Jul 24, 2008
Executives
Michael J. Monahan - VP, External Relations Douglas M.
Baker Jr. - Chairman of the Board, President, CEO
Analysts
David Begleiter - Deutsche Bank Michael J. Harrison - First Analysis John Mcnulty - Credit Suisse Dimitri Silverstein - Longbow Research Gary Bisbee - Lehman Brothers Prashant Juvekar - Citigroup Edward Yang - Oppenheimer & Co.
Michel Morin - Merrill Lynch Robert A. Koort - Goldman Sachs John Roberts - Buckingham Research Rosemarie Morbelli - Ingalls & Snyder, LLC Chris Shaw - UBS Laurence Alexander - Jefferies
Operator
Welcome to the Ecolab Second Quarter 2008 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. I would now like to turn the call over to Mr.
Michael Monahan, Vice President External relations. Sir, you may begin.
Michael J. Monahan - Vice President, External Relations
Thank you. Hello everyone and welcome to the Ecolab second quarter conference call.
With me today is Doug Baker, Ecolab's Chairman, President, and CEO who will join us for the Q&A session following the review of the quarter's results. A copy of our earnings release and the slides referenced in this teleconference is available on Ecolab's website at ecolab.com/investor.
Please take a moment to read the cautionary statement on slide 2 stating this teleconference and the slides six 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 slide 2. Starting with slide three, in the second quarter we achieved a strong performance despite challenging conditions in certain end markets and sizable increases in delivered product costs.
As we continue to aggressively drive sales, new account gains, cost reductions and pricing to deliver double-digit earnings growth, while still making the key investments to continue our growth for the future. Our outlook remains strong for the third quarter full-year 2008 and the foreseeable future.
Starting with some highlights from the quarter in slide four, reported second-quarter 2008 EPS increased 25% reaching $0.55. Pro forma in earnings per share which includes special gains and charges and discrete tax events rose 12% to $0.47, hitting the top end of our forecasted range.
We also note that these second-quarter earnings include dilutions from the Microtek and Ecovation acquisitions of approximately $0.02 per share. We once again enjoyed strong organic earnings growth.
Organic growth more than offset, higher delivered product costs while exchange and tax also benefited earnings. This overall strength helped fund our investments in Europe and acquisitions.
In the U.S., we continue to have strong sales trends from our Kay, Healthcare, Food and Beverage and Textile Care businesses, while Institutional reflected slower trends in its markets. International also showed good sales gains, as Latin America rose double digits.
Asia-Pacific showed a good increase and Europe reported moderate growth. The U.S.
food, service and hospitality markets representing about one quarter of our business have softened, reflecting headwinds from the economic slowdown. In response, we continue to focus on aggressive sales efforts, emphasizing innovative products that provide customers with labor, energy and water savings.
In addition, we have undertaken productivity and efficiency improvements, cost reduction actions, increased pricing and fuel charges to recover the increased raw material costs and to continued drive of our bottom line performance. Despite the challenges, we are confident in our action plan and are therefore raising the bottom end of our forecast range by $0.01 and now look for pro forma diluted earnings per share, which excludes special gains and charges and discrete tax items to be in the $1.85 to $1.88 range.
These results will include about $0.04 of dilution from the Microtek and Ecovation acquisitions for the year, which is $0.02 per share higher than previously forecast. Pro forma earnings, excluding that dilution are now expected to rise 14% to 16% to $1.89 to $1.92 per share, slightly above our previous forecast.
For the third Quarter, we expect pro forma EPS to be in the $0.53 to $0.55 range. These results will include $0.02 of dilution from acquisitions.
In summary, we continue to expect yet another superior performance for Ecolab in a challenging 2008 environment, as we leverage our markets with aggressive sales, appropriate pricing and cost efficiency actions to deliver very attractive growth and show the returns while continuing to build for future growth. Turning to the details, as shown on slide five, Ecolab's reported consolidated sales for the second quarter rose 15%.
Looking at the components, volume and mix were up 3%, pricing was up 2%, currency added 7%, and the impact of acquisitions and divestitures was 3%. Slide six include sales growth by segment and division.
Sales for U.S. Cleaning & Sanitizing operations increased 13%.
Excluding the Microtek and Ecovation acquisitions, sales rose 5%. Institutional sales rose 3%, we saw a hike in customer demand for energy and cost saving solutions like our new Apex solid ware washing line, which is running well ahead of plan.
New business gains also continued to be solid, as we picked up market share against regional and local competitors. These gains are partially offset by lower consumption among our food service and hospitality customers as they experienced a slowdown in their traffic trends.
We also saw some inventory reduction among distributors in the quarter, as they tightened their operations which cost us a percentage point of growth in the quarter. In response to the tighter market, we're driving new product and program sales focusing on the cost savings and performance improvement opportunities that our products offer customers and how well they tie into the broader 360 degrees of protection program that's designed to maximized total operational savings for customers.
We've accelerated the roll out of our new Apex Warewashing System which provides the customers with new standards of performance and cost savings and we are adding more new products and programs that deliver similar performance and value. We're also driving new account growth, utilizing improved prospecting tools and software and targeting independent accounts and regional chains with additional and redeployed sales people and programs.
We expect these aggressive sales efforts, along with market share gains and pricing will deliver higher growth for Institutional in the third quarter and the balance of 2008. Kay's second quarter sales grew 17%, primarily reflecting new account gains in comparison to a weaker quarter last year, which was due to lower than normal distributed shipments.
The underlying sales business trend in quick-service restaurants is good with strong ongoing demand from major existing and new fast food chain accounts. The food retail business continued to strong growth with a double-digit gain.
New products and programs like the introduction of solids for QSR along with customer wins continued to bolster Kay's results. We expect these initiatives to help drive strong gains in Kay's third quarter.
Textile Care sales increased 10%. New plan additions from existing customers more than offset softer volume from existing accounts.
We expect solid growth in the third quarter as Textile Care brings on new business and uses new technology, as well as leveraging customer needs for operational efficiency to drive growth. Reported second quarter sales for the Healthcare division more than tripled, reflecting the impact of the Microtek acquisition.
Excluding the impact of acquisition, organic healthcare sale grew... rose 8%.
Organic sales growth reflected continued solid end-market demand for infection control products and expanded penetration within our existing base of group purchasing organizations and healthcare purchasing systems. Our skin care product showed continued double-digit growth.
Microtek also rose double digits led by strong sales in infection barrier products across all channels. Looking ahead, third quarter organic healthcare sales should show continued good sales gains and be bolstered by Microtek growth.
Food and Beverage delivered a strong second quarter performance. Reported sales were up 13%.
Adjusted for acquisitions, sales rose 7%. The quarter was led by strong performances in nearly all markets.
Looking at the segments, corporate account wins, better pricing and new products contributed to dairy plant sales growth. The meat and poultry business enjoyed a strong quarter driven by customer gains, which more than offset weak market condition.
The Agri segment also saw a good growth, reflecting new account sales and favorable agri market conditions. Beverage also increased.
Water Care sales grew nicely in the quarter as a focus on larger SMB processor accounts help to offset account rationalization. And certain economy, has caused a number of Ecovation projects to be delayed and it will not reach the very aggressive targets for 2008 that were originally projected.
However, Ecovation still expected the enjoy substantial growth in 2008, and the need for its effluent management and energy systems and the resulting long-term growth prospects remain outstanding. We expect continued good sales trends for the Food and Beverages business in the third quarter of 2008, as we focus on new account acquisition, pricing and continued expansion of our antimicrobial and water management platforms.
The EcoCare sales decreased 7%. Results continue to be influenced by higher gas prices and a softening economy, both of which more than offset better pricing in new products, including the car wash industry's first comprehensive sustainability program.
The EcoCare expects new programs, investment in the sales force and new market opportunities to drive sales in a continuing challenging sales environment for the third quarter of 2008. Sales for US other services increased 6% in the second quarter.
Pest Elimination sales rose 7%. New account activity was driven by corporate account gains, while non-contract services for seasonal or periodic work experienced slower growth.
Both were affected by increased customer caution in food, service and hospitality, towards spending on such additional ancillary services or new initiatives. In response, we're focusing on growth markets like QSR and food and beverage processing, and continue to develop programs to better target specific market needs like our bed bug program, which is growing at double-digit rates.
We have also increased sales force hires to more aggressively pursue contract business and we are enhancing field sales force effectiveness with new training and hires. We expect Pest Elimination to show higher growth in the third quarter as it leverages its high quality and reliable service results to drive new business.
GCS increased 5% showing continuing good progress in service sales. These were slightly offset by parts volume.
The new business systems are fully online and we are in the process of completing the system optimization phase of the implementation. We are seeing the benefits of the new system through better business transparency, customer and market segment profitability, dispatching improvements and better tech utilization, all of which have helped our business decision making and operating efficiency, and work to improve profitability from the first quarter.
Productivity is continuing to improve on the new systems and we except significant gains as our people build experience with the new tools. The sales pipeline continues to look attractive and while the softer economy has resulted in some customer hesitancy in closing new sales, we still expect continued good sales growth in the third quarter and the year with significant profitability improvement in the second half.
Measured in fixed currencies, international sales increased 6%. Excluding acquisitions, fixed currency sales increased 5%.
Europe, Middle East and Africa sales rose 2% in the second quarter at fixed currencies rates. However, excluding acquisitions and divestitures, fixed currency sales increased 4%.
As expected, Europe institutional sales showed modest growth. Sales benefited from gains in flour machine sales and product sales growth, which offset slow markets.
New products like the introduction of Wash 'n Walk and the Max floor care lines, combined with continued gains from housekeeping also helped to drive sales. Food and Beverage sales showed a good gain benefiting from corporate and national account growth.
Healthcare sales also showed good growth led by skin care sales, while Textile Care had a modest sales increase in the quarter. Adjusted for the divestiture of a property services business last year, Pest Europe sales increased, as programs to improve sales and profitability gained traction.
Key metrics including service delivery in the UK, new contract sales growth in France and overall customer retention continue to show good improvement and help to offset the elimination of a couple of larger, but low margin contracts in the UK. As an update on our work to improve Europe's performance, the business information systems development work continues to move ahead and is completing the testing stage.
A multi-phase rollout will begin in the next couple of months, starting with two countries and we'll then roll out to additional countries over the next 24 months. Obviously it is still too early to see benefits and while these improvements will take time to implement, they are critical to the fundamental development we need to make to achieve better growth and profitability in Europe.
Sales force training is going well and we are beginning to see improvement in the sales team's performance. We have moved the bulk of our European management to our new regional headquarters, as we build a pan-European operating stature.
While these combined investments represent a significant cost to 2008, we remain confident these actions, as they are implemented, will lead to a higher sales and profit growth and a more effective business model. We look for Europe's third quarter fixed currency sales to show...
to show modest growth, however, we look for better results ahead as the actions we are implementing take hold. Asia-Pacific sales grew 6% in fixed currencies.
Excluding acquisitions, sales increased 5%. From a divisional perspective, institutional strong sales gains were driven by new products, including the launch of a new Warewashing platform in Japan and by growth in the Market Guard program for retail stores.
We achieved important account wins in casinos, catering, hotels and restaurants, as well as the food retail markets. Food and beverage sales had moderate growth, both the beverage and brewing sectors continue to show good growth in Asia.
The Food and Beverage division benefited from increased product penetration and account gains. Looking ahead Asia Pacific expects continue good sales growth in the third quarter.
Second-quarter sales for it Ecolab's Canadian operations were up 5% in fixed currency. Institutional and Pest Elimination sales were strong, benefiting from corporate account gains, accelerated street growth and a rollout of Apex.
Food and Beverage sales also improved. Latin America reported an outstanding performance, with the sales rising up very strong 15% at fix currency rates.
Sales were excellent throughout the region as all divisions rose double-digits. Institutional growth was driven by new account gains, increased product penetration as well as continued success with global and regional accounts.
Food and Beverage sales reflected strong demand in the beverage and brewing markets as well as the benefits of new accounts. Pest Elimination continued its outstanding performance throughout Latin America.
Overall, we expect healthy growth trends to continue in Latin America with another double-digit gain in the third quarter. Turning to the margins and the income statement in slide seven of our presentation.
As we expected, second quarter gross margins decreased by 180 basis points to 49.1%. The impact of acquisitions, which by their business model operate at lower gross margins than our historic business were 70 basis point of the margin decline and along with higher delivered product costs, more than offset sales leverage, pricing and cost savings initiatives from a margin perspective.
SG&A expenses were 36.9% of sales, 130 basis points below last year. The SG&A ratio reflected leverage from our healthy organic sales growth, cost controls, the impact of acquisitions which operate at lower SG&A ratios, is more than offset investments in the business systems and efficiency, R&D and Information Technology.
Operating Income for Ecolab's U.S. Cleaning & Sanitizing segment increased 8%.
Excluding dilution from the Microtek and Ecovation acquisitions operating income grew 11%, as adjusted margins expanded by 80 basis points. This increase was driven by the volume and pricing gains and improved cost efficiencies which more than offset higher delivered product cost and investments in the business.
Operating Income for U.S. Other Services grew 19%, adjusted for a legal reserve last year, Other Services operating income increased 5%.
GCS showed a better business performance, which resulted in profit improvement over the first quarter and was flat compared to the year ago period, despite higher costs of the new system. Pest Elimination income also rose.
International fixed currency operating income increased 2%, adjusted for acquisitions and divestitures operating income rose 3%. Latin America and Canada grew double digits, while Europe and Asia Pacific were off slightly as sales gains were more than offset by higher delivered product costs and continued investments in the regions.
The Corporate segment includes special gains and charges, which are reported as a separate line item on the income statement. Special gains and charges for the second quarter include $24 million from the previous announced sales of a plant in Denmark which more than offset non-recurring costs to optimize our business structure, including the establishment of our European headquarters in Zurich, Switzerland.
The Corporate segment also includes $8 million of investments, primarily related to the development of businesses systems and other corporate investments we're making, as part of our ongoing efforts to improve our efficiency and returns. Ecolab's second quarter consolidated tax rate was 28.8%, down from last year reported 30.9%.
Excluding discrete tax benefits last year and the tax impact of special gains and charges in this year, the adjusted effective income tax rate for the second quarter 2008 was 32.8%. The second quarter 2007 tax rate adjusted for discrete tax items was 34.3%.
The decrease in the adjusted second quarter 2008 effective tax rate was primarily due to tax planning efforts, international rate reductions and US tax legislation. There were no shares repurchased in the second quarter.
The net of this performance is that reported diluted net income per share for the second quarter was $0.55, up 25% over the $0.44 earned a year ago. Pro forma earnings were up 12% to $0.47 when adjusted for special gains and charges this year and a discrete tax benefit last year.
Second quarter 2008 results included dilution of $0.02 per share from the Microtek and Ecovation acquisitions. As mentioned in our opening comments, organic growth more than offset higher delivered product costs, while exchange in tax also benefited earnings.
This overall strength helped to fund our European investments and acquisitions. Turning to slide eight, Ecolab's total debt to total capital was 36% at June 30, compared with 35% reported a year ago.
Our net debt at June 30, was 30%. Depreciation and amortization for the quarter was $85 million and capital spending for the quarter was $89 million.
Slide nine shows our forecast for the full-year 2008 and the third quarter. We continue to expect another year of superior growth in 2008.
We look for solid sales gains as continued strong sales efforts in pricing along with acquisitions that accelerate our topline are leveraged by productivity and efficiency increases and cost savings. We expect these actions to enable us to overcome much higher delivered product costs and yield another year of attractive earnings growth.
We raised the bottom end of our pro forma forecast by $0.01. For the full year, we now look for pro forma diluted earnings per share, which excludes special gains and charges and discrete tax items to be in the $1.85 to $1.88 range.
Included in these expected pro forma earnings, are approximately $0.04 of dilution from acquisitions. The higher dilution than previously forecast reflects the delay of some projects and revenues at Ecovation due to the uncertain economy.
However, we also expect pro forma earnings, excluding dilution to be up $0.02 higher than previously expected and be... up 14% to 16% to $1.89 to $1.92 for the year, fully offsetting the additional dilution.
Please note these pro forma numbers, which excludes special gains and charges and discrete tax items. We presently expect the special gains and charges to net to a range of zero to a positive $0.02 per share in 2008.
This income statement includes the sale of a plant in Europe, as well as certain costs associated with the establishment of our Europe headquarters and moved to Zurich. In the third quarter, we look for our US operations to show continued solid momentum.
New products like the ongoing roll out of Apex, our new WareWashing platform that provides unparalleled performance and energy and cost savings for customers, as well as the first solids for QSR, new on premise laundry products in the US and Europe, and the new Floor Care line will provide further differentiation and opportunity and will help drive results. We look for international sales to again be led by strong growth from Latin America and Asia-Pacific, as they enhance moderate gains from Europe.
We believe this will result in overall good, fixed currency, international sales growth. The press release includes line item forecasts for our third quarter P&L.
As discussed in that release, we expect pro forma diluted earnings per share for the third quarter, excluding special gains and charges and discrete tax items to be in the $0.53 to $0.55 range, compared with a pro forma earnings per share of $0.49 earned a year ago. We expect third quarter 2008 pro forma results will include $0.02 per share of dilution from acquisitions.
We've nothing new to report regarding Henkel's stated intent to sell some or all of the Ecolab shares that they have. You may recall Henkel owns 73 million Ecolab shares.
In February, Henkel said it would sell part or all of its interest in Ecolab. Earlier this month, the Directors designated by Henkel resigned from Ecolab's Board saying that because of the uncertainty regarding when or how the sale would take place, it would be prudent for Henkel to forgo representation on Ecolab's Board at this time.
Further, until Henkel disclose the size, timing and method of its transaction, we have nothing on which comment regarding Ecolab's potential interest in purchasing shares in any such transaction. In summary, we are proud of our accomplishments in the second quarter as we delivered effectively against tough conditions and achieved double-digit EPS growth, while building for our future.
And despite the increased challenges from both the US food service and hospitality markets and raw material costs, we continue to expect a solid performance in 2008 as we use our strong sales and service team to drive growth through aggressive selling, additional solutions per account, new services and appropriate pricing to drive our topline and a constant focus on efficient and effectiveness to leverage our bottom line while at the same time making key investments to assure growth for the future. That concludes our remarks.
This conference call and the associated slides will be available for replay in our website through August 8. Operator, please begin the question and answer period.
Question and Answer
Operator
Thank you. [Operator Instructions].
Our first question comes from David Begleiter of Deutsche Bank.
David Begleiter - Deutsche Bank
Good afternoon, Doug and Mike. Can you just comment on how much your raw material costs increased in the quarter, can you quantify that?
Michael J. Monahan - Vice President, External Relations
I don't know if you are going to... Operator?
Operator
Go ahead and answer the question.
David Begleiter - Deutsche Bank
Hello, Mike.
Michael J. Monahan - Vice President, External Relations
David.
David Begleiter - Deutsche Bank
Yes. Hi.
Sorry about that. I was asking, can you quantify how much your raw material costs increased in the quarter and if pricing fully offset that?
Michael J. Monahan - Vice President, External Relations
David, were you able to hear the answer.
David Begleiter - Deutsche Bank
I was not, no.
Michael J. Monahan - Vice President, External Relations
Okay. We are up about 6% in the quarter.
David Begleiter - Deutsche Bank
And did pricing fully offset that?
Michael J. Monahan - Vice President, External Relations
Yes.
David Begleiter - Deutsche Bank
And only a question, Doug, you mentioned some moderation in food and hospitality, can you quantify that moderation and is it continuing, I assume it is into the third quarter?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes. We track a number of metrics, but probably the one is food traffic and there is clearly some moderation, but this is in a highly cyclical market.
So, in a lot of ways it's flat, there is some trading between full-service and QSR. You can see that in some of our results.
I guess our expectation coming into the year was that it was going to be a soft market. You might argue that it is a little softer that we thought.
Our expectations for the balance of the year is that it is going to remain soft at this level. With that said, Institutional, we believe Q2 was really there are low watermark and feel pretty bullish about how they are going to respond in the second half as we move forward, simply because we had a lot of, we think very positive initiatives which are gaining traction as we go forward.
David Begleiter - Deutsche Bank
Thank you very much.
Operator
Our next question is from Mike Harrison with First Analysis.
Michael J. Harrison - First Analysis
Good afternoon.
Michael J. Monahan - Vice President, External Relations
HI, Mike.
Michael J. Harrison - First Analysis
You've talked about getting more aggressive in going after market share in Kay in particular, but also in the Institutional side, do you have any metrics that you could point to that indicate how successful that push has been or barring that do you have any anecdotal evidence of some share gains?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Mike, this is Doug. I would point to a couple of things.
On Kay side this would be very strongest new business here, may be since we owned them. It is going to be certainly in the upper one or two years only owned the business since '95.
So, we have had a couple of big wins there which is what's going to propel the business, as well as there are some trade down to QSR etcetera. In Institutional, we're also in a position to have had very strong new business result this year in the U.S.
I would say Europe is doing much better in terms of gains and losses as we are in every region. So this is a big focus, we've recently gone back through, just illustrate where the opportunity is for each of the business and ask them to identify opportunity.
We are still a very target rich business and have a lot of shares gain in front of us, which is why we remain confident in our expectations for the business as we move forward.
Michael J. Harrison - First Analysis
Doug, what about this new... it sounds like you have a new targeting software system for trying to find some of these new customers.
Can you talk about that a little bit?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes, we are really running it right now in Institutional North America and it's taken some purchase database and cleansing it with some of the data that we have and identify clearly by S&P dollar volume because that way we can start segmenting the markets most attractive to us, where the business opportunities are. We've recently in the last few years rolled out new technology to all of our field associates, who were able to really...
if you will send these leads out via the technology so that they have them in hand track and manage this in a much more efficient manner than in the past. So we've got better clarity on the leads, I think better segmentation i.e., we know where the volume is and were the most attractive targets are and we've gotten them out of the deeper closets of the business.
So that's why we are... we are seeing traction there.
Its working and that's why we feel very good about the business.
Michael J. Harrison - First Analysis
Right and then the last question I had is, you noted some delays related to the higher integration costs for the Ecovation, can you give us some more details on that front and also how that's impacting your plans to roll out the Ecovation offering across some of your Food and Beverage customers?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
What's really gotten on Ecovation is two things. One, there is a portfolio of business in hand when we bought the business.
We have chosen really not to pursue several of all those deals because of our assessments of the credit risk and really walked away very late in the process on a couple of them. And additionally, it's taken longer, which is normal in this environment for people to get to yes.
With that said, if you go further back in the portfolio and we are gaining a lot of momentum, have a lot of interest in Ecovation, have a number of strong trials, so we are bullish and remained as bullish in the long-term prospect of this business as we were when we bought it. This year is not going to be a strong as we thought when we bought it basically because we choose to not pursue some business and we've got a few delayed yes's.
David Begleiter - Deutsche Bank
Right. Thanks very much.
Operator
Our next question comes from John Mcnulty of Credit Suisse.
John Mcnulty - Credit Suisse
Hi, good afternoon. Just a few quick questions.
First of all can you give us an update in terms of what your actually European margins were for the quarter?
Michael J. Monahan - Vice President, External Relations
Hi, John.
John Mcnulty - Credit Suisse
Yes.
Michael J. Monahan - Vice President, External Relations
Margins were about 8%.
John Mcnulty - Credit Suisse
Okay, great. And then, the growth that you saw, the 4% growth in Europe excluding acquisitions and divestitures, can you give us some color as to how that stands up relative to the past few quarters, it sounds like it actually is maybe a little bit higher than what you've been doing and maybe indicating there is some traction there?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes, John, you know in Europe, last year '07 was, our organic sales growth was 80 basis points higher than '06. Our first-half is stronger than last year's first half in terms of organic sales growth.
So, we expect in '08 lot... several basis points better than '07.
But, we expect to be accelerating again for the balance of the year and in total for the year. It is...
John Mcnulty - Credit Suisse
Okay. And then the last question, with regard to that distributors, I believe you'd indicate there were some inventory clearing out issues and that curbed your growth a little bit.
To the best of your knowledge, is that done or should we expect some of that to linger in... into the third quarter's as well ?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Our guess is the bulk of it is behind us, particularly in U.S. Institutional.
But, we don't have absolute transparency into where we're going with inventory. But our guess is the bulk of it is behind us.
John Mcnulty - Credit Suisse
Okay, great. Thanks a lot.
Operator
Our next question is from Dimitri Silverstein of Longbow Research
Dimitri Silverstein - Longbow Research
Good morning, or good afternoon I should say. Couple of questions, first to follow-up on the GCS, I'm not sure I heard you correctly on that business.
Did you say what's going on with losses in that business, is it getting close to break-even or just had losses where it is same as last year?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Dimitry, this is Doug. We lost $4 million in Q2 and that's following a $6 million loss in Q4 another $6 million in Q1.
So it's sequentially better, it was marginally improved versus Q2 of last year. Importantly, I think it's more of a trend and clearly the business has a very good handle on the money flow and how it's going and we expect continued improvement in Q3 and Q4.
I think GCS performed... met our expectations in Q2 and we usually have high expectations, we are moving in the right direction.
Dimitri Silverstein - Longbow Research
Okay, so to kind of extrapolate that further, you do expect to be break-even or better by the end of the year in that business?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes. I think what I...
what we've said is that we would end the year at a breakeven run rate. I've tried and generally been successful and also saying it doesn't mean we expected to make money in the fourth quarter.
Dimitri Silverstein - Longbow Research
Okay.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
With that... Yes.
I would say we are more on track to... what GCS is dealing with, which we didn't plan when we said that...
honestly, I'm not going to spin a change the outcome dramatically. Yes, clearly the economy is softer than we thought.
What I would say is I think GCS' progress on the margin side is probably faster than we thought , which is offsetting a little bit of smoothness on the top line due to the economy.
Dimitri Silverstein - Longbow Research
Gotcha. Okay.
Doug, thanks for the color. And then a question on sales force headcount increases, I hope.
Did you have any data that you would be willing to share with us on that?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
For the year, we were up 2 points for this year.
Dimitri Silverstein - Longbow Research
Are there plans to accelerate hiring into the second half of the year to kind of deal with the weaker North American market?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes. We are going into second half.
I would say we are probably in the year between 3% and 4% increase in sales force and some of this is, we are clearly going to continue to aggressively feed our growth businesses, we are going to aggressively feed where we've got great growth opportunities, but we are also working to redeploy headcount from businesses that aren't growing quite as fast as those that are growing fast.
Dimitri Silverstein - Longbow Research
Okay. And then final question just on Europe and the progress you are making there.
You talked about having 8% operating margin in that business, which I think is kind of as low as it has been. So can you give us some milestones or markers, what you're looking for as incremental improvement in Europe until we start seeing it in the numbers?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
We've tried talking this. This isn't always that easy to see in the reported numbers.
It is... clearly we are making a number of investments in Europe to get after a couple of things.
First, to accelerate organic sales growth, which we are doing. Second, to drive improved margins in the business, which will translate and improve the wide margin.
And third, improve our cash flow and tax rate. And the way we said they would come is we expect to see ongoing improvements immediate, which we've been seeing in organic sales growth.
Second area you are going to see is tax improvement, because frankly we had to make investments in SG&A to realize some of the tax savings and shift the way it flows, and then we will see... the third stage will be improved margin as well.
Dimitri Silverstein - Longbow Research
Okay.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
All these things together, we are very excited about the one... our prospects in Europe and our ability to generate more income and better cash flow.
Dimitri Silverstein - Longbow Research
Okay. Thank you, Doug.
Operator
Our next question is from Gary Bisbee of Lehman Brothers.
Gary Bisbee - Lehman Brothers
Hi, guys. Good afternoon.
I would like to start out with just a macro question. It seems like every data point we see these days from Europe indicate that things are really beginning to flow there pretty aggressively and I guess, wanted to know how you think that impacts the turnaround you are trying to do there?
And secondly, maybe you could give us a sense as to what type of a plan have you built into your guidance in terms of weakness in Europe and how much you actually think it will impact this?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes. We are usually pretty conservative on economic improvements and generally assume the worst as we go through this.
So, I can't say we've got great hope for economic turnarounds or improvements and in fact, I've got forecast counts on the same type of situation we are or minor worsening now. How is it going to affect Europe.
We would rather compete in robust economies than in weak economies, but with that said, they are not share gain and that's why we figure we're responsible for creating our own wind in all conditions and we're out there aggressively investing in new sales firepower, manpower putting them in the street, getting after business, our win-loss ratio if you will has improved and that's the type of metric we got to go stay on because it's what drives your business regardless of the economic situation. So I don't know if that answers it.
Our forecast is predicated on perfect economy.
Michael J. Monahan - Vice President, External Relations
[inaudible] your business. we got through this economic situation
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Right. I don't upset [inaudible] our forecast is predicated on perfect economy.
Gary Bisbee - Lehman Brothers
Okay. And you said in the prepared remarks and early in the Q&A that you thought that the second quarter would be the bottom for Institutional and that U.S.-based tax business would also reaccelerate in the third quarter.
Can you give any more color exactly how you are confident in it, is it pipeline of sales calls that you've made and you're trying to deals, is it the new product rollouts or what gives you comfort in that statement?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yeah, that's a fair question. I think it's a couple of things, in Institutional...
sometimes the businesses are worse than they are and there are times they look better than they are. American Institutional second quarter makes it look worse than it is.
And so the underlying things going in Institutional is they've got great new business activity per the earlier question, the targeted new account activities that we've got going. Apex, the new dishwash platform is ahead of our revived more aggressive plan.
We've got a number of units already on and like what we are seeing on Apex, that's going quite well. We are also on SKU reduction, which we're using to do a number of things, including enhanced margin and we're on pricing and so as we track these initiatives and look at the traction, you can start getting a good idea of how this is going to translate into business performance.
So, we urge you to say it to say it I mean... where it's going to be, we're very confident third and fourth quarter will be better than the second.
Gary Bisbee - Lehman Brothers
Okay. And then just last question.
Is there... are you seeing any real change in terms of the pipeline or what your sales force appearing in the Healthcare business related to the expected reimbursement changes that fall around infections people get one on the hospital for some [inaudible], is that really more of an '09 opportunity for you guys.
I guess I'm trying to understand what the health systems, trying to get prepared ahead of that and is that really, a real positive in near-term, is it more of a opportunity you are tackling for the future? Thanks a lot.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yeah, what I'd say about our Healthcare business is its performing well. Microtek, our newly acquisition has accelerated since we bought it and is growing at double-digit rates on an organic basis if you compare to their year-on-year performance and our if you will...
historic healthcare business is also doing quite well and we expect it to accelerate too. To your specific question about the reimbursement change, yes, it is very hard to figure it out exactly what drives purchase decision.
What I believe is customers are going to probably be in a reactive mode than proactive mode on this given the history in healthcare and I would expect that this is even a more important driver on post-change than it is pre-change.
Michael J. Monahan - Vice President, External Relations
Yaw, what I say about our healthcare business is that it is performing quite well and Microtek had new acquisition, as accelerated since we bought it and is growing at double-digit rates on an organic basis, if you compared to their year-on year performance and our [inaudible] historic healthcare businesses also doing quite well and we expected to accelerate to -- to specification about the reimbursement change. It's really hard to [inaudible] around exactly what drives purchase decision, what I believe is customers are going to probably in the mode of reactive mode than proactive mode on that [inaudible] and healthcare and I would expect to [inaudible] important driver on post change than it is pre change.
Gary Bisbee - Lehman Brothers
Okay. Thanks for the color.
Operator
Our next question is from P.J. Juvekar of Citi.
Prashant Juvekar - Citigroup
Good afternoon.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Hi, P.J.
Prashant Juvekar - Citigroup
Your Kay growth was really robust at 17%, and you mentioned share gains, are there any particular chains that you won the business, what's driving that?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
I mean... PJ, I guess our historic stance is we don't get into naming gains and losses, but yes, it picked up some very good business for the year.
So it's driven... driven from a couple of factors.
I mean, their first quarter, I think as we told you in first quarter, they were doing better than it looked also, because we had some inventory shifts going on in that business between quarters. With that said...
and so, some of that is why the second quarter looks as strong as it does, but really, we expect a very strong second half as Kay starts realizing the benefit to the share gain, particularly in the second half. So, they picked up some nice change.
Prashant Juvekar - Citigroup
Okay. And since you bought Microtek, have you started negotiating with large national hospital chains and...
for your one-stop shop and have you had any success, can you talk about that?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes. Often the way chains buy or hospitals buy through group purchasing organization and we've certainly had some success, if you will, bringing Microtek into relationships that were previously Ecolab and quite candidly going the other way.
And I would say the sales synergy, which we really don't generally count on immediately has come faster than we thought.
Prashant Juvekar - Citigroup
And then finally, you talked about inventory drawdown by distributor, you have this alliance with Cisco, and do you believe that these distributors were drawing down inventory because there is slowdown in the end market?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
I think there is a couple of things going on... all...
Cisco has made a number of large investments in technology, in distribution systems, all designed to improve working capital, which for a distributor reads inventory. And so, some of this is just a natural outcome, I think of investments that they have been making over the years as they deploy, then get down to X.
They need some inventory and I think that's the larger reason, but naturally if there is slowdown, they adjust down and when there is a pick up, they adjust up.
Prashant Juvekar - Citigroup
Okay. Thank you.
Operator
Our next question is from Edward Yang of Oppenheimer.
Edward Yang - Oppenheimer & Co.
Hi, good afternoon.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Hi.
Edward Yang - Oppenheimer & Co.
Doug, you were pretty pressured in expecting some headwinds this year, I know it's early, but could you share your preliminary thoughts on expectations for '09 and historically you've grown earnings in the low to mid teens, if the current environment persists, is that something that's achievable?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
You know '09, our only assumption right now is its lousy, because I mean not for us, but for the markets. And I think that's the safe assumption, most of the assumptions we need to make, because we want to hold ourselves accountable for driving new business, driving share gains, making sure we are getting after the things that we need to get after to ensure we're positioned to deliver no matter what the environment, and we would always rather be surprised on the upside.
All right. That's how we generally view the world until the world proves us wrong.
With that said, do we... we have no plan to change our objective of 15% EPS growth and we work to drive sustainable growth this year..
You ex acquisitions, dilution which we are going to have time to time and you look at our forecast, it's clearly in our range and what I'll call a difficult environment, and we're doing it while making, key investments in the business for the long-term which will benefit us in '09, '10 and '11 and that's the type of ribbon that we worked hard to achieve and we are going to work hard to sustain.
Edward Yang - Oppenheimer & Co.
When you say lousy environmental overall for next year, does that mean things gets worse from here or...?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
I don't...I don't think we believe it's going to get dramatically worse, so we're not predicting...economic meltdowns, we're also not predicting economic recovery in '09, particularly in North America, Europe may soften somewhat. In some of the other markets, we just...I guess we just are willing to believe given our share position our opportunity that that's going to dictate our future.
Edward Yang - Oppenheimer & Co.
And you mentioned with regards to Ecovation you walked away from some projects due to credit quality. Are you doing this in any other parts of your businesses, are you being more watchful and...what's your bad debt experience being lately?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes, I think Ecovation is somewhat unique in the capital investment made up front, so we are going to be particularly sensitive in a business where you are putting a bunch of capital in. [inaudible] watchful, I would say clearly in these environments we become even more vigilant on payables, in receivables...
receivables and we have been, I think we've got a very good handle on it as we go forward. So I think that's exactly you would expect us to do.
Edward Yang - Oppenheimer & Co.
Thank you.
Operator
Our next question is from Michel Morin of Merrill Lynch.
Michel Morin - Merrill Lynch
Hi, good afternoon guys. Couple of quick ones, the extra $0.02 that you now expect to get from the core business, I guess because you are saying you are going to get two additional cents of dilution.
So the base business is giving you a little bit more than you had anticipated. Where is that coming from?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes, it's coming from a couple of places, I mean, we've clearly stepped on the gas on cost savings and we are... continue to be on the gas on organic growth and pricing.
Michel Morin - Merrill Lynch
Okay. And just going back...
that's very helpful, thank you. And on the earlier question about your sales force, it's good to see that you're not cutting back there.
What do you think your competitors do, it looks like you are picking up some share, is that facilitated by some of your competitors perhaps pulling back a little bit on their sales force, are you seeing any of that in the field?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yeah, I think it's been a trend of a number of our competitors reducing their field sales, manpower, overtime we have seen a continuation of that trend. I don't know if there has been a big change in trend recently.
But we figure what... generally in these tough environments, I'd be rather be [inaudible] than anybody else and we figure this is going to give us advantage versus competition and we want to make sure that we're in position to capitalize.
I don't... so we will go aggressively to build share and all the way you do that, have a great offer for customers.
Michel Morin - Merrill Lynch
That's great. Thank you.
And then just finally on GCS, Mike could you break out the growth that you had from service relative to the parts portion of the business?
Michael J. Monahan - Vice President, External Relations
Yes, services up about 8%.
Michel Morin - Merrill Lynch
Parts was negative?
Michael J. Monahan - Vice President, External Relations
Yes, parts was down a few percent.
Michel Morin - Merrill Lynch
Right, thanks very much.
Operator
Your next question is from Bob Koort of Goldman Sachs.
Robert A. Koort - Goldman Sachs
Thanks, good afternoon guys.
Michael J. Monahan - Vice President, External Relations
Hi, Bob.
Robert A. Koort - Goldman Sachs
Couple of questions. One, Mike can you remind us when you guys bought the JV in Europe.
How high your debt-to-cap ratio went then?
Michael J. Monahan - Vice President, External Relations
It got up to 47% of capital.
Robert A. Koort - Goldman Sachs
And Doug, is there any reason you won't pursue those limits again?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Bob, I knew that was the second question.
Robert A. Koort - Goldman Sachs
I didn't asked anything about Henkel.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
You are very clever. Look I think, we've always said that our debt- to-cap ratio we talk about is a range and if there are unique situations be the acquisitions rather that we aren't afraid to extend beyond our range.
Robert A. Koort - Goldman Sachs
Can I ask a couple of different questions? And I think Mike, you said in Europe and Asia-Pacific your profitability was down year-on- year?
Is that primarily because of logistical costs, or what is it about the business models in those environments that are providing the earnings leverage that you get in the U.S. markets?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Bob, this is Doug. We have accelerated investments in corporate account hedge, right, in a couple of what we thought were key investments to give us a bigger platform to grow on, right.
Operations, we added a plant in China, yes we've done a number of things and in those businesses you kind of go through some step function changes. But, they were investments that we proactively made and we feel good about the investments.
Robert A. Koort - Goldman Sachs
Okay my last one, on the health of the US Institutional markets, it seems like that growth is about as low as we've seen it for several years. I think Doug you alluded to that being somewhat misrepresentative of the underlying business.
What can we expect in the second half or maybe even looking further out, is this going to be, as long as the economy is a little sketchy 3% to 5% revenue growth business or can you ramp it back up into the mid-single digits?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Yes, we haven't... we talked about Institutional's range in the 6% to 8% piece, you know we believe we will be close not in the range.
Robert A. Koort - Goldman Sachs
Great, thanks very much.
Operator
Our next question, it's from Jeff Zekauskas of J.P. Morgan.
Unidentified Analyst
This is Ben Richardson [ph] coming in for Jeff. Just sort of question concerning your sensitivity to fuel cost and how you might manage that?
Michael J. Monahan - Vice President, External Relations
Well, where as fuel cost is not one of our major raw materials it is decking it down the list. In terms of how we are managing it, is we've instituted some fuel surcharges in some divisions and we will continue to look at that and react to fuel cost as we go forward.
Unidentified Analyst
All right. That's all I have.
Operator
Our next question is from John Roberts of Buckingham Research.
John Roberts - Buckingham Research
Good afternoon guys.
Michael J. Monahan - Vice President, External Relations
Okay, John.
John Roberts - Buckingham Research
The corporate line when you back out the $26 million gain was a $14 million expense, does that stay at that rate the next couple of quarters, or when did it drop back down towards the mid-single digit number?
Michael J. Monahan - Vice President, External Relations
I'm sorry John, I couldn't hear you. Could you repeat that?
John Roberts - Buckingham Research
The corporate expense line, when you back out the one-time gain was I think about $14 million expense in the quarter, again, higher than normal because of the activity in Europe, does that stay at that level the next couple of quarters or when does it come back down into the more normal historical mid single-digit kind of levels [ph]?
Michael J. Monahan - Vice President, External Relations
Hi, John, that corporate line includes two things, the special gains and charges, which are like the one-time things that we talk about, so that included that gain which you are correct in backing out. Since we don't forecast special gains and charges, the only thing we can look to is what we would call the corporate side, which would be the cost of the European systems and the cost of the move to Zurich which we think over the second half, it will be different by quarter, but it will be around 13 million bucks.
John Roberts - Buckingham Research
Okay. And then secondly, back to the question about your debt to cap ratio and so forth, we are obviously in a different credit environment right now than you were when you last had your peak debt to cap ratio.
How does that factor into your thinking? How important is it to maintain certain level of credit rating?
Michael J. Monahan - Vice President, External Relations
I am sorry. I missed the part of that John, the phone broke up.
John Roberts - Buckingham Research
In fact, the last time, you had a very high debt-to-cap ratio when you bought out the joint venture, that was a different credit environment than now. Today, it's pretty scarce to have the kind of balance sheet that you guys have out there and I don't know how concerned you are about your credit rating and as you would lever up possibly?
Michael J. Monahan - Vice President, External Relations
It is... you are right, the credit environment is very different.
We do value, we've always valued our strong balance sheet. Now, we are not alone in valuing it, and we don't plan and do anything to cream our balance sheet.
I don't know... that would be not a move we would view as wise.
John Roberts - Buckingham Research
Okay. Thank you.
Operator
Our next question is from Rosemarie Morbelli of Ingalls & Snyder.
Rosemarie Morbelli - Ingalls & Snyder, LLC
Good afternoon, all and congratulations on a very good quarter.
Michael J. Monahan - Vice President, External Relations
Well, thank you, Rosemarie. Nice way to say that
Rosemarie Morbelli - Ingalls & Snyder, LLC
Looking at Asia Pacific, a 6% growth rate excluding currency is really not that big for this small size business compared to some of your other areas. Could you give us a feel as to what is going on there and why with all of the investments you have been talking about, and still it is not growing at a rate that is a little closer to Latin America, for example?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Rose, this is Doug. Yes, you are right.
I don't say we don't like 6% either, but really it's principally driven by Japan and Australia, which are outside businesses for us in that market where it had very slow growth. We had very strong growth in North East Asia, and frankly the balance of Asia as you would expect.
Rosemarie Morbelli - Ingalls & Snyder, LLC
Okay. So we should see...
as time goes by and the balance of Asia becomes a little larger, we should see that rate pick up to a level of 10% to 15%?
Michael J. Monahan - Vice President, External Relations
Yes. I won't argue with you there.
Rosemarie Morbelli - Ingalls & Snyder, LLC
Okay. And then looking at other services, I mean, the operating margin has improved substantially to 10.8%, is that a new base level going forward or was there something special in the second quarter and then we go back down a little in the second half of the year?
Michael J. Monahan - Vice President, External Relations
Yes. We expect that should continue to improve as GCS' margin continues to improve.
Rosemarie Morbelli - Ingalls & Snyder, LLC
But there was nothing special that prompted so much between the first and the second quarter?
Michael J. Monahan - Vice President, External Relations
I think it's principally GCS.
Rosemarie Morbelli - Ingalls & Snyder, LLC
Okay. And that is not...
well it is not growing as much. You're not doing anything there in terms of major investment that would lower the overall margin if GCS stayed at the same level?
Michael J. Monahan - Vice President, External Relations
No. I think the Pest business is a stable business, we invest on a continual basis.
Will continue to but that's in it's base and we don't have any planned outsize investment up or down for that business.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
For continued improvement in there, Rosemarie going forward.
Michael J. Monahan - Vice President, External Relations
Principally the GCS.
Rosemarie Morbelli - Ingalls & Snyder, LLC
Okay. And then lastly if I may, the gross margin Q4 versus Q3, historically is a little lower, but considering what you're doing in terms of price increases and new products, which I'm assuming as Ecolab usually does have higher margins.
Should we expect the gross margin to improve sequentially Q4 versus Q3?
Michael J. Monahan - Vice President, External Relations
I don't think so Rosemarie. At this point I think they'll be flattish.
Rosemarie Morbelli - Ingalls & Snyder, LLC
Okay. So nevertheless a little better than the historical pattern?
Michael J. Monahan - Vice President, External Relations
Yes. And I think you've got the reasons why.
Rosemarie Morbelli - Ingalls & Snyder, LLC
Okay. All right.
Thanks a lot.
Michael J. Monahan - Vice President, External Relations
Thank you.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Thank you.
Michael J. Monahan - Vice President, External Relations
Thank you
Operator
Our next question comes from Chris Shaw of UBS .
Chris Shaw - UBS
Hi guys. How are you doing?
Michael J. Monahan - Vice President, External Relations
Hi Chris.
Chris Shaw - UBS
Where does the other $0.02 of dilution from those deals comes from, was that a new deal included in there or was that just you redid the numbers?
Michael J. Monahan - Vice President, External Relations
You know what, Chris, it's principally Ecovation and it goes back to the earlier conversation. The pipeline that we acquired, changed when we did the blocking from frankly a very sizable deal because of a credit insurance that we had.
And some of the other pieces of the pipeline have been somewhat delayed by the economic situation. With that said, we view this as a year phenomenon.
Chris Shaw - UBS
Okay. That's reasonable.
And then on pricing, you guys said pricing was up 2% for the quarter. Now to me that seems kind of low...
I will think that's the kind of pricing you do in sort of even a flat raw material year, I would think that just from your new products and the value you bring to customers that you could get 2% easily in a given year. So should it be higher?
Michael J. Monahan - Vice President, External Relations
Yes. A couple of things, one it will be...
we expected to increase in the second half as we go given the environment change and everything else we are out there getting pricing. This is a global number, of that includes pricing benefits that we realize or we change out products, i.e., mix driven margin moves in that line.
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
Another thing Chris, remember we are giving rounded number. So we are seeing actually some improvement from little bit below to a little better than to going forward.
Michael J. Monahan - Vice President, External Relations
It's moving up.
Chris Shaw - UBS
It does include mix it doesn't capture when you introduce a new higher value product?
Michael J. Monahan - Vice President, External Relations
Right.
Chris Shaw - UBS
Okay, great. Thanks.
Operator
Our next question it is from Laurence Alexander, of Jefferies.
Laurence Alexander - Jefferies
There are just two quick ones. Can I just...
are you still looking for mid-single digits raw material inflation for the year or is that creeping higher?
Douglas M. Baker Jr. - Chairman of the Board, President, Chief Executive Officer
This is Doug. It has increased and our forecast if you want to include without freight and fuel to delivered product, it's going to be closer to 8%, if you include freight and fuel that we use to move product.
It's going to be around 10% for the year. The number that we've historically given you is ex-freight and fuel.
Laurence Alexander - Jefferies
Right. And then can you briefly discuss the volume trends in Institutional in both the US and Europe, because I guess given the pricing, it looks as if...
I mean, is it still positive in both region, or is there...?
Michael J. Monahan - Vice President, External Relations
Yes. No, it is still...
yes, we have positive volume growth in both North America, U.S., Canada, Europe.
Laurence Alexander - Jefferies
Okay, perfect.
Michael J. Monahan - Vice President, External Relations
And we get back to... continue to have positive volume.
Laurence Alexander - Jefferies
Right.
Michael J. Monahan - Vice President, External Relations
Okay. Well, I guess, this is the last question.
So, thank you all for your participation and have a terrific day.