Ecolab (ECL)

Q4 2011 Earnings Call

February 28, 2012 1:00 pm ET

Executives

Michael Monahan - Vice President of External Relations

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

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

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

Dmitry Silversteyn - Longbow Research LLC

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

David Ridley-Lane - BofA Merrill Lynch, Research Division

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

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

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Brian Maguire - Goldman Sachs Group Inc., Research Division

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

Alina Khaykin

Presentation

Operator

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Welcome to the Ecolab Fourth Quarter 2011 Earnings Release Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the call over to Mr. Michael Monahan, Senior Vice President, External Relations. Sir, you may begin.

Michael Monahan

Thank you. Hello, everyone, and welcome to Ecolab's fourth quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO. A copy of our earnings release and accompanying slides referenced in the teleconference are available on Ecolab's website at investor.ecolab.com.

Please take a moment to read the cautionary statements on Slide 12 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 fourth quarter earnings release and on Slide 2. We also refer you to the supplemental diluted earnings per share information in the release.

Starting with our overview in Slide 3, we delivered strong results once again in the fourth quarter. We leveraged our sales volume, growth, pricing and cost-efficiency work along with excellent acquisition performances to offset significantly higher delivered product cost to produce another strong double-digit increase in our adjusted earnings per share. In addition, note that we included one month of Nalco's U.S. results in our quarter, reflecting their operations in the period following our December 1 close.

Looking ahead, we expect to continue outperforming our combined markets and show good earnings gains in the first quarter and stronger growth for the full year as better sales growth, pricing, innovation, synergies and margin leverage more than offset lessening increases in delivered product cost and merger-related cost. Further, we expect 2012 will be our tenth year of double-digit adjusted EPS growth in the last 11, and we will do so while setting up further strong growth in the years ahead.

Moving to some highlights from the quarter and as discussed in our press release, reported fourth quarter earnings per share were $0.34. On an adjusted basis, excluding special gains and charges and discrete tax items from both years as well as the impact from the Nalco merger from 2011, fourth quarter 2011 earnings per share increased 17% to $0.70 which was the midpoint of our forecasted range. The adjusted earnings per share growth was driven by volume and pricing gains, new products and new accounts which, along with the strong performance from acquisitions, lower variable compensation and cost-savings actions, more than offset higher delivered product cost.

We enjoyed strong sales growth in our Food & Beverage and Kay businesses worldwide. Geographically, Latin America was strong, and our Canada operations also saw good gains. We continue to be aggressive, focusing on accelerating our top line growth as we emphasize our innovative product and service strengths to help drive increased market share in our core businesses and new account acquisition across all of our customer segments. We also continue to implement appropriate price increases to help offset higher delivered product cost.

We remain focused on expanding our margins, emphasizing productivity and efficiency improvements to help increase profitability as well as drive merger synergies. We are achieving excellent progress in our actions to improve profitability in our Europe business. We have seen the benefits of these actions in our results. Though, as we outlined in our last call, Europe's fourth quarter also reflected the impact of significantly higher raw material cost. We continue to expect strong margin improvement in the fourth quarter 2012 with further significant gains over the next several years. We also continue to make investments in key growth businesses and acquisitions to build future growth.

As announced in our January update, our work to integrate Ecolab and Nalco has gone very well. The merger bolsters our opportunity set for our customers and positions us as the leader in additional high-growth markets that leverage our mutual core strengths in product technology and sales and service execution. We look for the first quarter results to show upper single-digit sales growth led by global energy and our Asia Pacific and Latin America operations. This strong business performance will be impacted by the much higher depreciation and amortization expense from our merger in what is our seasonally slowest sales quarter.

As such, first quarter adjusted EPS is expected to be in the $0.46 to $0.49 range compared with adjusted EPS of $0.45 earned by legacy Ecolab in the first quarter of 2011. However, we expect the quarterly earnings growth rate to accelerate over the balance of the year as higher fixed depreciation and amortization and interest expense are offset by increasing benefits from synergies and cost reductions by seasonally higher revenues and by underlying business growth. We look for full-year earnings per share to rise 16% to 20% to the $2.95 to $3.05 range.

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

Slide 4 shows our adjusted income statement and Slide 5 shows our sales growth detail. Ecolab's reported consolidated sales for the fourth quarter, including the impact of Nalco, increased 17%. Excluding the impact of Nalco and the previously disclosed contract modification charge, legacy Ecolab's fixed currency fourth quarter sales increased 7%. Looking at the fixed currency components, volume and mix increased 2%, pricing rose 2% and acquisitions were 2%. Rounding accounts for the difference.

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