Ecolab Inc. (ECL) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the Ecolab First Quarter 2015 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. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. Now I’d like to turn over the call to Mr. Michael Monahan, Senior Vice President, External Relations. Sir, you may begin.

Thank you. Hello everyone and welcome to Ecolab’s First Quarter Conference Call. With me today is Doug Baker, Ecolab’s Chairman and CEO. A copy of our earnings release and the accompanying slides are 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 that this teleconference and the slides include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent Form 10-K under Item 1A, Risk Factors, in our first quarter earnings release and on Slide 2. We also refer you to the supplemental diluted earnings per share information in the release. Starting with an overview on Slide 3, strong new account growth and new product introductions drove a solid fixed currency sales increase in the first quarter. We leveraged that growth along with pricing, delivered product cost savings and our ongoing synergy and cost efficiency work to more than offset headwinds and increase our adjusted operating margins. These along with a lower tax rate and fewer shares outstanding drove an attractive adjusted earnings per share increase. Looking ahead, we expect 2015 to be another year of superior growth despite mixed macroeconomic and market trends, as well as substantially unfavorable currency exchange and pension costs. We’re seeing better sales growth in our institutional, other and industrial segments primarily resulting from internal work we’ve undertaken to improve our effectiveness. In addition North America restaurant trends are showing gradual improvement. Lower oil prices have yielded lower delivered product costs, while also slowing our energy segment. Net we continue to look for a strong profit growth in the mid to high-teens before currency and pension effects. The dollar has strengthened since the last call and we now expect currency exchange will be an unfavorable $0.30 per share. With pension and unfavorable $0.09 per share, currency and pension will represent a combined unfavorable impact of nearly $0.40 per share in 2015 or $0.09 or our EPS and 10 percentage points of EPS growth. We’ve adjusted our 2015 forecast to reflect the increased headwind from currency exchange in energy markets and now look for 6% to 10% EPS growth for the full year to the 4.45 per share to 4.60 per share range as continued good fixed currency sales growth, appropriate pricing, delivered product cost savings, innovation and synergies more than offset 2015’s increased challenges. We expect to show 2% to 8% adjusted earnings gain in the second quarter as currency alone represents an estimated $0.08 per share which is $0.04 more than the first quarter impact. Moving to some highlights from the first quarter and as discussed on our press release, reported first quarter earnings per share were $0.77. On an adjusted basis excluding special gains and charges and discreet tax items from both years, first quarter 2015 earnings per share increased 8% to a record $0.80 despite a $0.06 headwind from the currencies and pension. The adjusted earnings per share growth was driven by volume, appropriate pricing, synergies, new products and the lower tax rate and share count. Our fixed currency acquisition adjusted sales growth was solid rising 4% and was led by our global institutional, other and industrial segments as each improved over its fourth quarter and 2014 growth rates. Latin America and Middle-East led the regional growth, while Europe growth also improved. Adjusted fixed currency operating income grew 7% and we expanded our operating margins by 30 basis points. We also continue to make key investments in the drivers for our future growth. We remain on plan to achieve our Nalco and Champion synergy targets and our Europe margins are on track for further strong expansion this year. In addition, we’re underway with our $1 billion share repurchase and bought nearly 3 million shares in the first quarter. Looking ahead, energy markets and some regional economies will present challenges in 2015 and the headwinds from currency exchange have only increased since we reported the last quarter. However, we also expect favorable tailwinds from lower oil cost to benefit our more consumer facing customers and we are realizing raw material savings that should improve in subsequent quarters. In this mixed environment, we will drive new business gains and lower costs as we maximize the benefits and minimize the challenges in 2015. We will once again use our product innovation and service strengths to help customers get better results and lower operating cost and through these drive new account gains across all of our segments. We expect the second quarter 2015 to show further solid fixed currency sales growth and margin improvement from our institutional, other and industrial segments as they more than offset lower energy results. Second quarter adjusted EPS is expected to increase 2% to 8% to the $1.05 to $1.11 range as the unfavorable currency impact increases by approximately $0.04 in the quarter and we compare against last year’s very strong second quarter when adjusted EPS grew 20% and was $1.03 per share. We look for the second half to show better gains as our institution, industrial and other segment sales continue to lead top-line growth. Delivered product cost savings should nearly double versus the first half and along with synergies and cost efficiencies lead to further margin expansion and yield the better EPS gains. We adjusted our forecast for the full year 2015 to reflect the increased headwinds from currency exchange in energy markets. We now look for 6% to 10% EPS growth to the 4.45 per share to 4.60 per share range with that wider than normal range reflecting the dynamic currency and commodity markets. In summary, we believe our first quarter performed very well despite very challenging conditions. We continue to expect 2015 to show strong operating performance for the company, despite the challenges in energy and to more than offset the increased drag on EPS growth from currencies and pension. We remain confident in our business, our markets and our people as well as our capacities to meet our aggressive growth objectives over the coming years, while also delivering attractive returns in 2015. Slide 4 shows our first quarter results both as reported and with adjustments for special gains and charges, while Slide 5 shows our sales growth detail. Ecolab’s consolidated fixed currency sales for the first quarter increased 4%. Acquisition adjusted fixed currency sales also rose 4%. Looking at the growth components, volume and mix increased 3% and pricing rose 1%. Currency was a negative 5% and acquisitions and divestitures were not significant. Reported fixed currency sales for the global industrial segment rose 5%. Adjusted for acquisitions and divestitures, sales increased 3%. First quarter fixed currency global food and beverage sales increased 6%. Adjusted for acquisitions, fixed currency sales grew 4%. Food and beverage growth was primarily driven by share gains and we use them to more than offset generally weak volumes. We enjoyed good growth in agri and food and beverage and modest sales gains in dairy and food. Regionally, we saw solid gains in Latin America, Middle-East Africa, Europe and Asia Pacific with modest growth in North America. Food and beverage continues to drive sales growth using its Total Plant Assurance approach to customers, in which we combine our industry-leading Cleaning & Sanitizing, Water Treatment and Pest Elimination capabilities to deliver improved food safety results, lower operating costs and better product quality assurance for our customers. This is enabled us to win business with key global customers and offset difficult conditions in our North America and Europe market, where lower volumes have to impact sales. Looking ahead, we expect improved organic sales growth in the second quarter. We look for further benefits from growth synergies, better customer penetration and new business capture, as well as leverage from our innovation pipeline, including 3D TRASAR for cleaning plate systems in food and beverage plants to more than offset continued tough industry conditions. Fixed-currency water sales grew 5%. Adjusted for acquisitions water sales grew 3%. Fixed-currency acquisition adjusted water sales excluding mining grew 4% as good gain in the power and light industries were partially offset year weak steel industry demand. Acquisition adjusted fixed-currency mining sales were flat. Regionally, we saw strong growth in Latin America and Middle East Africa, modest growth in Europe and North America and a modest decline in Asia-Pacific sales. The introduction of 3D TRASAR for hotel and other institutional cooling systems, utilizing solid chemistry and advanced dispensing is going well. We also continue to drive better penetration in our other water markets, using our innovative solutions to optimize water usage. We remain focused on building our corporate account and enterprise sales teams, delivering our growth synergies and improving product innovation to drive revenues. We expect to show improving growth through 2015 as market share gains drive our heavy and light businesses to outperform soft end-markets. First quarter fixed-currency paper sales grew 2%. Latin America recorded strong growth. Elsewhere we saw overall modest gains with slight improvement in North America and lower sales in Europe and Asia-Pacific resulting from continued low customer plan utilization and extended customer shutdowns and slowdowns. We expect paper to show to modest growth in 2015 as we drive new business and technology penetration to augment stabilizing paper market conditions. Fixed-currency sales for the Global Institutional segment rose 6%. Adjusted for divestitures sales were grew 7%. Turning to the businesses that make up the segment, fixed-currency sales growth for the Institutional business grow 6%. Adjusted for small divestiture in your sales grew strong 7%. We saw further good growth in global lodging demand, but also positive signs in North America food service foot traffic. Another regional food service foot traffic trends remain steady. Looking at our regional sales, we continue to outperform our markets. We record strong sales growth in North America, North America, Asia-Pacific and Middle East Africa. Europe also improved reporting a moderate sales gain. Sales initiatives targeting new customers along with the effective product and service programs appropriate pricing drive our results. We continue to globalize our leading technologies as we rollout our next generation laundry platform in Europe this year. Our work to standardize global competencies and initiative is going well and they’re helping to drive our sales improvements. We’re also focus on strength in our execution and delivering increase customer value with solutions that reduce their water, energy and labor costs. With the work on our business fundamentals yielding good results and with end market study to improving, we look for further solid sales growth in the second quarter and for the full year. First quarter sales for specially grew 8% in fixed currencies. Quick service sales were solid as new account, increase service coverage and additional solutions leverage generally modest industry trends to drive growth. Regionally, Europe quick service sales grew double-digits benefiting from new accounts and additional customer solutions. While Asia-Pacific also show strong gains billing on good quick service foot traffic growth North America sales rose modestly. The food retail business posted solid double-digit sales growth benefiting from international customer additions, new products and increased penetration in North America. We look for good sales growth again in the second quarter, especially works to deliver another solid performance in 2015. Fixed currency global healthcare sales increased 5%. Sales gains were driven by new account growth, better penetration and new product introductions. We continued our work to strengthen our corporate accounts approach and our integrated value proposition, as well as better focused on product portfolio. We believe we are on the right track and look for core global healthcare sales to show moderate growth in the second quarter and the full year. First quarter fixed-currency Energy segment sales rose 1%. Looking at the components our upstream business rose modestly as the decline in North America results was offset by very strong international performance. The downstream business saw a good growth also led by strong international sales and share gains in North America. First quarter results reflected North American drilling and well completion activity that felled much faster than once than while we expected while production gains were steady. Downstream growth stayed solid worldwide. Looking ahead, we now expect energy segment sales for the full year 2015 to show a low single digit decline primary reflecting faster than expected reduction in North American drilling activity and customer spending reductions. We expect that second quarter and second half energy segment sales to decline in the mid single digit range as good international growth, ongoing share gains and solid downstream sales are more than offset by lower North American upstream activity and price decreases. We expect a very challenging year particularly in the North American upstream industry. We are very experienced team in place. They have remained aggressive using our industry leading product innovation and outstanding sales and service team to drive sales and share growth and they will use this period to strengthen our position. We continue to remain confident in our energy segment and its long term growth prospects. Sales for other segment increased 6%. Fixed-currency Global Pest sales increased 7% in the first quarter. Adjusted for acquisitions, fixed currency sales grew 6%. Sales to Food & Beverage customers and restaurants once again led the growth. We enjoyed sales gain in all regions. We continue to drive market penetration using innovative service offerings and technologies. We also showed further progress in globalizing our market focus capabilities and field technologies. We expect Global Pest sales to show further good growth in the second quarter led by gains in all markets. Equipment Care sales grew 7% in the first quarter. New customer additions continued at a solid rate and productivity improvements from our technology investments and strengthened execution work continue to pay off. With solid underlying business growth trends expected to continue, we look for Equipment Care to show upper single digit growth in the second quarter and expect a strong second half. Slide 6 of our presentation shows selected income statement items. First quarter gross margins were 46.5%. On adjusted for special charges first quarter 2015 gross margins were also 46.5% and rose 80 basis points above last year. The improvement resulted from volume and pricing gains, lower raw material cost, merger synergies and cost efficiencies. SG&A expenses represented 34.5% of our first quarter sales. The SG&A ratio increased 40 basis points versus last year. The increase primarily reflected the impact of higher pension expense investments in the business. Consolidated operating income margins were 11.8% adjusted for special charges fixed currency operating income margins with 12% raising 30 basis points over the last year’s comparable margins. Sales volume appropriate pricing, cost savings and efficiency improvements as well as merger synergies more than offset, higher pension cost and investments in the field sales force and the business. Fixed Currency operating income for global industry increased 5%. Acquisition adjusted operating income grew 4% and margins rose 10 basis points, pricing, volume gains, lower delivered product cost and cost efficiencies more than offset paper business exchanges. Fixed Currency operating income for Global Industrial increased 12% and margin expanded 80 basis points. Results benefited from volume gains pricing and cost efficiencies which more than offset business investments. Fixed currency global energy operating income increased 1% and margins were steady. Flattish volume, lower pricing and business investments were offset by lower delivered product cost synergies and cost savings. Fixed Currency operating income for the other segment increased 9% and margins expanded 40 basis points. improved operating results more than offset business investments and higher cost. The corporate segment and tax rates are discussed the press release. We repurchased approximately 2.9 million shares during the first quarter. The net of this performance is that Ecolab reported first quarter diluted earnings per share of $0.77 compared with $0.62 reported a year ago. When adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 8% to $0.80 when compared with $0.74 earned a year ago. Turning to Slide 7 and looking at Ecolab’s balance sheet, net debt to total capital is 50% with net debt to adjusted EBITDA at 2.4 times. Slight increase in the net debt to adjusted EBITDA ratio from year end 2014 primarily reflects the first quarter share repurchase. First quarter cash flow from operations reflects the normal seasonal pattern of our business where in we typically see low income and smaller cash flow in the first half with both of them stronger in the second half. Looking ahead, and as outlined in Slide 8 we will take aggressive actions in 2015 to drive both our top and bottom lines. We will work to leverage the benefits and offset the challenges of lower oil prices as we capture the lower raw material cost, leverage the expected consumer spending tailwind and gain share in the Energy markets. We will also continue to drive organic growth through further cooperate account wins, stepped up innovation work and improve field productivity. We still expect a very strong operating performance in 2015 showing our business balance that more than offset substantial headwinds from currency in pension. We expect our second quarter to show good Fixed Currency sales growth with currency negative impacting reported sales by about 6 percentage points. we look forward second quarter earnings to increase 2% to 8% to the $0.05 to $0.11 as currency becomes increasingly unfavorable with currency pension combining for a negative impact of $0.10 or approximately 10% of second quarter earnings growth. Further the second quarter will also compare against a very strong period last year when adjusted earnings per share rose 20% to $1.03. As mentioned earlier, we adjusted our full year outlook while we continue to expect high teens earnings growth before currency and pension. We now look for 6% to 10% EPS growth for the full year in 4.45 to 4.60 per share range as continued good fixed currency sales growth appropriate pricing delivered product cost savings, innovations in synergies more than offset the increased headwinds from currencies pension and energy. In summary, once again we delivered on our forecast in the first quarter with a solid fixed currency sales gain and continued margin improvement while offsetting market and currency challenges and investing in our future. We have our work cut out for us in 2015, but we are well positioned and well prepared to outperform once again and deliver another superior performance for shareholders this year and for the years ahead. And now here is Doug Baker with some comments.

Thanks Mike and hello to everybody. So, my headline for the quarter in the year would be our underlying business performance was very good and it’s getting better. So all segments are growing share, all segments are executing very well, we had record new business in the quarter and that follows a huge year last year, we’ve got excellent innovation programming in almost every business all segments have strengthened their teams that are doing the things they need to do built the culture. In all segments we’re accelerating from Q1 versus Q4 with the exception of energy. So, what’s new in the forecast, I guess I would point out three things. Number one; the energy markets are clearly more challenging than previously anticipated. Rigs of our declined further and faster rig counts in North America in particular, we’re not expecting energy to show a modest decrease on the top line any flat to modest increase on the bottom line for the year. Offsetting the energy news, now it’s a equally or more important is affect that the balance of our business will do better than originally forecasted. We’re capturing the raw materials saving driven by lower oil with benefiting from improved institutional markets driven by cheaper gasoline, beyond the plus side of the oil impact we’re also seeing as previously mentioned business acceleration or emerging markets were up double digits Europe top line accelerated was up 5%, 3% without energy. There is a lot of good news in our businesses around the globe. Our EPS delivery promote businesses at fixed rate remains at 15% which is exactly what our forecast was last call. The major optic impact the third if you will piece of news is really FX. And so this certainly colors a result, but I don’t believe this is a strategic issue for our business because most of our cost are incurred in the selling currency, but this does not dictate our competitiveness when we compete around the world. I also believe based on history it’s almost certainly going to reverse itself someday. We’ll probably all enjoy that. The perspective in our forecast FX is a $0.30 hit for the year or 7% that is $0.04 worse than the last call. The perspective around $0.30 this is 40 times worse than our 10 year average move, so this is truly outsize it is 3x worse than our next highest impact over the last 10 years. So I think it’s hard to wrap minds around this. We’ve been dealing with this for a while and it certainly has a big impact on how results look. The important thing is that we want to continue to focus on what we need to do to drive our business, drive value and drive returns. And as our FX forecast implies, I think the team is doing a lot of good things. At constant FX, our new forecast is 14% to 17% adjusted EPS that compares to the last forecast of 14 to 19, net we trim the top that really reflects the belief that we aren’t going to see any material improvement in our markets in time to impact this year. So we do anticipate the mid to upper-teen performance ex-FX. Clearly I think the team is doing a right stop to focus on the things to drive value and returns. They all will renew business. They all will renew innovation. We know these are the two drivers of organic sales acceleration and that’s a primary driver of improved returns. We’re doing a great job on team and talent building. We’ll continue to invest in both and we continue to make sizable investments in process and system improvements which we know are key to our long term health. So we continue to be well positioned. We continue to build market position. I feel great about our ability to delivery another strong year, while improving ability of the business to perform over the long haul. So with that, I’m going to turn it back to Mike and then we’ll go to Q&A.

Thanks Doug. A final note before we start Q&A. We plan to hold our annual tour of our booth at the National Restaurant Association Show in Chicago on May 18th. Looking further ahead, we also plan to hold our 2015 Investor Day in Saint Paul on September 10. If you have any questions, please contact my office. That concludes our formal remarks. Operator, please begin the question and answer period.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We ask that you limit yourself to one question and a brief related follow up question per caller, so that others will have a chance to participate. First question comes from Mike Ritzenthaler with Piper Jaffray.

Doug just wanted to drill little bit more into the new business wins on the sustained good growth within institutional. Is there a way to parse out the things like new product launches and account wins versus end market health? From your prepared comments it seems like 2015 is setting up for a healthy pace of account wins after a very productive 2014.

Yes in our institutional business in the segment there are other businesses besides institutional grew 7% in the quarter and clearly I would say I think like a point of the acceleration is probably just market improvement as a consequence of lower gasoline particularly in the U.S. where it’s fully reflected because currency hasn’t eroded simultaneously. And I would say though the other acceleration and you’ve seen steady acceleration quarter by quarter for the last five plus quarters is really a consequence of continued driving – I mean continually driving new business performance. Last year I think we talked about when we looked at net new business gains when you look at on annualized contribution we were up 45% versus the prior year. I mean we glued out of the water institutional is one of the real leaders in that whole area. We’re up another 10% cumulatively in the first quarter versus last, that’s netting our losses, so we’ve really I think done a very good job there, but clearly we are gaining share. I think it’d be hard to argue that the food service and hospitality businesses are growing at 7%. So we are I think outperforming. Europe grew an institutional roughly 3% when it controlled for divestitures almost in every market we see real strength.

Okay. That’s helpful. And then on energy, if the business slow and faster than expected would that not also mean that potentially and recovery in growth to mid-single-digit growth or happen faster as well. So we can look at the potential for that business into 2016s for all obviously with the -- that we’ve got a stable energy price environment?

Yeah, I mean I guess, you would certainly argue that the first quarter basis a little easier that we have forecasted previously. So I think I would speak to, if you think oil is going to stay in the same range as it is now through ’16, which is what our assumption is. And we think energy next year recovers in this call it mid, it’s mid-single-digit growth and that’s going to be accelerating throughout the year.

Next question comes from Nate Brochmann with William Blair.

Hello everyone. Just a follow-up and just a little bit more basically on the last question. In terms of the new business wins and obviously again great performance their. But you guys have always been great at going after business wins and the new product introductions et cetera and obviously Europe is doing well on that front as well. Is there any tricks or any differences in terms of what’s going to on today versus what you’ve done in terms of great performance over last X number of years. In terms of why this could be a permanent infection point or why this is accelerating at such the rate is it. Changing customer behavior is it a better understanding the value proposition or is it internal tricks that you’ve made in the selling approach?

Well, I think is a couple of things, a lot of new touch on. But I guess, I would highlight one of the things that we said we want to drive when we bought the WPS business was really leveraging Ecolab’s now how on enterprise selling in that market. That business and team done a lot of really solid things we’ve obviously stole in a lot of their processes and apply them our businesses, but one of the things that we wanted to transfer, if you will 1 WPS was the enterprise selling, view, skills and focus that we have an F&B institutional --. And I think we’re doing a very good job of doing that, we’ve taken a number of their top sales people, we’re taking them through the same skill development that we’ve taken Ecolab both through the years, but we have a broader based. So that’s one and I would say we’ve done better on training and better on fundamentals. Second is innovation and so a lot of the things that we’ve been working on over the last five to seven years that are now -- are really getting innovation with a very sharp point and that point is we will give you world class results but we’re do it and reduce energy and water footprint. And that resonate I’d say in good and bad time, I’d say every business is got pretty aggressive sustainability goals, we can help need those while delivering cost savings and continued to their foot safety and/or efficacy performance objectives and that’s become I think even more relevant particularly the new types of environment where we’ve got water scarcity energy concerns and like around the world.

And just I mean what that mean that like with California going throughout the draw out issues is that been extra area of growth for you to kind of reinforce step point?

Yes, without a doubt, we’ve got a team of over a 1,000 California focus right now and delivering our world class water technology solutions throughout the industries that we serves, I don't and care if it’s light industry like hospitality or light manufacturing all the way to heavy industries. We are all over the situation there. The edit from governor ground or the 25% savings, it’s really focused on 25% of the water users, because so far agree it’s been sort of off on the side line, but that 25% is at the hard of what we do. So we’re all over trying to help them one at least need that target is probably going to have to do better that than long-term and make sure that they can get the water if they need to operate.

Okay, that’s helpful. And then just the follow-up on energy two just feel more specific. But I mean we’re all quarter-to-quarter assuming stable from here and obviously one of the hallmarks of Ecolab is just overall predictability and things obviously slip here a little bit faster in the first quarter from where we started out from. What gives you the level of confidence at this point and don’t get me wrong if you had perfect confidence you’d probably be doing something else even, but what gives us the level of confidence at this point that we are stabilizing in terms of your customers and then the ultimate end market demand in terms of whether it’s rig count or the new projects et cetera and clearly production seems to have stabilized, but like in terms of some of that new business where you got that higher margin from.

Well I guess I would say one let me enter a little bigger – from a little bigger perspective. Like our operating model I think it’s proven its resilience, so our forecasted delivery if you will from our combined institutional, industrial, energy and other segments hasn’t changed on iota. So our energy softened, the other businesses strengthened, some of its exact mirror reflection of the same issue and so we basically said while we have a bias towards higher oil prices, it is not a huge bias and we will perform well in the low oil environment or a high oil environment. For this year, we anticipate operating delivery EPS to be around 15% which is exactly what we forecasted in the last call. So I don’t know if there’s any question about the resilience. I think we’re seeing it come through. If you look at energy in particular look I think the team is on exactly where you’d want them to be on. Energy is more cyclical if our cyclicality means basically flat sales in Ol at the bottom of the trop I don’t know how you called it cyclical. If you draw it on a graph, it’s a flat piece of a graph before you start going up again. And that’s exactly what we anticipated, that’s what we talked about that we saw when we did the analysis of the last drop in ’08, ’09 it’s basically what we’re forecasting right now and the team is on new technology we’ve got some great new launches. We’ve got stuff that’s going to make fracs much more efficacious while reducing water substantially and this is exactly what this industry needs. I think we’re going to be positioned with more sail when the wind starts blowing in our direction and that’s what the team is focused on. So I don’t know I think the model is doing pretty well. You got to get under the covers if there’s down FX news and look at the underlying business and I guess I would only offer this, if FX was a $0.30 help I think you guys would be looking deeply to say how the heck is the core business performing. And I think those are the fundamental questions to long term value that have got to be asked and I think when they’re asked and addressed here they look pretty good.

Next question comes from Gary Bisbee with RBC Capital Markets.

[indiscernible] and I guess Mike you’ve said that you expect the second half to look better from an earnings growth perspective than the first and I understand that the raw material cost benefit increases. Is that the primary driver of that statement or are you expecting the revenue growth acceleration you’ve seen in the last quarter or two on a constant currency basis in non-energy to continue into the back half of the year?

Yes I think you got it Gary its continued strong sales performance from the non-energy segments. The energy as we already forecasted and you’re right, the raw material savings grow as the year goes simply because it takes a while for it to work through inventory. And so we anticipate that we will have significantly more benefit in Q2, Q3 and Q4 than we had in Q1.

And then as a follow up I guess I’d like to ask about the record bookings again. I think it’s a third straight quarter you’ve talked about that, but you’ve got a pretty sticky business right and so and my guess is that much more of the revenue base comes from people using hopefully more but same customers using similar volumes. So how much really does record bookings if you have it for two quarters to three quarters or four quarters impact growth in any given year? Is it right to think that it’s a fairly modest improvement, but if you do it year after year that’s what really drives revenue?

No I mean clearly it will add a point or two of growth, it’s not going to add 8 points of growth but it’s a very important metric because it basically – we’re going head to head versus competition who’s winning and so we look at this metric and then work very hard to understand how we’re doing in each of our businesses and versus key competitors because at the end of the day also the business is going to be dictated by how successful we are securing new business and obviously keep our existing customers. So for us it’s one of the leading indicator metrics that we look at, where we get to health of innovation portfolio, the health of the team and also just strength of our overall metrics to customers is resonating or not. But ultimately we’re epic growth driver but it’s not on outsized, but a point or two every year comes from this.

And is the big part of this just having had time to effect improvement at the Nalco and Champion businesses or is it really very broad based across all the businesses. Thank you.

It’s a broad based, I would say we reenergize the focus here, I think we also supplemented with stronger training in development focused for our corporate account professional who are the ones who lead this charge and I think it’s a combination of those plus as I mentioned earlier innovation. And really at the end of the day what’s new, what you’re talking to customer about, what is the benefit of moving to us. That’s going to be obviously pretty going stronger, you’re not going see new business results like this.

Question comes from David Begleiter with Deutsche Bank.

Thank you. Doug, just back on energy, you mentioned pricing pressure, where are you seeing the pricing pressure and how do you think that reverses or how do you think it reverses going forward?

We’re seeing pricing pressure fairly broad it was anticipated because it’s not that similar from pricing pressure that is been realized by that business in other downturns. Right now I would say that pricing pressure which we would love to have none is close to forecast. And so the closer you are well head the higher the pressure in the business simply because that’s where it’s more acutely felt in that industry but this pressure throughout.

And in energy going forward post the realization synergies if you do achieve 5%, 6% topline growth, what should OI grow operating profit, at what rate on that type of sales growth?

I think 5%, 6% will get you into the double digit.

Next question comes from David Ridley from Lane with Banc of America.

So paper margins were a bit of a drag in the quarter even though you did have some topline growth. Is this more about shifting regional demand and would you expect paper margins to be flattish for the full year?

Yes. In the quarter it was more a mix issue in paper, I think the good news is we saw paper fuel sales rebound obviously it was a negative for majority of last year and so we thought about 2.5% growth in this quarter. For the year our anticipated margins in paper are going to be we think it they’ll up.

Okay, great. And then heard you alluded to some of the investments you are making in the energy segment. Maybe a few examples of that. And also would the proposed fracking regulations on federal land be a potential positive catalyst for your business? Thanks.

We don’t see any capital impact in our business or any material change versus what we’ve talked about going forward and in terms of investments in energy if we talked about investments in the first quarter some of that were investments made last year as we lap first quarter. But we aren’t adding headcount obviously in the energy business this year. So, we are going to have material investments in terms of SG&A. we are continuing to investment in innovation because we believe that is core to our advantage in that market we will continue to see investments there.

Next question comes from Manav Patnaik with Barclays Capital.

Thank you. Good afternoon, gentlemen. So firstly, just wanted to clarify your sort of renewed assumptions that you made on Energy. I think last quarter you told us on the rig count side you had assumed it was down 30% plus some share gain. So I was wondering if you could just help us understand what you are thinking in these new forecasts?

I think before we thought they would be down 30 to 40 for the year, they already down at that rate right now and now they’re forecast out there of 50% to 60% decline pretty good in North America. I mean, we’re going to be, we are going to present ourselves as the lead forecast either rig count and/or certainly oil price as we go forward. But certainly I think, you can’t read a player in the energy industry world that as I comment that the decline of which has surprised them in terms of debt and speed and we would add our ourselves to that room which I’d say is full of people.

Okay. I guess what I’m trying to get add is I guess do you see any room for further downside just outside of the FX headwinds?

Well, I can’t, yeah and I guess, I would see room for upside too. Right now the forecast that we have is our best estimation of 50-50. And I would say in total from an operating standpoint as I million earlier or forecast in total have changed. So the elements of change, energy got worse and the other business is got better, net it’s about -- and all I know was next time we’re talking, we’ll have some changes in our forecast, but I don’t believe our forecast on operating performance for the year in total is highly risks.

Okay. And then on the FX side, obviously every company out there is getting hit and it seems like it probably gets worse too. But at some point does the pressure from FX force you to make any operational changes in the different regions or is it just purely translational and when it goes down you get the hit and when it goes up you will start seeing a benefit?

Yes, by and large most of its optics it’s translation of locally generated operating profit translated back in the dollars. Now with that said, there are certainly some items that we manufacture in one currency and selling another. And we are looking in all those items, you got to be very careful not to change currency. And so if we can see that we can safe money under any currencies scenario, we will make the moves. If it is a move dependent on a strong dollar, you got to be very careful, because by the time you finish executing the dollar can reverse sign and you are now unhappy for a different reasons. So we’ve been through this next 40 or in 88 that Euro I mean we’ve seen both over our in-time operating these businesses and all I know is going to change again, I just can’t tell you when. So we when operate in the smart way and not chase currency, but certainly there are sub situations that we’ll require us addressing we’ll make sense in today’s environment and even in tomorrow.

Next question comes from Laurence Alexander with Jefferies.

Hey, this is Dan -- for Laurence. Will you guys be buying shares at the current rate or we should become more attractive with that accelerate?

We’ll continue to be buying shares over the balance of the year.

What the target that we’ve said originally for the year is the same.

Okay. And then one more question. So you’re seeing a tailwind from raw material costs, but I think you said that also we’re increasing prices for certain segments. Are you seeing, I mean is there would you expect any push back against that just given, I don’t know your input costs or going down at all, is that help works?

Yes, look I mean what we always get push back and pricing that sort of the given. But we’re seeing one to two pricing in the balance of the segment X energy, which is what we expected.

Question comes from John Quealy with Canaccord Genuity.

Hi, good afternoon. First question can we go back to your visit lower oil for outcast the sales. Can you comment by segment, have you been capturing those savings yet, when should we expect to see the full benefit of the oil in the cost side and I have a follow-up?

Well, I would say we gave, our forecast on raw material benefit for the year remain the same it was last call. And when we gave the chart last time I think we dictated how it’s going to show up first quarter and second half and obviously it was remaining of the year waited as I discussed in the previous question. We have not broken it out if you will by segment nor do we plan to do that, so in the first quarter it was roughly a nickel. We anticipate it to be $0.32 for the balance of the year, so $0.37 in total.

And then second follow up more of a macro question, so Premax after many months is finally getting a little closer May and July of detailing out service contracts as well as oil field auctions. How does that impact your business? Is there an additional opportunity for Premax I know you folks do a lot with some sovereign producers if you could just comment on Mexico? Thank you.

Yes as we believe the move in Mexico is favorable and will be positive for our energy business.

Next question comes from Mike Harrison with Global Hunter Securities.

In the healthcare business you noted new accounts but also improved penetration and showed some of the best growth that you’ve seen there in quite a while. You do have a fairly broad suite of products there. What do you usually lead with in healthcare? What’s the ware washing equivalent? And how much bigger does the overall opportunity get as the penetration increases toward the full range of offerings?

Well the big wins that we highlighted in late last year and are clearly the driver for the growth acceleration were around the environmental hygiene offering or the program that we’ve developed to reduce infections contracted in hospital by patients and importantly we think that’s a program that we want to continue to focus on and drive and leverage because it’s our anchor program much like if you will, dish machine or ware-washing it’d be an anchor program and institutional or CIP and F&B et cetera. So the fact that we’re seeing success there I think bodes well because that’s basically what you’ll build-up of to drive further penetration as you move forward. So I think healthcare showed improvement, the year has shown improvement in the fourth quarter which was consistent with the timing we talked about last year during this call that we wanted to work on our fundamentals in 2014 I think the team did a good job. We started showing benefits at the end of the year and you saw that was a 5% top-line growth in this quarter in healthcare which was certainly better than we saw last year.

And on the energy side, it sounds like the international side was quite a bit better and when I think international I think more offshore and obviously new CapEx has been an important driver particularly in the offshore business for you guys. Can you talk about what you’re seeing in terms of offshore CapEx projects going forward? Are they being delayed? Are they being delayed indefinitely or just pushed out a few quarters?

Yes I mean some have been pushed out and delayed I would say we are having still significant success securing new CapEx projects which you’re right it’s been a core part of the strategy and a successful part. We’re not walking away from that. The team has secured a lot of business this year. That business won’t come on until in many cases even ’18 and ’19 that’s the type of pipeline that we have here, but we feel good about what they’re doing. A lot of the CapEx that was if you will initiated several years ago that we had secured. Some has been delayed. Some of it is coming on obviously offshore continues to move on and progress. You’ve built the big piece of CapEx. You’re going to go deploy it. The money is already sunk and so that continues to move forward. What we’re seeing mostly is a huge decline in unconventional onshore and that’s where you have a lot of the pressure. It is the part of the industry that can move with the market and does move with the market probably most rapidly but that’s where the most the queue pressure is.

And then last one for me, do you expect any impact from Bird Flu on the F&B business in the rest of the year?

I think when we it’s certainly going to have an impact on a number of important customers of ours. Typically when you end up with shortage of one protein consumers adjustments are buying more of another protein and our exposure across protein sources is pretty wide. So, I don’t anticipate it’s going to make the call.

Next question comes from John McNulty with Credit Suisse.

Good afternoon. Thanks for taking my question. So Doug, I think you had said earlier if energy prices kind of level off here, you are kind of looking at for next year mid single-digit growth in Energy and it kind of accelerates throughout that period. I guess how do you get to that? When you think about the major buckets that will drive that growth, what are they in kind of a flat $60 oil, $55, $60 oil range?

I think you start doing is annualizing against the very significant reaction and decline and activity. I think you’ve got a couple other things happening, you’ve got some 4,000 wells that are temporary capped, people going to have to deal with this because they have about 12 months under current law to get after these and deal with it which means Q4, Q1 activity. Our guess is the majority of those, we’re going to be brought online, the pricing pressure that we are filling now or annualize against and that’s -- and you’re going to have constant to mannerly increased production next year versus this year. But you won’t have the price pressure that we have going on this year so you could see better sales from that and ultimately we even thinking downstream. We had some minor impacts in Q1 this year from the refinery strikes which were over and we will again annualize against next year.

Okay. When you think about pricing, kind of in the core or legacy Ecolab businesses, it seemed like pricing was always pretty much either stable or up modestly and it looks like you are seeing some negative pricing pressures in the energy markets at a minimum in kind of a new parts of Ecolab. How do you think about being able to get that pricing back? It always seems like giving up price easy maybe isn't the right word but it happens. Getting it back tends to be tougher so I guess how do you think about working with your customers and making sure you can get the pricing back?

The majority of this impact is coming from cost plus contracts that we have with major energy supplier. So when our energy prices go down and oil and raw material inputs go down as a result that ends up reflecting in the formula and worse when energy and raw materials go up it’s going to be reflected in the pricing because that’s the arrangement we have with those customers. So, it’s not like we negotiated the price decrease we’re going to have to renegotiate price increase in most of these cases, most of its formula here.

Okay, so it is really just price pass-throughs then or cost pass-through, it is not a true give back on price, is that right?

A significant portion of it, there are some that would a give back on price but the vast majority is contractual.

Next question comes from John Roberts with UBS.

Good afternoon. Doug, I think in last quarter's release you were optimistic about acquisitions for the coming year. Could you give us an update on the environment out there?

I remain optimistic, there is a number of things and number of opportunities that we’re chasing some of them quite a ways long in the process. So, I still remain bullish on being successful in this environment making some key acquisitions.

And then back to the food and beverage segments since it is the highest growth Industrial segment for you, there were a couple of high-profile dairy contaminations over the past quarter. Are there any trends there or are there just greater levels of detection going on that are going to cause customers to have to clean more intensely or anything else we might translate more across the overall segment rather than just a couple of isolated events?

What I would say, food safety in general is food producers are always constantly on high alter and nature has its ways. It’s a difficult game and on the producers by and large doing a amazing job if you look at the number of meals served. Just take it in this country and the number of incidents, it is an amazingly low number given number of meals consumed, With that said, I don’t think this is a big trend, I don’t think vigilant way, I don’t think it’s turn in the United States up, because I think it’s in a high level. I do think in emerging markets you’re going to continue to see height in awareness, height scrutiny and height in consumption, but that’s mostly were you’re going to see it.

Next question comes from Dmitry Silversteyn with Longbow Research.

Good afternoon, guys. Thanks for taking my call. Couple of questions, first of all can you differentiate in the performance, if there was any between new international and your domestic pest elimination business?

Yeah about the same really on top-line both very good. North America, which I think we talked about a couple of years ago with disappointing, is really done a good job rebuilding their sales acceleration. They’ve made a lot of, I think very smart investments with the team. There is a lot of improvement from their business. I’m very bullish on what past team is done and the outlook. And particularly our North America, we done have the same if you will turn down internationally that business is remain consistently strong.

Okay. And the food and beverage question as previous call is pointed out this business is done well for you or it’s a result or at least in this quarter, it’s a quarter of many years of work and getting traction in some of the progress and programs. In sort of combining food and beverage to the healthcare if you will, I don’t think you guys do a lot currently in sort of clean in place of pharmaceutical production facilities. Is that I’m I correct first of all, this is not an important market for you yet and is there an opportunity given your, it’s a great in place in food and beverage and then given you bio-science and antimicrobial capabilities and healthcare too to perhaps go after this market a little bit more aggressively?

Yeah, I would say CIP opportunity is beyond food and beverage exists and certainly pharmaceuticals would be a good example there others as well. And that’s exactly how we look at extensions. So either try to sell more to the existing markets. So you try to follow your technology to its natural end. And so certainly that would be an example of an area that you could push CIP and do.

And my one final question in terms of your traditional Cleaning & Sanitizing business as in Europe versus North America. Where do you stay in terms of rolling out the more complete product line-up if you will in Europe to match about what you have in the U.S.. Are you pretty much fair is that ahead of the time schedule and have there been any sort of early indications of success of getting growth accelerated given a fuller tool box for you sales people to go after market with.

Yeah, I think we mentioned or I did Europe sales were up 5% or 3% X energy for the quarter. Which is substantially higher than we’ve announced and quite a while in Europe. I think you reflects exactly what you talked about, we have, we will behind in innovation in Europe was a consequence of our EBS/SAP program. We’ve got free to product line for a couple of years, while you’re putting that just in place that has unfrozen, we’ve been launching our technology over there for the last couple of years starting to make headway in particular in both F&B and institutional. And so that one of the reasons that you’ve see sales acceleration in Europe. We expect sales to be positive for the year in Europe and it’s really as a result of the new business which attribute in -- innovation.

Question comes from Bob Koort with Goldman Sachs.

Thanks. I appreciate the overtime here. Doug could you talk a little bit, I guess, I envision your energy business, you’d characterize is it some point having a similar business model approach to the traditional business of having feed on the street or folks out in the customers facility. I’m just curious, how quickly can you dial down those costs if you need to another words. If you typically having several employees out of these well ahead on the exploration production side and now you seen this big drop up in North America unconventional. Can you dial down those expenses just as quickly as you move them up or you have to absorb that until you see some recovery in those markets?

Yes, the real pressure in that business really is in the production phase. It’s closer to the wellheads. It’s in our WellChem business. The WellChem business isn’t a people intensive business I’d say a production or OFC business or our downstream business. There are certainly costs that we continue to take out. There is much a part of the synergy program that was put in place with Champion as they are anything else. We certainly are accelerating some of those moves as a consequence of the market, but really it’s still in line with what we anticipated creating once we got through the synergy moves with Champion. And so G&A rightsizing that and doing all those things, we are looking at how do you accelerate it, but in line with anticipated ultimate goal that we saw once we put Champion and Nalco energy together. So are there opportunities in the field? Yes they’re small. We tend not to go, we don’t want to create a overreaction in that business too. I think I would remind you we expect sale to be roughly in line with last year. We’ve got this monstrous degradation in activity in our business like there are in other businesses and so I would call this not a decline, but sort of a pause in the growth and we anticipate re-growing next year and that’s how we’re managing the business.

And my last question if I might, can you just help us characterize the energy business in total maybe geographic spread or upstream, downstream, refining just some shares of the business scale the business?

Be around top of my head. All right …

I could follow up with Mike if you want...

I’m saying again it’s a lot of model flush. North America is about 60% of our business in total and then when you look at the balance you’ve got fairly little more in Latin America, Middle-East Africa would be next and then AP. Okay as you balance out the other regions, Europe is really North Sea type production. If you want to look at the rest of the business roughly WellChem was 17% last year it’s probably going to drop to about 15% this year and then you really split the rest you’ve got about 60% production phase and then the balance is downstream. That’s how…

Next question comes from Shlomo Rosenbaum with Stifel.

I just have a few kind of housekeeping questions and how it relates to the business. There is a little bit of move up in receivables and more of a move up in inventory. Can you talk a little bit on the receivable side? How much would that might be related to energy and your confidence in trying to covering those? And then just on the inventory side. Is that a investment in growth and where exactly was the build-up? Thank you.

Yes I believe I’d say this way working capital one of our highlight in the quarter and it’s something that we’re all over as a team so there’s three buckets. One you pointed out was receivables. That was really just a handful of large customers. It was a timing issue. All those have been resolved. That is not a systemic issue at all. And there was a couple of energy but a couple of other customers it wasn’t exclusively energy but those payments came and it was really just timing at the end of the quarter. You’ve also got inventory. I would say you got two things going on inventory, one energy inventory build because we weren’t able to turn production off as quickly as the business declined and as we previously mentioned the business declined quicker than we anticipated, so call that 30 million bucks in inventory. That will get out of the system, but that’s going to take a couple of turns to do as we go through. And then you’ve got payables and payables was higher I mean it sucked up more of our working capital. It’s probably easiest to say that was an internal different execution that we don’t plan on repeating. That would be the [indiscernible] get to that, so working capital for the year I think we will be moving in the right direction and we also have I think very good plans we have very favorable cash flow for the year.

Do you have a kind of range or targeting for the year for the free cash flow number?

90%.

On net income?

Yes.

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

Most of my questions have been answered but I was just wondering on the Energy side, Doug, let's assume that oil stays where it is today and you have some kind of a normal growth rate next year, can you make it all up in 2016 or will you need to go through 2017 before you catch up on whatever you missed in 2015?

I think you are talking about top line OI growth. Q - Rosemarie Morbelli Both.

I don't think you cannot make up the complete bill. I guess if we assume that the businesses really go double digit topline and extend margin and have 15% -- bottom line forever, you can never make it up. But that was never our forecast. We always knew when we bought this business. We you it should be overall of faster growth business, top and bottom, but was also going to go through some oil cycles where like '08 - '09, we thought we are going to see a pause in sales in OI growth. I guess next year, as I mentioned earlier, mid-single-digit top, double-digit bottom -- if oil stays, I don't know 60 plus-minus range for another year after that, I would expect it will be accelerating growth in '17 even with the kind of oil forecast. Most conventional guesses is oil will probably rise over time. I don't think we are going to be completely different upon it. But if it does, I think it's going to be a benefit for the business.

Okay, thanks and then quickly on Europe, other companies are seeing some improvement on the demand side. I know you grew 5% or 3% excluding Energy but do you see that as a result of what you are doing in-house or are you also getting some help from the market itself or at least expecting more help in the second half?

As I mentioned earlier in Europe, the changes like, I don't know, down one up one. It's not the most dynamic economy right now. It's hard for us to feel exactly the effects of those small moves. I would say we think it's more on our back and I think we stated before it we are flat. It was more focused on margins, trying to hold sales, so we can get the P&L for the future so that when we grow we get leverage. And right now I would say it's more of our efforts than the market.

Okay and if I can squeeze one more, on the Equipment Care, revenues up 7% in constant currency, that is quite high. Do you anticipate that kind of growth rate for the balance of the year and do you see margins continuing to improve after you have done all of the restructuring and reshuffling of your business model?

Yes and yes. Equipment care is on a good path.

[Operator Instructions] Next question comes from Andy Wittmann with Baird.

Doug, last quarter I think you talked about your ability to manage the business and how after a couple of years of a pretty good performance that you were worried about that -- I don't know if you used the word complacency but you talked about the fact that there might be opportunities that you could go to if you needed to. With Energy taking a slight step down here, have you gone to any of those other -- I don't know, contingencies or are you contemplating them today? Is the business at a level where you need to go to some of those?

We always wish you had these huge file drawers full of money ideas, I mean we have several, I wish we had more, like every CEO in the land. Now I would say we were pushing -- I think the team is doing a great job. I used the analogy last time that you know if it's a plain ride we are going to land in the right city on time, but it could be a turbulent ride. And I think the team is managing through a lot of turbulence. Making sure that you capture all these raw materials, and they show up in the P&L isn’t like a layout. I mean we had purchasing on suppliers early securing the business, we have to make sure the R&D that had shown up in the mix properly, and then we understood the impact. The supply chain has been all over this. Our team is within all over it. It has been a lot of incremental effort. Meanwhile, we continue to drive new business and innovation. So I think the team has managed this very successfully and I think it does -- if anything I think were showing the robustness of the model, you are a work through the damn clouds of FX. If you do it you'll see it. There are still huge margin opportunities. We'll talk synergies for one more year. We are then going to flip and no longer use the word synergy and start talking cost savings. But the cost savings that are out there is a consequence of both a Nalco merger and the Champion deal, still remains, they're are still significant. Because you really -- it takes a long time to get after the supply chain savings. It takes a long time to get after some of the regional savings. Because he got to implement systems, and when you're running two systems and you have two legal entities that precludes capturing some of the savings that you would normally get after, and doing that in a sensible way just takes time. And we didn't see any reason to create undue risk that could create havoc with our customers so we have done this over -- I think a very thoughtful period. But you're going to see those benefits show up in the business, which is why we talk our model. 60 is organic, 2 to 3 additional points from acquisition, and collect 50 basis points to 75 basis points a year in leverage. That's how you continue to drive. And other things you're flipping in our favor. So we do like our position. I think we're executing quite well. I think will do well, not only this year, but in the coming years.

The last question comes from Scott Schneeberger with Oppenheimer.

I guess on the Industrial business, Global Industrial, could you discuss a little bit about how you anticipate margins will build our progress over the balance of the year, maybe some of the drivers and some of the headwinds facing them?

The industry margins we anticipate continued to strengthen some. Some is just a consequence of seasonality where we always had better margins in the other years, but you also get to see some raw material benefit as we discussed in the other business flow through and these businesses as well. So I think innovation, raw material flow through and volume, you'll see margin increase for the year.

I would now like to turn the call back over to Monahan for closing comments.

Thanks everyone for your time today. We appreciate this, and have a great day. Thank you.