-the-art cleaning, sanitation and maintenance products and systems coupled with high customer support standards and continuing dedication to customer satisfaction. This is made possible, in part, by our significant on-going investment in training and technology and by our standard practice of advising customers on ways to lower operating costs and helping them comply with safety, environmental and sanitation regulations. In addition to our consultative approach, we emphasize our ability to uniformly provide a variety of related premium cleaning and sanitation programs to our customers and to provide that level of customer support to multiple locations of chain customer organizations worldwide. This approach is succinctly stated in our “Circle the Customer - Circle the Globe” strategy which is discussed above in this Item 1(c) under the heading “General.”

Sales : Products, systems and services are primarily marketed in domestic and international markets by company-trained field sales personnel who also advise and assist our customers in the proper and efficient use of the products and systems in order to meet a full range of cleaning and sanitation needs. Independent, third-party distributors are utilized in several markets, as described in the business unit descriptions found under the discussion of the three reportable segments above.

Number of Employees : We had approximately 26,500 employees as of December 31, 2010.

Customers and Classes of Products : We believe that our business is not materially dependent upon a single customer although, as described above in this Item 1(c) under the description of the Kay business, Kay is largely dependent upon a limited number of national and international quick service chains and franchisees. Additionally, although we have a diverse customer base and no customer or distributor constitutes 10 percent or more of our consolidated revenues, we do have customers and independent, third-party distributors, the loss of which could have a material negative effect on results of operations for the affected earnings periods; however, we consider it unlikely that such an event would have a material adverse impact on our financial position. No material part of our business is subject to renegotiation or termination at the election of a governmental unit. We sell two classes of products which each constitute 10 percent or more of our sales. Sales of warewashing products in 2010, 2009 and 2008 approximated 19 percent of our consolidated net sales. In addition, through our Institutional and Textile Care businesses around the world, we sell laundry products and provide customer support to a broad range of laundry customers. Sales of laundry products and services in 2010, 2009 and 2008 approximated 10, 11 and 11 percent, respectively, of our consolidated net sales.

Patents and Trademarks : We own and license a number of patents, trademarks and other intellectual property. While we have an active program to protect our intellectual property by filing for patents or trademarks, and pursuing legal action, when appropriate, to prevent infringement, we do not believe that our overall business is materially dependent on any individual patent or trademark.

Seasonality : We do experience variability in our quarterly operating results due to seasonal sales volume and business mix fluctuations in our operating segments. Note 17, entitled “Quarterly Financial Data” located on page 42 of the Annual Report, is incorporated herein by reference.

Working Capital : We have invested in the past, and will continue to invest in the future, in merchandising equipment consisting primarily of systems used by customers to dispense our cleaning and sanitizing products. Otherwise, we have no unusual working capital requirements.

Manufacturing and Distribution : We manufacture most of our products and related equipment in Company-operated manufacturing facilities. Some products are also produced for us by third-party contract manufacturers. Other products and equipment are purchased from third-party suppliers. Additional information on product/equipment sourcing is found in the segment discussions above and additional information on our manufacturing facilities is located beginning at page 16 of this Form 10-K under the heading “Properties.”

Deliveries to customers are made from our manufacturing plants and a network of distribution centers and third-party logistics service providers. We use common carriers, our own delivery vehicles, and distributors for transport. Additional information on our plant and distribution facilities is located beginning at page 16 of this Form 10-K under the heading “Properties.”

Raw Materials : Raw materials purchased for use in manufacturing our products are inorganic chemicals, including alkalis, acids, phosphorous materials, silicates and salts, and organic chemicals, including surfactants and solvents. These materials are generally purchased on an annual contract basis from a diverse group of chemical manufacturers. When practical, global sourcing is used so that purchasing or production locations can be shifted to control product costs at globally competitive levels. Our Healthcare Division purchases plastic films and parts to manufacture medical devices that serve the surgical and infection prevention markets. Pesticides used by our Pest Elimination Division are purchased as finished products under contract or purchase order from the producers or their distributors. We also purchase packaging materials for our manufactured products and components for our specialized cleaning equipment and systems. Most raw materials, or substitutes for those materials, used by us, with the exception of a few specialized chemicals which we manufacture, are available from several suppliers.

Research and Development : Our research and development program consists principally of devising and testing new products, processes, techniques and equipment, improving the efficiency of existing ones, improving service program content, and evaluating the environmental compatibility of products. Key disciplines include analytical and formulation chemistry, microbiology, process and packaging engineering and product dispensing technology. Substantially all of our principal products have been developed by our research, development and engineering personnel. At times, technology has also been licensed from third parties to develop offerings. Note 13, entitled “Research Expenditures” located on page 36 of the Annual Report, is incorporated herein by reference.

Environmental and Regulatory Considerations : Our businesses are subject to various legislative enactments and regulations relating to the protection of the environment and public health. While we cooperate with governmental authorities and take commercially practicable measures to meet regulatory requirements and avoid or limit environmental effects, some risks are inherent in our businesses. Among the risks are costs associated with transporting and managing hazardous materials and waste disposal and plant site clean-up, fines and penalties if we are found to be in violation of law, as well as modifications, disruptions or discontinuation of certain operations or types of operations including product recalls and reformulations. Additionally, although we are not currently aware of any such circumstances, there can be no assurance that future legislation or enforcement policies will not have a material adverse effect on our consolidated results of operations, financial position or cash flows. Environmental and regulatory matters most significant to us are discussed below.

Ingredient Legislation : Various laws and regulations have been enacted by state, local and foreign jurisdictions pertaining to the sale of products which contain phosphorous, volatile organic compounds, or other ingredients that may impact human health or the environment. Under California Proposition 65, label disclosures are required for certain products containing chemicals listed by California. Chemical management initiatives that promote pollution prevention through research and development of safer chemicals and safer chemical processes are being advanced by certain states, including California, Maine, Massachusetts, Minnesota and Oregon. Environmentally preferable purchasing programs for cleaning products have been enacted in nine states to date, and in 2010 were considered by several other state legislatures. Cleaning product ingredient disclosure legislation was re-introduced in the U.S. Congress in 2010 but did not pass, and several states including California and New York are considering further regulations in this area. To date, we generally have been able to comply with such legislative requirements by reformulation or labeling modifications. Such legislation has not had a material adverse effect on our consolidated results of operations, financial position or cash flows to date.


DOUGLAS M. BAKER, JR., age 52.

Biography — Chairman of the Board, President and Chief Executive Officer of Ecolab. Director of Ecolab since 2004.

Since joining Ecolab in 1989, Mr. Baker has held various leadership positions within our Institutional, Europe and Kay operations. Mr. Baker was named Ecolab's President and Chief Operating Officer in August 2002, was promoted to President and Chief Executive Officer in July 2004, and added the position of Chairman of the Board in May 2006. Prior to joining Ecolab in 1989, Mr. Baker was employed by The Procter & Gamble Company in various marketing and management positions.

Qualifications — Mr. Baker has more than 20 years of Ecolab marketing, sales and general management experience, including leadership roles in Ecolab's Institutional, Europe and Kay businesses before becoming Ecolab's Chief Operating Officer in 2002 and Chief Executive Officer in 2004. He has deep and direct knowledge of Ecolab's businesses and operations. In addition, his experience at The Procter & Gamble Company included various marketing and management positions, including in the institutional market in which Ecolab operates.

BARBARA J. BECK, age 50.

Biography — Chief Executive Officer, Learning Care Group, Inc., a leading for-profit early education/child care provider in North America. Director of Ecolab since February 2008. Member of the Compensation and Finance Committees.

Prior to joining Learning Care Group in March 2011, Ms. Beck spent nine years as an executive of Manpower Inc., a world leader in the employment services industry. From 2006 to 2011, Ms. Beck was President of Manpower's EMEA operations, overseeing Europe (excluding France), the Middle East and Africa. She previously served as Executive Vice President of Manpower's U.S. and Canada business unit from 2002 to 2005. Prior to joining Manpower, Ms. Beck was an executive of Sprint, a global communications company, serving in various operating and leadership roles for 15 years.

Qualifications — Ms. Beck has extensive North American and European general management and operational experience, including as a current CEO, allowing her to contribute to Ecolab's strategic vision particularly as it relates to Europe, the Middle East and Africa. With her Manpower knowledge of the impact of labor market trends on global and local economies combined with her knowledge of employment services, which tends to be a leading economic indicator, she provides timely insight into near-term projections of general economic activity. As an executive at Sprint, Ms. Beck obtained experience in the information technology field which is relevant to Ecolab's development of its ERP systems as well as field automation tools.

JERRY W. LEVIN, age 66.

Biography — Chairman and Chief Executive Officer of Wilton Brands Inc., a consumer products company. Also Chairman of JW Levin Partners LLC, a private investment and advisory firm. Director of Ecolab since 1992. Lead Director, Chairman of the Governance Committee and Vice Chair of the Compensation Committee.

Mr. Levin served in a number of senior executive positions with The Pillsbury Company from 1974 through 1989. In 1989, he joined MacAndrews & Forbes Holdings, Inc. which controlled Revlon, Inc. and The Coleman Company, among other companies. From 1989 through 1997, Mr. Levin served in various capacities at the Coleman Company, Inc., Revlon, Inc., Revlon Consumer Products Corporation and the Cosmetic Center, Inc., including as Chairman and/or Chief Executive Officer. Mr. Levin served as Chairman and Chief Executive Officer of American Household, Inc. (formerly known as Sunbeam Corporation) from 1998 to 2005. He joined the Board of Sharper Image in July 2006, and served as interim CEO from September 2006 to April 2007. He became Chairman and Chief Executive Officer of Wilton Brands in 2009.

Qualifications — Mr. Levin has more than 30 years of public company operating experience, including as Chairman and/or Chief Executive Officer of Coleman, Revlon and American Household, and has served on numerous public company boards. In addition to his experience leading companies, he has a background and expertise in mergers and acquisitions, which allows him to provide the company guidance and counsel for its acquisition program. He has experience in operating companies in diverse industries, giving him a unique perspective to provide advice to the Company regarding its many operating units. In addition, with 19 years on Ecolab's Board, Mr. Levin is our longest serving director and has developed a deep knowledge of our business. His long history with the Company, combined with his leadership skills and operating experience, makes him particularly well suited to be our Lead Director.


Biography — Chairman of the Board of The Mosaic Company, a leading producer and marketer of crop and animal nutrition products and services. Director of Ecolab since 1999. Vice Chair of the Audit Committee and Vice Chair of the Governance Committee.

Mr. Lumpkins, who retired as Vice Chairman and a director of Cargill Inc. in 2006, began his career with the company in 1968, and served in various finance and general management positions. Named President of the Financial Services Division in 1983 and Chief Financial Officer for Cargill Europe in 1988. Served as Chief Financial Officer of Cargill from 1989 to 2005, and elected to Cargill's Board of Directors in 1991. Elected Vice Chairman in 1995.

Qualifications — Mr. Lumpkins' nearly 40-year career at Cargill, a large and diverse global industrial company, which operates in the food industry and chemicals industry, provides him with background in two industries relevant to Ecolab. His service in various domestic and international senior operating and financial roles at Cargill, including as Chief Financial Officer, allows him to contribute both strategic direction and sophisticated financial management advice to the Company. As Chairman of the Board of Mosaic, he also has current experience leading a public company Board.


Biography — Chairman of the Board of Sterling Financial Corporation, the bank holding company for Sterling Savings Bank, a Pacific Northwest regional community bank. Also, Chief Executive Officer of Greendale Capital, LLC, a private investment and consultive company. Director of Ecolab since 1997. Chairman of the Finance Committee and member of the Compensation Committee.

After holding various positions with Citicorp and Bank of America, Mr. Biller joined Norwest Corporation in 1987 as Executive Vice President in charge of strategic planning and acquisitions for Norwest Banking. Appointed Executive Vice President in charge of South Central Community Banking in 1990. Mr. Biller served as President and Chief Operating Officer of Norwest Corporation from February 1997 until its merger with Wells Fargo & Company in November 1998. Mr. Biller retired as Vice Chairman and Chief Operating Officer of Wells Fargo & Company in October 2002. He became Chairman of Sterling Financial Corporation in 2010.

Qualifications — Throughout his career in banking, including as Vice Chair and Chief Operating Officer of Wells Fargo, Mr. Biller gained extensive public company senior management and board experience. Having spent a significant part of his career in international assignments in Europe, he is familiar with operating businesses in that region, which allows him to provide advice and guidance relevant to our significant European operations. He has extensive knowledge and experience in banking, treasury and finance, which enables him to provide insight and advice on financing, treasury and enterprise risk management areas. As a chemical engineer, he is familiar with chemicals manufacturing and distribution, which allows him to relate well to our operations.


Biography — Chairman of the Board of Citibank, N.A. and Chairman Emeritus and retired Chairman of the Board of U.S. Bancorp, a financial services holding company. Director of Ecolab since 1999. Chairman of the Compensation Committee and Vice Chair of the Finance Committee.

Following an extensive career in the commercial banking industry, including serving as Vice Chairman of the Board of BankAmerica Corporation, Mr. Grundhofer joined Star Banc Corporation as President and Chief Executive Officer in 1993, assuming the Chairman post in December 1993. In November 1998, Star Banc acquired Firstar Corporation and he assumed the position of President and Chief Executive Officer of Firstar Corporation. In 2001, following a merger of Firstar Corporation and U.S. Bancorp, Mr. Grundhofer was named President and CEO of U.S. Bancorp and added the position of Chairman of the Board in 2003. Mr. Grundhofer retired as CEO in 2006, and as Chairman of the Board in December 2007.

Qualifications — Mr. Grundhofer has more than 40 years leadership experience in the banking and financial services industry, including as Chairman and Chief Executive Officer of U.S. Bancorp. His senior operating experience and public company board experience give him an understanding for leading a public company and allow him to provide strategic vision to the company. He has extensive knowledge and experience in banking, treasury and finance, which enables him to provide insight and advice on financing, treasury and enterprise risk management areas. He also possesses extensive experience with mergers and acquisitions.


Overview of the Second Quarter Ended June 30, 2011

We reported strong adjusted earnings per share growth in the second quarter. Sales increased, led by good growth from our U.S. Cleaning and Sanitizing segment, Asia Pacific and Latin America. Increased sales and improving international profits more than offset higher delivered product costs.

Both 2011 and 2010 results of operations included special gains and charges, as well as discrete tax items which impact the year over year comparisons.

Sales Performance

• Consolidated net sales increased 12% to $1.7 billion. Excluding the impact of acquisitions, sales increased 9%. Net sales were favorably impacted by foreign currency exchange during the quarter. When measured in fixed rates of currency exchange, net sales grew 8%.

• U.S. Cleaning & Sanitizing sales rose 9% to $752 million. Excluding the impact of acquisitions, sales rose 6%. Results were led by 10% sales growth for Food & Beverage, 7% growth for Kay, 4% growth for Institutional and 27% growth for Healthcare. Excluding acquisitions, Healthcare sales were flat compared to the prior year.

• U.S. Other Services sales increased 1% to $116 million. GCS sales grew 7% while Pest Elimination sales were comparable to the prior year.

• International sales, when measured in fixed rates of currency exchange, increased 7% to $781 million in the second quarter. Excluding the impact of acquisitions and divestitures, fixed currency sales increased 5%. Asia Pacific reported 16% sales growth for the quarter (5% growth excluding impact from acquisitions) while Latin America reported sales growth of 14%. Canada sales rose 7% for the quarter and Europe/Middle East/Africa (“EMEA”) sales increased by 3%. When measured at public currency rates, International sales increased 16%.

Financial Performance

• Operating income decreased 3% to $198 million. Excluding the impact of special gains and charges from both years, adjusted operating income increased 11% compared to the second quarter of 2010.

• Net income attributable to Ecolab decreased 3% to $126 million. Excluding the impact of special gains and charges, and discrete tax items, adjusted net income attributable to Ecolab increased 14%.

• Reported diluted earnings per share attributable to Ecolab of $0.53 decreased 2% compared to the second quarter of 2010. Excluding the impact of special gains and charges, and discrete tax items, adjusted diluted earnings per share attributable to Ecolab increased 14% to $0.64 for the second quarter of 2011 compared to $0.56 in the second quarter of 2010.

Gross Profit Margin

The gross profit margin (“gross margin”)(defined as the difference between net sales less cost of sales divided by net sales) was 49.3% and 50.7% for the second quarter of 2011 and 2010, respectively. Our gross margin for the first six months of 2011 and 2010 was 49.3% and 50.3%, respectively. The gross margin decrease resulted from higher delivered product costs, which more than offset the impact of volume and pricing gains.

Selling, General and Administrative Expense

Selling, general and administrative expense as a percentage of consolidated net sales were 35.9% for the second quarter of 2011 compared to 37.2% in 2010. For the first six month periods, selling, general and administrative expenses were 37.0% of sales in 2011 and 38.1% of sales in 2010. Leverage from sales gains in 2011 more than offset cost increases.

Segment Results (Continued)

U.S. Other Services sales increased 1% in the second quarter of 2011 and 2% for the first six months of 2011. Sales for our U.S. Other Services businesses were as follows:

• Pest Elimination - Sales were flat to the prior year periods both for the second quarter and first six months of 2011. Gains in the hospitality, food & beverage plant, healthcare and grocery segments were offset by slow conditions in other major segments. Contract sales increased marginally, offset by a small decrease in non-contract sales.

• GCS Service - Sales grew 7% for the both the second quarter and first six months of 2011. Service and installed parts sales increased, benefiting from pricing gains and new accounts. Direct parts sales showed improvement in the second quarter compared to the prior year.

We evaluate the performance of our International operations based on fixed rates of foreign currency exchange. Fixed currency sales for our International operations increased 7% and 6% for the second quarter and six months of 2011, respectively. Excluding the impact of acquisitions and divestitures, fixed currency sales increased 5% for both the second quarter and six months ended 2011. When measured at public currency rates, International sales increased 16% for the second quarter of 2011 and 11% for the first six months of 2011. Fixed currency sales changes for our International regions were as follows:

• EMEA - Sales increased 3% for the second quarter and 2% for the first six months of 2011. For the second quarter, sales growth in MEA, Germany and the U.K. was partially offset by lower sales in France and Italy. From a divisional perspective, Europe’s Food & Beverage sales rose during the quarter, driven by market share gains through corporate accounts. Healthcare and Pest Elimination sales also increased during the second quarter. Institutional sales were flat for second quarter and Textile Care sales were slightly lower compared to the prior year.

• Asia Pacific - Sales increased 16% for the both the second quarter and first six months of 2011. Excluding the impact of acquisitions, sales increased 5% and 6% for the second quarter and first six months of 2011, respectively. Sales growth was driven primarily by increases in China and Australia. From a divisional perspective, Institutional sales remained strong as occupancy levels showed improvement. Food & Beverage also continued to report strong sales growth, benefiting from increased product penetration and account gains.

• Latin America - We continue to see strong sales growth in Latin America, as sales increased 14% for the second quarter and 13% for the first six months of 2011. At a country level, Brazil, Chile and Mexico all showed strong sales gains. Our Institutional, Food & Beverage and Pest Elimination businesses all reported double-digit increases in sales.

• Canada - Sales increased 7% for the second quarter and 2% for the first six months of 2011. For the quarter, solid growth in both Institutional and Food & Beverage led the sales increase. Institutional sales were comparable to the prior year for the first six months of 2011.

Financial Position and Liquidity

Total assets were $5.4 billion as of June 30, 2011, compared to total assets of $4.9 billion at December 31, 2010. The increase is due partially to acquisitions, which added $0.3 billion to total assets. Also driving the increase is the impact of foreign currency exchange rates which increased the value of international assets on our balance sheet when translated into U.S. dollars.

Total debt was $1.1 billion as of June 30, 2011 and $846 million as of December 31, 2010. The ratio of total debt to capitalization (total equity plus total debt) increased to 32% at June 30, 2011 compared to 28% at December 31, 2010. The increases in debt and the debt to capital ratio were due primarily to the O.R Solutions, Inc. acquisition, the $100 million voluntary contribution to our U.S. pension plan and share repurchases. We are in compliance with all of our debt covenants and believe we have sufficient borrowing capacity to meet our foreseeable operating needs.

Cash provided by operating activities totaled $302 million for the first six months of 2011 compared to $365 million in 2010. Operating cash flow in 2011 was negatively impacted by a $100 million voluntary contribution to our U.S. pension plan. We continue to generate strong cash flow from operations which has allowed us to continue to fund our ongoing operations, investments in the business, acquisitions, pension obligations and return cash to shareholders through share repurchases and dividend payments.

Cash used for investing activities was $464 million in 2011 compared to $135 million in 2010. Cash paid for acquisitions increased in 2011 due primarily to the acquisitions of the Cleantec business of Campbell Brothers Ltd. and O.R. Solutions, Inc. in the first quarter. There was minimal acquisition activity during the first six months of 2010. See Note 7 for further information on our business acquisition activity. Increases in capital expenditures compared to the prior year were partially offset by a decrease in software investments.

Cash provided by financing activities in 2011 included an increase of $362 million related to net issuances of commercial paper and notes payable. This increase was used to fund acquisition activity, a long-term debt repayment, the voluntary U.S. pension contribution and share repurchases. 2011 included the repurchase of 2.4 million of our common shares for approximately $120 million under our share repurchase program. During the first six months of 2010 we repurchased 4.5 million of our common shares for approximately $200 million.

The schedule of contractual obligations included in the Financial Position and Liquidity section of our Form 10-K for the year ended December 31, 2010 disclosed total notes payable and long-term debt due within one year of $189 million. As of June 30, 2011, the total notes payable and long-term debt due within one year has increased to $404 million. The increase from year end is primarily due to an increase in our outstanding U.S. commercial paper. Our gross liability for uncertain tax positions was $48 million as of June 30, 2011 and $66 million as of December 31, 2010. There are specific positions within the 1999 through 2001 examinations that are still open with the IRS. The decrease in the liability balance was due primarily to the settlement of our 2007 through 2008 IRS audit and corresponding adjustments to prior year reserves. We are not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, we do not expect significant payments related to these obligations within the next year.

Excluding the impact of the recently announced planned merger with Nalco which will require the issuance of shares, we currently expect to fund all of the cash requirements which are reasonably foreseeable for the next twelve months, including scheduled debt repayments, new investments in the business, dividend payments, possible business acquisitions and pension contributions with cash from operating activities, cash reserves and short-term or long-term borrowings. We expect to fund the cash portion of the planned merger with Nalco by accessing the capital markets through a combination of short-term and long-term debt.

Financial Position and Liquidity (Continued)

As of June 30, 2011, we had $163 million of cash and cash equivalents on hand and expect our operating cash flow to remain strong. Additionally, we have a $600 million multi-year credit facility with a diverse portfolio of banks which expires in June 2012. The credit facility supports our $600 million U.S. commercial paper program and our $200 million European commercial paper program. Combined borrowing under these two commercial paper programs may not exceed $600 million. As of June 30, 2011, we had $361 million in outstanding U.S. commercial paper, with an average annual interest rate of 0.1%, and no amounts outstanding under our European commercial paper program. Both programs are rated A-1 by Standard & Poor’s and P-1 by Moody’s. As a result of the recently announced planned merger with Nalco, we intend to replace the multi-year credit facility with a larger facility and correspondly upsize our commercial paper program. In light of the additional borrowing needs due to the planned Nalco merger, the ratings agencies are reviewing the ratings of our programs, and both have put us on a negative watch for a potential downgrade.

New Accounting Pronouncements

For information on new accounting pronouncements, see Note 12.

Subsequent Events

On July 19, 2011, we entered into an agreement and plan of merger with Nalco Holding Company (“Nalco”), under which Nalco will be merged with a subsidiary of our company. Based in Naperville, Illinois, Nalco is the world’s leading water treatment and process improvement company, offering water management sustainability services focused on industrial, energy and institutional market segments. Nalco delivers significant environmental, social and economic performance benefits to customers through value-added services in water treatment and management, pollution reduction programs, energy conservation, and oil and gas extraction efficiency and sustainability offerings. Nalco sales were approximately $4.3 billion in 2010.

Under the terms of the merger agreement, Nalco shareholders will have the option to receive either 0.7005 shares of Ecolab common stock or $38.80 per Nalco share in cash, without interest, subject to proration such that the overall consideration paid to Nalco shareholders will be approximately 70% in Ecolab shares and 30% in cash. Subject to the terms of the merger agreement, we will issue approximately 68.9 million shares of Ecolab stock and pay approximately $1.6 billion in cash to Nalco shareholders. This represents a fully-diluted offer value for Nalco’s equity of $5.4 billion and, inclusive of $2.7 billion in Nalco net debt, a total transaction value of $8.1 billion, based on our closing stock price on July 19, 2011, the last stock trading day prior to the announcement of the merger.

The transaction is expected to close in the fourth quarter, subject to customary closing conditions, regulatory clearance, as well as approval of both our and Nalco’s shareholders.

On August 1, 2011, we were served with a purported class action lawsuit, filed in Illinois state court, by a purported Nalco shareholder alleging that the directors of Nalco breached their fiduciary duties in connection with Nalco’s decision to enter into the merger agreement, and that Ecolab aided and abetted such breach. The plaintiff seeks declaratory and equitable relief, including an order enjoining consummation of the merger. Ecolab believes that the allegations are without merit and intends to vigorously defend itself against the lawsuit.


Michael Monahan

Thank you. Hello, everyone, and welcome to Ecolab's second quarter conference call. With me today are Doug Baker, Ecolab's Chairman, President and CEO; and Steve Fritze, Ecolab's Chief Financial Officer. A copy of our earnings release and 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 Slides 2 and 3. Stating of this teleconference and the slides include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent Form 10-K under Item 1A, risk factors, in our second quarter earnings release and in our recent Nalco merger agreement and on Slide 2. We also refer you to Slide 3, which describes additional merger information and where to find it, as well as participants in this merger.

This conference call does not constitute an offer to sell or a solicitation of an offer to buy any securities. We also refer you to the supplemental diluted earnings per share information that is also in the release. Starting with Slide 4, we delivered an accelerated sales and profit gain in the second quarter. We leveraged the improved sales volume and pricing growth, along with strong acquisition performances to offset the significant run-up in delivered product costs and produce a double-digit increase in our adjusted earnings per share. Our actions to transform our Europe business into a higher growth and more profitable geography are going well and we remain confident in our prospects for a substantial margin improvement.

Looking ahead, we expect to continue outperforming our generally improving markets and show continued strong quarterly earnings gains in the second half as better sales growth, pricing, innovation and margin leverage work to deliver double-digit adjusted EPS growth once again in 2011. Reflecting this robust outlook, we raised our forecasted adjusted earnings for the full year to $2.52 to $2.56 per share, excluding the impact of a recently announced merger agreement with Nalco. Further, we believe these continued improving business trends, along with accelerating benefits from our Europe transformation and the additional growth opportunities from the Nalco merger will lead to better EPS growth for Ecolab in the years ahead.

Moving to some highlights from the quarter as shown on Slide 5 and discussed in our press release, reported second quarter earnings per share declined 2% to $0.53. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, second quarter 2011 earnings per share increased 14% to $0.64, which was at the top end of our forecasted range. The adjusted earnings per share growth was driven by better volume and pricing from new products and new account gains, along with the strong performance from acquisitions, which more than offset higher delivered product and other costs.

We enjoyed strong sales growth in our U.S. Cleaning & Sanitizing, Asia Pacific and Latin America operations. In the U.S., we benefited from an improved momentum across the board, including our Food & Beverage, Kay, Institutional and GCS divisions. We continue to be aggressive, focusing on accelerating our top line growth, as we emphasize our innovative products and service strengths to help drive increased market share in our core businesses and deliver new account acquisition among our national, regional and independent prospects. We are implementing 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. We are underway with our actions to improve growth and profitability in our Europe business. While still early in our process, we are seeing good initial results and we continue to expect strong margin improvement for the full year 2011 and more significant progress over the next several years. And we are also making significant investments in key growth businesses and acquisitions to build future growth. This includes last week's announcement of our merger agreement with Nalco, which we believe will bolster our opportunities set for customers and position us as the leader in additional high-growth markets that leverage our mutual core strengths in product technology and sales and service execution.

Looking ahead, we expect continued strong adjusted quarterly earnings growth through 2011, as pricing, innovation and efficiency improvements, along with favorable currency trends offset the impact of higher delivered product costs and as our restructuring efforts accelerate. We look for our third quarter adjusted EPS to be in the $0.73 to $0.75 range, compared with adjusted EPS of $0.66 in the third quarter 2010. We raised our full year forecast and outlook for 2011 adjusted EPS to be in the range of $2.52 to $2.56 per share, showing a 13% to 15% gain over last year, excluding the prospective impact from the Nalco, which is expected to close in the fourth quarter. That EPS gain would represent the ninth year in the last 10 of adjusted double-digit EPS growth.

In summary, we expect 2011 to reflect a strengthening performance by Ecolab as we show strong earnings gains to once again deliver attractive growth and shareholder returns, and set the stage for improved results in the years ahead.

Ecolab's reported consolidated sales for the second quarter increased 12%. Looking at the components, volume and mix increased 4%, pricing rose 1%, acquisitions were 3% and currency increased sales by 4%. Slide 6 includes sales growth by segment and division. Sales for the U.S. Cleaning & Sanitizing operations rose 9%. Adjusted for acquisitions, sales increased 6%. Institutional sales improved in the second quarter, growing 4%. Sales initiatives targeting new accounts and effective product and service programs continue to lead our results. Our markets were mixed, with further expansion in lodging and softer food servers' foot traffic. We are introducing more new products that deliver improved value to reduce labor, water and energy costs for customers in our warewashing, laundry and housekeeping markets, as we continue driving our growth and industry leadership. We showed a number of these at the National Restaurant Show in May and are confident these solutions will have important benefits for our customers and business results. These new products include Solid Power XL, our new concentrated warewashing product that provides 50% more cleaning power per capsule, as well as the Cleaning Caddy, which won an industry innovation award and provides customers with the ability to more frequently clean their restrooms with less downtime, thereby saving money and improving guest and employee satisfaction. We're also making additional investments in our sales and service force and leveraging additional marketing initiatives to drive sales growth. We expect these growth initiatives, as well as additional pricing, to help offset raw material inflation and deliver improving institutional sales gains over the balance of the year.

Kay's second quarter sales were up 7%, led by strong new account growth from food retail. We expect continued good new account growth in food retail, along with better quick service sales in Kay's third quarter. Reported sales for Textile Care increased 70%. Adjusted foreign acquisitions, sales were up a solid 9%. Good customer gains, momentum from new product launches and additional sales within existing customers more than offset soft but improving industry conditions. We expect to have further gradual improvement in textile industry conditions, when combined with our strength in Textile Care business, will yield good sales growth, and again in the third quarter.

Healthcare sales increased 27%. Excluding the acquisition of OR solutions, sales were flat as we compare it against a large one-time government order in the prior year and the transfer of some sales to Ecolab International segment. Adjusting for these items, U.S. Healthcare division sales increased 5%. The equipment and patient drapes, hand hygiene and instrument processing led the sales gain. We continue to be pleased with the acquisition of OR solutions. It is performing well. We also continue to see new account gains from our OptiPro instrument reprocessing line for central sterile and further progress in our EnCompass environmental hygiene line for patient room hygiene.

Looking ahead, third quarter sales are expected to show continued good organic and strong reported sales gains. Food & Beverage sales grew 10%, led by strong water management sales. Sales increased in most 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 and is expected to show strong growth in the third quarter. EcoCare sales increased 3%. Division continues focusing on new products and accounts. EcoCare once again outperformed its markets, offsetting mixed and market conditions with good growth led by In-Bev and auto dealership volume. We look for our Vehicle Care to continue showing year-over-year sales growth in the third quarter.

Sales for U.S. Other Services rose 1% in the second quarter. Pest elimination sales were flat as gains in food processing, healthcare and food retail were offset by slow conditions in other major end markets. We continue to develop new product and program solutions to better meet our customer needs and differentiate our offerings. Recent new program launches like Guardian Plus for full-service restaurants and bedbug treatments in non-hospitality markets, such as long-term care, retail and restaurants are showing good results. We expect our new products and programs, along with aggressive selling, to help offset the soft markets and yield sales improvement in the second half of the year.

GCS sales increased 7% in the quarter. Once again, profitability improved over last year. New account wins and appropriate pricing helped to drive the sales gain. We remain focused on developing chain account relationships and driving sales through their regional and franchise organizations. We expect GCS to show continued sales growth and improved profitability in the third quarter. Measured in fixed currencies, international sales increased 7%. Adjusted for acquisitions, sales increased 5%. Europe, Middle East and Africa sales rose 3% in the second quarter at fixed currency rates. Europe's Institutional second quarter sales increased modestly adjusted for divestitures. New business gains among regional and local customers leveraged new products that offer customers superior results, cost savings and better efficiency to deliver the increase.

Food & Beverage sales rose nicely over last year, reflecting market share gains. Food & Beverage continues to focus on corporate accounts, emphasizing the cost savings benefits of our innovative products. Textile Care sales declined modestly in a continued weak market. And Europe Healthcare sales showed a solid increase as gains in pharmaceutical and infection prevention led the growth. After Europe reported a solid increase benefiting from operational improvements as well as seasonal shifts that will be partially offset in the second half. Our work to improve operating efficiency in our Europe operations is well underway and showing good progress. We're nearly finished with the rightsizing of our European headquarters. We have implemented logistics improvements in France. We opened our shared services center in East Europe, with the first transfers of work completed. In addition, discussions with the works councils had been successfully concluded. We are still early in the process, with more actions to be taken, as we work to realize the approximately 100 basis point margin improvement in 2011 from transformation activities, and double that in each of the next 2 years.

Looking ahead, we expect Europe's third quarter fixed currency sales to show continued modest growth. We are seeing the expected margin improvement from our transformation work, though it will be offset by higher delivered product costs and higher variable compensation in the third quarter. However, we expect the fourth quarter profits will be markedly better.

Asia Pacific sales grew 16% in fixed currencies. Adjusted for acquisitions, sales grew 5%. We estimate the effects of the earthquake in Japan reduced that second quarter sales gain by about 3 percentage points. Institutional sales, adjusted for the Cleantech acquisition and the impact of the Japan earthquake, were strong. Food & Beverage sales also showed strong organic growth. Both the beverage and brewing sectors continued their increase, benefiting from improved product penetration and account gains. Looking ahead, Asia Pacific expects continued good sales growth in the third quarter but there will be, perhaps, 1 percentage point of negative impact on Asia-Pacific's third quarter growth from the earthquake in Japan.

Second quarter sales for Ecolab's Canadian operations increased 7% in fixed currency rates. Strong growth in the core businesses drove the strong results. Latin America reported a strong sales gain, rising 14% in fixed currencies, as all divisions in their region grew double digits. Institutional growth was driven by new accounts, increased product penetration and continued success with global and regional accounts. Food & Beverage sales reflected good demand in the beverage and brewing markets, as well as the benefits of new accounts. And Pest Elimination sales showed us double-digit gain. Overall, we expect attractive growth trends to continue in Latin America and they should yield a solid gain in the third quarter.

Turning to margins on the income statement in Slide 7 in our presentation, second quarter gross margins decreased 140 basis points to 49.3%. The decrease primarily reflected the impact of higher delivered product costs, which more than offset the impact of volume and pricing gains. We expect that the second quarter will be the peak in terms of year-over-year impact from the higher delivered product costs in North America, and in total, and that pricing and cost reduction actions that are underway will increasingly offset the cost impact in future quarters. We anticipate that the delivered product costs will peak in Europe in the third quarter.

SG&A expenses represented 35.9% of sales, 130 basis points below last year. Leverage from the sales gains and acquisitions more than offset cost increases. Operating income for Ecolab's U.S. Cleaning & Sanitizing segment rose 3%. Adjusted for acquisitions, U.S. Cleaning & Sanitizing operating income was off 4%, as higher delivered product costs more than offset pricing and volume gains in the quarter. Operating income for U.S. Other Services declined 15% as higher service delivery and other costs more than offset pricing and cost savings actions. International fixed currency operating income increased 26% versus last year, while margins expanded 130 basis points. Volume and pricing gains, along with improved efficiencies, more than offset higher delivered product costs.

Corporate segment and tax rate are discussed in the press release. We repurchased 0.9 million shares during the second quarter. The nether's [ph] performance is that Ecolab's reported second quarter diluted earnings per share of $0.53 compared with $0.54 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 14% to $0.64 when compared with $0.56 earned a year ago.

Turning to Slide 8, Ecolab's balance sheet and cash flow remain strong. Total debt to total capital was 32% at June 30, compared with 34% reported a year ago. Our net debt was 27%. As detailed in Slide 9, we will continue to take aggressive actions in 2011 to drive both our top and bottom lines, expanding our market share and customer penetration, using differentiated new products and leveraging our investments in our key growth markets. We are using pricing and innovation to benefit margins, and along with favorable currency trends, expect to more than offset delivered product cost increases in the second half.

Further, recent acquisitions will be a meaningful contributor to 2011 earnings growth. Europe's work to transform itself into a higher growth and more profitable operation continues to go very well and we continue to look for about 100 basis points of margin improvement from Europe in 2011, though higher raw material costs and higher variable comp will offset that progress in the third quarter. Despite this short-term impact, we expect the results from our actions to accelerate in the fourth quarter of 2011 and continue to increase significantly over the next several years.

Looking at the third quarter 2011, we expect adjusted earnings per share, excluding special gains and charges and discrete tax items, to be in the $0.73 to $0.75 range compared with the adjusted earnings per share of $0.66 earned a year ago. We raised both the top and bottom of our full year estimate by $0.03 and now look for full year 2011 earnings per share to increase 13% to 15% to the $2.52 to $2.56 range, excluding the impact of our recently announced agreement to merge with Nalco. We expect the second half gains to be driven by improving sales volume, higher pricing, cost savings, acquisitions and the actions we are taking to improve your profits.

In summary, as noted on Slide 10, we deliver at the top end of our forecast range in the second quarter while offsetting higher delivered product costs and while still investing in our future. We look for the third quarter to show continued growth, and for 2011 to represent our ninth year of adjusted double-digit EPS growth out of the last 10 years. And we expect the investments and actions we are now taking will yield better sales and EPS growth in 2012 and '13. We are very excited by the potential of the merger with Nalco. Nalco's position in large and high-growth markets, its technology and sales and service leadership, offer substantial compelling benefits for our customers and provide significant additional growth drivers for our business. In response to questions we received following the announcement, we're including some supplementary financial information in Slides 11 and 12. I'll turn the call over to Steve Fritze to walk through these slides for you. Steve?

Steven Fritze

Thanks, Mike. In response to questions from investors, we are providing a detailed view of the 2012 P&L, the pacing of cost synergies through 2014, depreciation and amortization changes due to purchase accounting, capital additions, as well as return on invested capital information and perspective. Remember, this is way before we would normally give guidance for the following year. So of course, we have risk-adjusted the information accordingly.

First, the 2012 P&L Slide 11 as we see it. To explain the chart, we've started with the median consensus forecast of each entity for next year in the first 2 columns. Remember, these are the median. So for example, if you took the high and low analyst sales forecast for next year for each of the 2 businesses and added them together, you'd get a range of about $800 million. Hopefully, that puts into perspective our adjustment column, which is merely our adjustment to the median view of 2012 for the combined business base. This is our view before synergies and other deal-related P&L changes. You can see our view is for strong underlying business performance from both entities. Both businesses just increased 2011 guidance last week, yet the 2012 consensus for each is largely unchanged.

Then we have synergies. We have started with a pretty conservative assumption here. We know it. Integration planning will begin soon and we will be all over it for 2012. Finally, on this slide, there are other transaction impacts. First is the expected accounting impacts on tangible and intangible assets. For tangible assets, while there will be a write-off in value, there will also be a reset on remaining useful lives so as to reduce depreciation and net of $42 million. Then the impact of customer list, technology, et cetera, should increase amortization from Nalco's current amortization rate and it'll add $211 million to it. Thus, the net of $169 million between amortization and depreciation. These numbers are educated in the sense that we have used outside valuation resources to get a preliminary view. But of course, they are not final. Interest expense is our view of the financing cost based on expected structure and current interest rates with some cushion. Tax is simply the reduced taxes due to the additional expense. Finally, the increase in shares. So, that's the walkthrough of the 2012 P&L, getting to $3.

The next page provides some important information on depreciation and amortization expense and capital additions for cash flow modeling and our views on synergy pacing, tax rate and importantly, returns. I think they all speak for themselves, but I want to give some perspective on ROIC. We expect our ROIC, including the impacts of purchase accounting, to be at 10% next year, growing about 400 basis points over the following 3 years. So we expect a strong improvement, and this is very consistent with our history.

For perspective, in year 2000, Ecolab's ROIC was 18.3%. In 2002, the first year after we acquired the other half of the European joint venture, it dropped to 13.6%. And it then continued to grow and increased to 18.9% in 2007 before we did some healthcare and food and beverage acquisitions, which dropped it back to 16.3% in 2008. And by 2010, just a couple of years later, it was at 20.5%. So we have a strong history of focus on improving returns, which can be accomplished when you operate with a highly recurring strong cash flow business. And you can see the strong cash EPS of the combined businesses up about $0.60 or 20% from Ecolab alone next year. So you can see that strong cash flow. So that concludes my financial remarks, providing more transparency into what I view as a transaction that brings a lot of opportunity and is very attractive from a financial perspective. Now, I'll turn it over to Doug Baker.

Douglas Baker

Good afternoon. Look, I want to offer perspective on 2 key points, one is our business performance in the second quarter and then also our outlook for the year. And then on the planned merger with Nalco. So first, our business. I characterize our second quarter as a very good quarter. We don't use the words "very good" around here easily. I would say if you take a look at our sales and you exclude FX, foreign exchange and acquisitions, we grew it plus 5%. And so we're really closing in on our 6% to 8% historic target much faster than we had predicted. In the last call, we predicted that we'd start reaching, if you will, the 6% mark by year end. And so clearly, we're on a pace to do that in a much shorter time period.

The sales acceleration was really driven by our own efforts. We've got great innovation, it's working, being accepted by customers. Our team is doing a great job driving it. We also, in part because of innovation, have great new business activity. We've had very strong results and we're very pleased with what we're doing in the market in terms of capturing new customers and driving new sales. New growth initiatives are working. We had strong healthcare, strong emerging markets, strong wool [ph] results, Water, Energy & Waste results in this quarter. And I would say, the sales acceleration and the stronger growth initiatives are very important because the market still is quite slow as we projected. So really, market turnaround would be in front of us. It certainly isn't behind us at this point.

If we turn to Europe, Europe, you saw improving growth on the top, albeit still slow, 2% to 3% range. Good margin expansion, 130 basis points year-on-year for the quarter and we're on track for the year to hit our target in spite of, really, unplanned, insignificant raw material increases that are affecting all of our regions but also Europe. Now we also want to say that we expect a little lumpy story in the second half. In Q3, we will have raw materials peaking in Europe and we also have a year-on-year bonus comparison, which frankly turns favorable in Q4 and is a little bit of a problem in Q3. So we expect strong results in Europe margins in the second half, but it's going to be lumpy, much, much -- really strong in Q4, not as strong in Q3. We want to make sure that's clear.

Margins overall. They are gaining traction. We've got pricing coming on, the raw price delta declines as the year progresses, not because we expect our raw material prices to decrease this year but simply because the base gets easier. Last year, you had raw material inflation in the second half versus the first half. So if you will, what we have to overcome in terms of year-on-year comps becomes easier in the second half. The second quarter globally or in total for the business was our toughest comp period for raw material or for margin compression. So that's behind us and we know with pricing and frankly easier comps, our margin story is going to get stronger, which is important because this going to leave us in a very good position with very strong momentum, leaving the year and moving into 2012.

So as a result of our sales acceleration, margin recovery, we raised our forecast for the year, and it now stands on an EPS basis of a 13% to 15% increase versus last year. So in that, we expect to have another very, very solid year this year and are excited about what's going on in our business.

So now let me turn to the planned merger with Nalco. Let me start with the logic. And so we've talked to a lot of people about this. At the end of the day, we're excited about this merger because it makes us a bigger, faster and better growth company. It equips us to grow our existing portfolio in a much better way long term. Currently, if you look at our current customer set at Ecolab, over 50% of them buy water processing management sustainability services, not always from Nalco, but from a provider of those services. It is an existing revenue stream in those markets. Our customer needs in this area are growing.

Water, while everybody talks about the secular trends, is becoming a real issue, particularly in our industrial set but also in hotels and hospitals in terms of their need for competency, help assuring quality water, handling ebb flow to water and handling the captive water in their environment. For us, long term, it was very clear that strategically, we were going to need enhanced water competency to thrive going forward. Wasn't urgent, but it was very important. And we knew it's something we're going to need to do to make sure that we continue to thrive long term.

This combination opens up great innovation opportunity for us to meet our customer needs as we work to couple this and package deals in a way that we can do it uniquely, given the combination of our businesses. It also will bring core innovation that we can leverage back in our traditional businesses, too.

Second, we bought a great company. Nalco has the best market position. Number one. [indiscernible] technology, they're the clear leaders in this business in this industry, and buying the leader is really going to put us in a very advantageous position. We also believe that we will enhance Nalco's ability to compete going forward. Number one, we believe, they say, they have been somewhat hindered from moving as fast as they want because of their cash or their debt position. That gets cleared up. We add significant management bandwidth. Why? Because we're taking their talented team, coupling with our talented team and we know there's overlap that goes away, we will have additional capabilities and we run identical models, which means we can add value right away. There is great technology overlap and there are tremendous CTC, Circle the Customer, opportunities.

We estimate that there will be $0.5 billion in CTC sales over the first 5 years, which equates to about 1 point of additional sales in each of those years. And it's really because there is over $1 billion opportunity up in B. There's also great opportunity at Textile Care, hotels, healthcare, et cetera. There is significant opportunity to get after.

Ultimately, the combination opens up a broader list of M&A bolt-on and technology play opportunities for us. Net, we expect to live at the top end of our traditional organic range, call it 8% plus moving forward, which means we will grow, and that is without M&A, because when you start adding M&A, we really believe we've got a very, very strong top line growth story as a result of this combination. Net, we've got a faster growth portfolio, chasing $100 billion opportunity.

The fit of these businesses is excellent. They fit together very naturally. We have very similar cultures, servicing growth mindsets. We have very similar technologies and most importantly, we have nearly a mirror image in terms of the business model we deploy in our markets. Taking technology and field service, coupled in unit to deliver outsized value to customers. And we trade for product premiums, but deliver enhanced value through energy, water and other savings. That is exactly the model we deploy. That is the model they deploy.

So we understand how this business works and are quite confident we can add value, given our long history in running these types of models. This combination creates real cost synergies. We have conservatively estimated these to be $150 million on a run rate basis. We project that we will be at full $150 million run rate at the end of year 2, which means at the end of 2013, there is significant corporate in G&A overlap, there are purchasing synergies in supply chain. We see 0 synergies coming from R&D in field sales and service. This is principally about growth, but there are great cost synergies and we plan to get after them quite aggressively. On top of the cost, there's also interest and tax savings synergies as well.

Net, the sum total of the cost synergies more than exceeded value, the premium we paid for this business and handily covers it, which brings me to deal valuation. We paid a real premium on this business but we get an excellent deal for our shareholders. We spent a lot of time on due diligence. We're confident that their business is accelerating, that their margins are on track to improve because they're getting pricing.

They've recently made, we think, very smart, but P&L punishing investments and expanding R&D significantly, which we think they did the right thing, on adding 500 net sales people, 900 specifically in the emerging markets. So their P&L base is quite solid. It is fully invested and we have not, I don't think, seen all the benefits of these investments because they don't appear immediately. We believe they are poised for strong performance, and the combination of these businesses only enhances their opportunities going forward. The deal, as a result of the cost synergies alone, is accretive. In 2012, we talked about $0.10. Nearly $0.08 of that is coming from the cost savings. $0.24 will come from the cost savings in 2013, and $0.34 in 2014. So you can see just from the cost savings, this does not include growth, it doesn't include growth synergies. The cost savings alone drive significant accretion as we go through this.

Last point, enterprise valuation. Ecolab has earned a premium over the years because one, the market understands our near and long-term growth story and buys into it; and two, the market understands our model and rewards us for our transparency, predictability and consistency. We believe firmly in our ability to continue to deliver on both of these fronts going forward. Our growth story, we believe, has only been enhanced as a result of this combination, we chase a bigger opportunity, there are clear CTC opportunities. The portfolio, we think, is naturally a faster growth portfolio, which is why we are talking about 8% plus organic growth going forward.

Our consistency is also an area we believe we can drive great improvements in their business. And in total, our consistency is driven by steps we take. It is not naturally occurring, not like gravity in our business. We do a number of things which drives this over time, which we also believe can be successfully applied to their business. How we procure, how we reward and compensate people, how we incent customers. All are designed to reduce, not accentuate, cyclicality.

Most importantly, how we manage. We know the details of our business. We get into it monthly. We understand the issues early. We develop excellent forecast capabilities. We demand it of our general managers. All of this allows us to start predicting and driving consistency in our business, and all of the above are going to enhance our ability to do the same with them. And we are quite confident we will end up with a business which is predictable and ultimately consistent.

So in the end, we know that the only thing that really determines value in any enterprise is how successfully one executes against marked strategies. And this is exactly the case here. And we like this deal. We think it's strategically perfect for us. It is a very natural fit. It's ripe with opportunity. And so, our commitment is to realize the value for our shareholders, which we are very confident we can do. And we will do it predictably and consistently, and we will ultimately drive, we think, a very successful enterprise that will show value for customers, for our employees and for shareholders. So with that, let me turn it to Mike.

Michael Monahan

Thanks, Doug. Some final notes before the Q&A. As mentioned on the last call, we plan to hold our biennial investor meeting on September 8 in St. Paul. If you have an interest in attending or you have any questions about it, please contact me or Nicole in my office. And with that, operator, will you please begin the Q&A period?

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