Feb 17, 2011
Executives
Michael Monahan - Vice President of External Relations Douglas Baker - Chairman, Chief Executive Officer and President
Analysts
John Hirt Brian Maguire David Begleiter - Deutsche Bank AG Jeffrey Zekauskas - JP Morgan Chase & Co David Ridley-Lane - BofA Merrill Lynch John McNulty - Crédit Suisse AG Michael Harrison - First Analysis Edward Yang - Oppenheimer & Co. Inc.
Andrew Wittmann - Robert W. Baird & Co.
Incorporated Robert Walker Gary Bisbee - Barclays Capital Nathan Brochmann - William Blair & Company L.L.C. Dmitry Silversteyn - Longbow Research LLC
Operator
Welcome to the Ecolab Fourth Quarter 2010 Earnings Release Conference Call. [Operator Instructions] 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, President and CEO. A copy of our earnings release and the accompanying slides referenced on this teleconference are available in 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 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 in Slide 2. We also refer you to the supplemental diluted earnings per share information that is also in the release.
Starting with Slide 3. We delivered solid earnings growth in the fourth quarter despite mixed conditions in our end markets as double-digit earnings gains in our U.S.
Services and International segments more than offset what we believe were temporary shifts in U.S. Cleaning & Sanitizing.
We announced plans for a restructuring of Europe to help accelerate the transformation of that business to a higher growth and more profitable entity following implementation of our new systems in that region. Looking ahead, we expect to continue outperforming our gradually improving markets with accelerating quarterly earnings gains as better sales growth, pricing and innovations and margin leverage work to deliver double-digit adjusted EPS growth, once again, in 2011.
Further, we believe these continued improving business trends along with accelerating benefits from our Europe transformation will lead to better EPS growth in the years ahead. Moving to some highlights from the quarter as shown on Slide 4 and discussed in our press release.
Reported fourth quarter earnings per share were up 17% to $0.56. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, fourth quarter 2010 earnings per share increased 9% to $0.60.
The adjusted earnings per share growth was driven by better volume from new products, new account gains and cost savings actions, which more than offset higher operating costs and continued investments in our business. Lower taxes and share count also benefited earnings.
We enjoyed continued good growth in Asia Pacific and Latin America. In the U.S., we benefited from improved momentum in our Healthcare, Pest Elimination, GCS and Vehicle Care divisions and saw continued good results from Food & Beverage.
Restaurants were better but remained slow in the U.S. and Europe.
Slide 5 clearly shows the divergence and improvement we experienced during 2010 in our end markets as well as the balance they provided. All areas improved from the first half to the second.
Our sales to U.S. restaurants rose, outperforming the generally weak industry conditions.
Overall, Europe sales also got better during the year, and the rest of our businesses showed good growth throughout 2010. We think these trends will continue and that we will see further improvement in all categories in 2011.
We also announced as part of our comprehensive plans to transform our Europe business. We are developing plans for an estimated $150 million restructuring of our European operations.
The restructuring is expected to involve the reduction of approximately 900 positions, a significant realignment of our supply chain, including repositioning of our product and warehouse networks, as well as business simplification and a broad number of other actions, to make Europe a more efficient, more competitive and higher-growth business. The restructuring should yield more than $120 million in annual savings when fully completed over the next three years and should accelerate the pace of improvement in Europe sales and profits.
Looking to 2011, our end markets are improving. Asia Pacific and Latin America continue to see good growth across all market segments.
The global lodging room demand continues to show good gains. Food & Beverage and Healthcare are showing steady progress worldwide, and our U.S.
and European foodservice markets remained soft but have shown modest improvement from prior periods. 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 delivering new account acquisition among our national, regional and independent prospects.
We're also making significant investments in key growth businesses and acquisitions to build future growth. We remained focused on cost savings, emphasizing productivity and efficiency improvements to help increase margins.
And we are underway with a range of actions to improve growth and profitability in our Europe business where we expect significant margin improvement in 2011 and for the next several years. Looking ahead, we expect adjusted quarterly earnings to show an accelerating pattern through 2011 as the impact of higher raw materials lessens and as benefits of pricing and our restructuring efforts accelerate.
We look for a first quarter adjusted EPS in a $0.42 to $0.45 range compared with adjusted EPS of $0.41 in the first quarter of 2010. First quarter 2011 adjusted earnings will be impacted by the recent run-up in raw material costs as well as $0.01 cost from Europe transformation activities.
Adjusted for the Europe transformation expenses, first quarter 2011 earnings per share are expected to increase 5% to 12%. We look for the remaining 2011 quarters to show increasingly better gains as we expect to achieve yet another year of double-digit EPS growth in 2011.
We look for adjusted EPS to be in the range of $2.47 to $2.53 per share, showing an 11% to 13% gain over last year. That would represent the ninth year in the last 10 of adjusted double-digit EPS growth for Ecolab.
In summary, we expect 2011 to reflect a strengthening performance by Ecolab as we show accelerating earnings to, once again, deliver attractive growth and show the returns and as we set the stage for improved results in the years ahead. Ecolab's reported consolidated sales for the fourth quarter increased 1%.
Looking at the components, volume and mix increased 2%, pricing was positive but not significant and currency decreased sales by 1%. Acquisitions were negligible.
Slide 6 includes sales growth by segment and division. Sales for the U.S.
Cleaning & Sanitizing operations rose 1%. Adjusted for an acquisition, sales declined 1%.
Institutional's underlying sales improved in the fourth quarter, though reported results reflected the impact of distributor inventory changes. Institutional's reported fourth quarter sales declined 2%.
As was discussed in last quarter's call, higher sales to distributors and the new product and program pipeline building that occurred in the third quarter reversed in the fourth quarter and hurt the sales comparison to last year. In addition, we saw a decrease in distributor inventories during the quarter.
Nonetheless, total shipments, meaning direct post-distributor shipments to our end-use customers, continued their sequential improvement and outperformed the mixed-market trends, which showed continued decline in full service, restaurant foot traffic and strengthening lodging room demand. We also saw a good increase in new account sales as we benefited from targeting new accounts with additional and redeployed sales people, in effective programs that deliver improved value and lower total costs for customers.
We expect continued progress in the first quarter as these growth drivers enable Institutional to show sales gains in the low single digits and better gains for the balance of the year. Kay's fourth quarter sales were flat as strong growth from Food Retail was offset by lower orders in the quarter from quick service in comparison to a strong period last year.
We expect continued good new account growth in Food Retail along with better quick service sales to drive improved gains in Kay's first quarter. Reported sales for Textile Care increased 72%.
Adjusted for the Dober acquisitions, sales were up 5%. Customer gains, new program launches and additional sales within existing customers more than offset continued challenging industry conditions.
The Dober acquisition is going well as the added sales and service teams, strong customer relationships and innovative monitoring technology and products add scale and growth to our Textile Care business. While textile industry conditions remain difficult, we look for better sales from our strengthened Textile Care business in the first quarter.
Healthcare sales increased 1% over the first quarter 2009. Excluding the H1N1 impact from both periods, sales would have increased by approximately 6%.
Gains in equipment drapes, hand hygiene, instrument reprocessing and environmental hygiene continue to more than offset comparison to the prior year's spike in the band due to H1N1 fears. During the fourth quarter, we continued to build on our expanded product portfolio.
Our new line of specialty patient drapes for robotic procedures and Virasept, the first non-bleach EPA-approved ready-to-use disinfectant that kills C. diff [Clostridium difficile] spores, are doing well as are the new hand-care dispenser platform and the OptiPro sanitizer line for central sterile.
Looking ahead, first quarter sales are expected to show an improved sales gain. Food & Beverage sales grew 4%.
Sales increased in almost all segments as corporate account wins and product penetration offset soft results in meat and poultry. Food & Beverage will continue to focus on new account acquisition, pricing and better product penetration to yield better growth in the first quarter.
Vehicle Care sales increased 2%. The division continues focusing on new products and new accounts.
Vehicle Care, once again, outperformed its markets, offsetting mixed and market conditions with growth led by in-bay and auto dealership volume. We look for Vehicle Care to continue showing year-over-year sales growth in the first quarter.
Sales for U.S. Other Services rose 2% in the fourth quarter.
Pest Elimination sales trends improved slightly, yet sales were flat. Gains in fast food, retail grocery stores, healthcare and food & beverage plants were offset by slow conditions in other major end markets.
We continue to develop new products and program solutions to better serve customer needs in the current environment. For example, we launched Guardian Plus, a new program for full service restaurants that provides expanded coverage for the most common pest through an all-inclusive program.
We also continue to work on additional new solutions that fit our sustainability profiles and goals. We expect these efforts, along with others, to help offset soft markets and yield sales improvement in 2011.
GCS sales increased 6% in the quarter. Once again, profitability improved significantly over last year.
New account wins helped drive the sales gain. GCS profitability also continued to improve as productivity and efficiency gains were realized throughout the business.
We remained focus on developing chain-account relationships and driving sales through their regional and franchise organizations. We expect GCS to show continued sales growth in the first quarter and for the full year 2011.
Measuring fixed currencies, International sales increased 3%. Europe, Middle East and Africa sales were up 2% in the fourth quarter at fixed currency rates.
Europe's Institutional's division fourth quarter sales were flat. Our sales team targeted new business gains with regional local customers.
These efforts were leveraged by new products that offer customers superior results, cost savings and better efficiency and helped to offset soft foodservice environment. Food & Beverage sales improved.
The business continued to focus on winning new customers by emphasizing cost savings benefits of our leading products, like Inspexx and Water Care. Textile Care sales were off in a continued weak environment while Europe's Healthcare sales benefited from higher shipments of infection prevention products.
Pest Europe sales increased as we continue to improve operations. Looking ahead, we expect Europe's first quarter of fixed currency sales to be similar to last year.
Asia Pacific sales grew 6% in fixed currencies as the region shows a continued recovery from last year's low levels of business travel and tourism. Institutional sales were solid as occupancy levels improve and economies recover.
Food & Beverage sales showed strong growth, both the beverage and brewing sectors continue to increase benefiting from improved product penetration and account gains. The Cleantec acquisition is doing well.
Integration efforts are going smoothly, and we have remained optimistic regarding Cleantec's benefits to expand our customer base, improve our business position and provide additional services and coverage to our customers. Looking ahead, Asia Pacific expects continued good sales growth in the first quarter, though there will be some negative impact on growth from the Australian flooding.
Fourth quarter sales for Ecolab's Canadian operations grew 3% at fixed currency rates. Food & Beverage and Pest reported strong growth.
Institutional, Vehicle Care and Kay also reported good sales gains. We expect solid sales trends to continue in the first quarter.
Latin America reported strong sales gains rising 9% in fixed currencies as all divisions in that region increased. Institutional growth was driven by new accounts, increased product penetration and continued success with global and regional accounts.
Food & Beverage sales reflected good demand in the beverage and brewing markets, as well as the benefits of new accounts. Overall, we expect attractive growth trends to continue in Latin America with another solid gain in the first quarter.
Turning to margins on the income statement in Slide 7 of our presentation. Fourth quarter gross margins continued their recovery increasing 20 basis points to 50.3%.
The increase benefited from volume gains and cost-savings actions, which more than offset unfavorable business mix. SG&A expenses represented 36.8% of sales, 10 basis points below last year.
Leverage from sales gains and cost-savings actions more than offset continued investments in our business, people and systems and other cost increases. Operating income for Ecolab's U.S.
Cleaning & Sanitizing segment decreased 10%. The decrease is primarily driven by inventory changes that negatively impact the Institutional business, a less profitable mix of business in the quarter, higher delivered product costs and a write-down of a customer receivable.
Operating income for U.S. Other Services grew 17%.
Margins expanded by 220 basis points over last year driven by pricing and cost savings actions. International fixed currency operating income increased 13% versus last year while margins expanded 90 basis points.
Volume gains, favorable delivered product costs, favorable customer rebate adjustments and cost savings and efficiency efforts more than offset higher costs from Europe's systems and pensions. Corporate segment and tax rate are discussed in the press release.
No shares were repurchased during the fourth quarter. The [indiscernible] performance that Ecolab's reported fourth quarter diluted earnings per share was $0.56 compared with $0.48 reported a year ago.
While adjusted for special gains and charges and discrete tax items in both years, adjusted earnings increased 9% to $0.60 when compared with $0.55 earned a year earlier. Turning to Slide 8.
Ecolab's balance sheet and cash flow remained strong. Total debt-to-total capital was 28% at December 31 compared with 33% reported year ago.
Our net debt was 20%. Cash was $242 million, higher than normal for us.
The lower debt levels and higher cash at year end reflect anticipation of the purchase of Cleantec and O.R. Solutions, a $100 million contribution to the U.S.
pension plan in early January and the retirement of $150 million of maturing debt in February. Our current total debt-to-total capital is approximately 34% with a net debt of about 32%.
That's a review of 2010's fourth quarter. With the year now reported, we thought it would be worthwhile to look at a longer-term perspective on Ecolab's performance as shown on Slide 9.
While we have gone through a pretty turbulent period over the last five years, Ecolab has performed well, showing good sales gains, 13% compound earnings growth and 500-basis point improvement in our return on capital. It's a performance we're quite proud of given that rough environment, but it's also a record we're determined to improve upon.
And we believe we will. We are well-positioned for the next five years.
As shown on Slide 10, we expect continued recovery in all of our global end markets. We are seeing our investments in growth areas deliver with double-digit growth from emerging markets in water, energy and waste management.
And after an unusual year, Healthcare should be back on a strong growth track. We have seen increased momentum in the acquisition front, and Europe is ready to deliver improved growth.
A key part of our growth plans for the next several years will be Europe. As mentioned in our opening comments and included on Slide 11, following the implementation of our systems in Europe, we're developing plans for the transformation of our European operations.
This plan is designed to sharpen our Europe business competitiveness, improve efficiency and effectiveness and accelerate growth and profitability. As part of this larger plan, we will undertake a restructuring to accelerate the benefits of these actions.
These activities will likely include those highlighted on Slide 12 and will leverage the many opportunities across our supply chain, G&A and within our divisions. We will be working jointly with our various Works Councils in Europe to develop these plans.
Expected results from the restructuring and our other actions are summarized on Slide 13 and should begin to show up in the second half of 2011 and increase over the next several years to more than $120 million in annualized savings when completed. Net, we expect the restructuring will accelerate our Europe margin improvement, increasing operating income margins by approximately 100 basis points in 2011 and more than double that in each of 2012 and '13.
Turning to our plans for 2011, and as detailed in Slide 14, we will continue to take aggressive actions to drive both our top and bottom lines, expanding market share and customer penetration using differentiated new products and leveraging our investments in our emerging markets and growth businesses like healthcare and water, energy and waste management. We will use targeted pricing and innovation to benefit margins and offset raw material cost increases.
Further, acquisitions will be a contributor to 2011 earnings growth. But clearly, this will also be a year where we expect to see margin development from Europe as a significant driver for Ecolab earnings.
Slide 15 shows an EPS bridge for the first quarter and the full year 2011 that details our outlook. We expect much stronger top line growth in 2011, and we see it improving throughout the year.
Delivered product costs is expected to be a headwind in 2011, though with a lessening comparative impact in the second half. We will also continue to make substantially higher investments for future growth, including sales and service headcount, customer and field technology and new products and program development, significantly ramping up these investments through the year.
We will see costs in the first quarter from our actions to transform Europe, as well as from acquisitions, to be split to EPS positives as we move to the second half. Looking at the first quarter 2011, we expect the adjusted diluted earnings per share, excluding special gains and charges and discrete tax items, in the $0.42 to $0.45 range compared with adjusted earnings per share of $0.41 earned a year ago.
However, excluding the transformation costs impact, first quarter EPS should show solid gain of 5% to 12% despite the raw material impacts and our growth investments. We look for full year 2011 earnings per share to increase 11% to 13% to the $2.47 to $2.53 range as quarterly earnings show accelerating gains driven by improving sales volume, higher pricing, cost savings, acquisitions and the actions we are taking to improve Europe profits.
In summary, as noted on Slide 16, we delivered on our forecast in the fourth quarter while still investing in our future. We look for the first quarter to show a good operating profit growth for the following quarterly earnings comparisons accelerating through year.
We expect 2011 to outperform mixed, though improving, end markets and deliver double-digit EPS growth, representing our ninth year of adjusted EPS growth of the last 10 years. And we expect the investments and actions we are taking now will yield better sales and EPS growth in 2012 and '13.
And now, here's Doug Baker with some closing comments.
Douglas Baker
Thank you, Mike. Look, I want to do a couple of things.
One, Mike has run through our fourth quarter and outlook, I want to take a moment to share my thoughts about the year completed, 2010 and, importantly, 2011 and also the actions that were taken in Europe. First, we completed what we regard as another successful year in 2010.
And while it wasn't perfect, the fundamentals, I'd say, most importantly improved throughout the year and leave us with very solid momentum moving into 2011. There are a number of highlights in 2010.
We had an excellent new innovation portfolio launched. We had great success selling large corporate accounts in our Institutional, Kay, Food Retail and F&B businesses.
We continued very good progress in our growth initiatives. Emerging markets performed very well.
Our water, energy and waste business continued to gain traction and also had very good results, and our Healthcare business is moving from the H1N1 shadow and now puts that behind them as it enters 2011. Also, our core businesses had very solid performances, too.
Institutional finished the year with a record number of food service and hospitality accounts, i.e. it continued to add new customers in an environment where accounts were being taken away.
They also built solid underlying momentum. F&B had an excellent year, very strong results and entered 2011 with very strong momentum.
Kay building international momentum, and the FRS [Food Retail Service] business continues to perform exceptionally. And importantly, Europe transitioned from systems implementation to leverage, which obviously we talked about in our earnings release and we'll talk more about today.
So you saw in Europe that we saw daylight in leverage in Q4, which is what we forecasted first half of last year. And so for the first time, Q4 operating income margin was ahead of previous years.
And obviously, we expect that to accelerate not only in 2011, but in '12 and '13, as Mike just talked about. So we see big improvements ahead.
So to 2011, I would really point to -- there's a few key points. We think we entered the year with strong momentum.
We've got recovery markets. The growth investments that we've been making are paying off.
Emerging markets are doing quite well. Healthcare, as I mentioned, is moving away from the H1N1 shadow, and our water, energy and waste business is doing very well.
We have M&A momentum. We closed on a number of businesses, and the Europe systems are in place and now in a position to be leveraged.
So we're quite excited about that, not only for what it means for 2011 but what it means for 2012 and beyond. So we like where we are.
We still have a huge sales opportunity. We've got significant leverage opportunities.
We've got a great track record of performance, and we plan to maintain it moving forward. So as Mike says, we're very proud of the last five years and looking forward to even better five years moving forward.
So with that, I'll turn it back to Mike for Q&A.
Michael Monahan
Thanks, Doug. Some final notes, our updated Fact's Book will be online next week at ecolab.com/publications.
It is updated in thorough descriptions of our businesses and is helpful in providing deeper understanding of our company. Also, we plan to hold a tour of our booth at the National Restaurant Association show in Chicago, May 23, with more details as we get closer.
So that concludes our formal remarks. Operator, please begin the Q&A period.
Operator
[Operator Instructions] Our first question is from Nate Brochmann of William Blair & Company.
Nathan Brochmann - William Blair & Company L.L.C.
Doug, I wanted to dig in a little bit more on the raw material side. Obviously, across the globe, we're seeing raws kind of going up.
Can you kind of remind us in terms of the impact that, that has in terms of the cost that you pay as well as how long it takes you to adjust your pricing to recoup those?
Douglas Baker
Yes, Nate, well, we laid out in one of the charts that we just put online that we expect raw materials to have a negative impact of $0.10 for the year. It's very much weighted in the first quarter, precisely for the reasons you laid out.
It does take us some time to go recover, if you will. I know we have very fast moves in the raw material markets.
It's exactly what we saw in '05, '06, '07, but I would also point out that we overcame the raw material inflation during that period. It was much more significant, if you will, as a percentage of our total raw material bill back in those years.
So it takes several quarters for us to overcome this. I would say our expectation is you'll start seeing daylight again on our operational income margins beginning in Q2.
Nathan Brochmann - William Blair & Company L.L.C.
And then if we could talk about the European restructuring a little bit. It seems like if we kind of get through the noise a little bit, we're certainly seeing that margin expansion, as you highlighted, to start see daylight there in the fourth quarter.
Could you talk a little bit in terms of the decision to do this additional restructuring? It sounds like this is kind of above and beyond a lot of things that we've already done and are just nice add-it-on features in terms of really positioning the business well.
If you could just kind of share your thoughts a little more specifically on that?
Douglas Baker
I guess I would position it this way, Nate, the restructure is a way for us to get to the endpoint that we've foreseen the whole time. I mean, even when we contemplated the investment in EBS [Ecolab Business Solutions] systems.
And it's important for two reasons, we believe. One, it's much, much better way of doing this from an organizational impact basis, which means you got to move quickly and make sure that the organization understands what the new structure is and how do you get them from point A to point B as fast as possible, because frankly it minimizes disruption.
So we believe it's the right thing to do from a business operation standpoint. It also adds obvious financial benefits, and that it accelerates or brings forward the ultimate benefits that we talked about all along, which is we've always believed this business to be a 13%- to 14%-type business, which means you've got a delta if you take the ending point last year of roughly 1,000 points.
We have talked about a pacing of 100 basis points a year. We still believe that's the right number for this year.
But what this restructuring enables us to do is more than double that in '12 and '13 and likely beyond that.
Operator
Our next question is from Gary Bisbee of Barclays Capital.
Gary Bisbee - Barclays Capital
I guess I'll just add on about that. How much of the Europe restructuring effort is really a result of the European implementation.
It sounded like some of it was if you're more efficient now, you don't need as many heads and that type of thing, is a lot of it coming out of that or is a lot of it sort of incremental? And I guess the secondary question on that, how long has this been in the planning stage?
Douglas Baker
Well, I would say the simple answer is, I don't know if you can lay this on any one point. I would say we have been discussing and moving forward on plans to improve our profitability in Europe for a number of years.
We identified several years ago that we had two principal challenges. One was a structural issue in Europe and the other was a weak systems environment.
They somewhat worked hand-in-hand. In fact, with weak systems you almost always get too much structure.
And so we wouldn't be able to do exactly what we're doing without the new systems, but there are a number of moves we're doing to improve profitability that are outside of, if you will, or unrelated to the systems move as well. How long have we been contemplating this?
I would say probably as long, in some sense, as we’ve owned the business. We wanted to understand how you do this, improve the business and, most importantly, improve our ability to compete in that market effectively.
So we want better customer service. We want better service at the customers' end unit.
And we want more efficient back offices, so that we don't waste any money, if you will, not creating value for our customers. And that's not the position we've been at.
So we believe, ultimately, this restructure is the smart the way to do it. It's a huge financial payoff.
It makes a lot of sense financially. And as I mentioned earlier to Nate's question, it's also the best way to do this from a organizational and a business standpoint.
Gary Bisbee - Barclays Capital
And then I guess the follow-up question, can you size it all, how much you think the distributor inventory drawdown impacted the U.S. Institutional business revenue?
Douglas Baker
Yes, you know it was in the neighborhood of $5 million or so in the fourth quarter. Here's what I would say, our fourth quarter, I will probably not give you the politically correct answer, our fourth quarter wasn't a great quarter but it certainly was better than it shows up in public reporting.
So you've got -- really if you look at the underlying growth rate organically when we ferret out all of the noise was probably in the 3% range. Importantly, we believe it's accelerating.
We expect to do better than that moving into Q1.
Operator
Our next question is from Andrew Wittmann of Baird.
Andrew Wittmann - Robert W. Baird & Co. Incorporated
I guess I want to follow-up a little bit on that last question, digging in Institutional a little bit more. You mentioned the unfavorable business mix.
Can you just give a little bit more detail about exactly what that was and your expectation for that here heading into 2011 if that trend could continue, if those pricing environments are the same now as they were a few months ago?
Douglas Baker
Yes. The business mix conversation was about total U.S.
Cleaning & Sanitizing. With that said, big portion of that did happen to occur in Institutional.
And it's a natural outcome of distributor inventory reductions, because, often, what we have in distributors is principally foodservice goods and foodservice solids that are high margin. So when you have a reduction of both sales, you have some natural reduction of GP [gross profit] for that period.
I guess what I would focus on, on Institutional and, broadly, is our U.S. Cleaning & Sanitizing operating income margin to improve for the year, and we expect it to improve again next year.
And so we don't think we have anything fundamental here. We did have some oddities in the quarter.
Andrew Wittmann - Robert W. Baird & Co. Incorporated
Kind of a similar question, I guess, on Kay. That business had been growing mid, high single digits kind of sequentially.
A bit of a step back here this quarter, flattish. Just wondering what you attribute that to.
Is that slowdown maybe internationally, same customers using less? Any color there would be appreciated.
Douglas Baker
Yes, the number you're looking at is a U.S. number.
And as I described Kay before, Kay is an elephant-hunting business. And so it doesn't move on steady lines, and so what you're doing is annualizing, if you will, to get some very large wins year ago.
And as they continue to succeed with change, you will see that business start moving up. Their International business is accelerating, right, and is double-digit plus.
And honestly, I think we've got significant upside there that we haven't capitalized on yet either.
Gary Bisbee - Barclays Capital
Just on the M&A. I think I caught there quickly that you said there was some elements of M&A that was already included in 2011 guidance.
I was wondering if that's quantifiable to see how much of the guidance number is attributable to that?
Douglas Baker
Yes, from a sales standpoint, we expect to see roughly two points of sales growth that's going to be attributable to M&A already discussed and announced to the market. Roughly, we estimate that to deliver about $0.03 positive from an EPS standpoint.
Operator
Our next question is from Edward Yang of Oppenheimer.
Edward Yang - Oppenheimer & Co. Inc.
Just circling back on this change in distributor inventory. What's creating the volatility there?
And the last time you faced this issue was due to your own actions in terms of incentives. But what led to some of this sales volatility this time around?
Douglas Baker
Yes, I would just say I think it's simple as you're going into a year-end, for distributors, too. And they're quite sensitive to their inventory positions.
It's important part of their financial metrics. They manage it.
They clearly have been managing the inventories much more tightly over the last three years and maybe prior to that. So we've seen, if you will, significant step-down in inventories in distributors over the last three years.
I'd say until you see a substantial market improvement in sales momentum, we don't expect to see a big change in that. But ultimately, distributor inventory is a reflection of how lean they can operate given the systems' effectiveness and what underlying demand is.
Demand is starting to pick up, but unfortunately it's been offset somewhat by their ability to manage the systems upgrade.
Edward Yang - Oppenheimer & Co. Inc.
And, Doug, I think I might have asked you this in a prior call as well, but outside of Healthcare, I didn't really think that you had much inventory at the distributors or maybe customer inventory, and maybe that's a separate issue. Is that still the case?
And do you still expect your distributors to try to run leaner? And will there be any further impacts from their efforts to reduce working capital?
Douglas Baker
Yes. This wouldn't be a conversation for total 2010, the conversation, because we're focusing on a 13-week period.
I don't expect there to be material changes in inventory moving forward. They've brought it down substantially over the last three years.
We don't believe there is a lot of room for that to move further. Regarding the first part of your question, there is not much inventory in customers.
But there is inventory in the distributor channels. And even in Institutional, a sizable number of our accounts are shipped via distributors even though on all cases, we have the direct service relationship.
So what we're talking about is the distributor inventories not the end-use customer inventories.
Edward Yang - Oppenheimer & Co. Inc.
Did I detect a change in tone regarding your pricing strategy? Because your answer to the question on raw materials and the impact of most of that, hence, an impact on the first quarter, and you had mentioned you expect pricing to catch up.
I think in prior calls you said that Ecolab will never really price towards rigging pricing with raw materials. Given the extraordinary environment we are seeing for raw materials, are you softening that stance somewhat?
Douglas Baker
No, there has been no change in our pricing policy. We like pricing when we can get it.
So we try to manage it in a way that works for our customers and our markets. And as a result, we don't intend to pass on immediate large spikes to our customers.
We've taken more measured approach. And as a result, when we see spikes in raw materials, like we've just seen, it takes us a while to catch up because of the way we do approach pricing, which is a more measured approach.
It's been quite effective in the past, and we believe that's exactly the right strategy to play again.
Operator
Our next question is from John McNulty of Credit Suisse.
John McNulty - Crédit Suisse AG
It certainly sounds like you're expecting the growth to start accelerating in 2011 on the top line. And I guess I'm wondering what's giving you the confidence that you're going to actually see that, because it doesn't seem like your end markets are showing kind of any hockey stick-type improvements?
Douglas Baker
Yes, John. Well, I agree that we do not see any hockey stick-type improvements in our end markets, what we've seen is probably, in 2010, in some market, it's a steady improvement, in others, a bottoming, if you will, from that standpoint.
And we see further improvement in 2011 but by no means rapid improvement or hockey stick-type effects. What gives us confidence in the sales is, one, we believe we've got a very good handle on our underlying, if you will, consumption patterns in customers.
We understand clearly what inventory situations are, and we also know what we accomplished last year in terms of innovation or new product pipelines, which have been launched and are out what we accomplished in terms of new business successes, particularly the corporate account arena. And so when we start putting that equation together and also watching business trends, we feel fairly confident that our business, from a top line standpoint, will perform better in '11 than it did in 2010, not just year-on-year record, i.e.
one-front war, but, in fact, accelerating trends.
John McNulty - Crédit Suisse AG
Question on the longer-term. It looks like if we kind of assume that you get back to your normal historical growth rates, call it, 6%, 7%, 8% on the top line and you get this 200 basis points of margin improvement in Europe, all is being equal, nothing else is getting better in terms of margins, you do kind of 15% or better depending on a 6% or 7% or 8% top line in terms of earnings growth, so I guess how should we think about the growth kind of over the longer term for Ecolab?
Because it seems like it may be coming in, or if you're successful on the European side, it may come in better than what you've done historically.
Douglas Baker
Yes, I guess I would say two things. Even if you look at the last period, the last five years, we were in the 16% EPS delivery for the first couple of years of that period until we ran into 2008, which was still double digits, right.
'09 was 7%, and we're back in double digits again and, we believe, accelerating. So I guess we opened this thing -- we expect this five-year period to be more successful than last five year.
I can give you all the forward-looking caveats, I'm not predicting another financial crisis equal to the last one, right. And we're not expecting monster raw increases, like $140 oil, here in the next three months or anything like that, but I don't think anybody else is.
So what we always aim for is to outperform our objectives, and our objective is 15% EPS. And we continue to try to work to lay the ground and make sure we have the initiatives in place to achieve that.
What we can never predict fully is what the world's going to throw at us. But our hope is, yes, that we do overachieve 15%, but we're not in the forecasting mode beyond 2011.
John McNulty - Crédit Suisse AG
I believe you're targeting like $0.01 of, essentially, a charge tied into Europe in your first quarter numbers, the guidance that you gave. What are you targeting for the full year?
What's in that $2.47 to $2.53 target?
Michael Monahan
John, this is Mike. We show on the table that there's about $0.01 of transformation costs from the first quarter.
And that for the year, net, we think that it'll be a net $0.02 positive. So that's netting the benefits against the transformation activity costs.
Operator
Our next question is from David Ridley-Lane from Bank of America-Merrill Lynch.
David Ridley-Lane - BofA Merrill Lynch
Since EMEA is around 2/3 of International, can we translate your comments that EMEA margins will be up about 100 basis points in 2011 to roughly that the International segment will be up, say, 60 or 70 basis points?
Douglas Baker
Yes.
David Ridley-Lane - BofA Merrill Lynch
And then do you have the GCS contribution in the quarter? And maybe you could talk about expectations for that division profitability in 2011?
Douglas Baker
Yes, we'll look up the exact...
Michael Monahan
For the year, David, it's basically cut its loss in half again. And for the quarter, GCS loss was just a little over $1 million.
David Ridley-Lane - BofA Merrill Lynch
Do you think that 2011 could be a year of profitability for GCS?
Douglas Baker
Look, I think I have a good track record of forecasting broadly. I'm not sure it's extended yet to GCS.
So what I would say is that where we are down to, as we said, GCS is one-front war sales. And GCS sales, as you see in our recent reporting, has improved and was 6% in Q4.
If we are successful at continuing that trend, which we plan to be, we are going to ultimately start crossing the threshold and making money in that business. And of course, our hope is, sooner versus later.
I will say this, it will be accretive again in 2011, that we're quite confident. Our hope is that we get it over the profit line, but I am going to go and stop short of predicting it.
Operator
Our next question is from Laurence Alexander of Jefferies.
Robert Walker
This is Rob Walker on for Laurence. If you can help quantify the impact of the receivable write-off in the quarter?
And then on the raws, you mentioned the $0.10 hit in raws that will be in 2011, largely, in Q1. Did you mention the hit in Q4?
And can the $0.10 hit in 2011 potentially reverse by the back half of the year? And not to squeeze another one in there, but with the higher raw materials, is it becoming more urgent to try to restructure and shorten your supply chain?
And could you talk about your ability to do that?
Douglas Baker
Well, the receivable was roughly $5 million yet in Q4. Oh well, yet.
So that's that. Regarding direct product costs, fourth quarter, they were flat around the world, flattish, but they show up differently in different businesses in different regions of the world.
But they were probably net positive in Asia Pacific and some of the others. U.S., they were unfavorable, alright.
So if you look at U.S. Cleaning & Sanitizing there was an impact of probably in the neighborhood $4 million, $5 million for raw materials, offset by other regions.
The second thing, in terms of raw materials next year, we expect them to be $0.10 negative. We are forecasting markets that are pretty dynamic.
We are out moving on pricing and others And typically our product supply system moves. We don't try to react to market moves.
We try to react to what's the best way to set up the supply chain for long-term optimal performance from customer service and cost standpoint. It's very hard.
You got 60-plus plants and 100-plus warehouses. You don't go rearrange that because polyethylene is moving up.
Robert Walker
And can that $0.10 potentially reverse in the back half of the year of 2012?
Douglas Baker
Well, potentially, I think, sure. But my guess, long term in our assumption, broadly this helps us but not when we buy raw material.
Look, I think water is going to be a more important commodity for our customers and for anybody operating in the world, including humans who drink it. And energy costs are going to be under pressure and going up, not down.
And energy is a big component in many of the raws we buy. So yes, we suspect there's going to be ongoing inflation in our raw material by moving forward.
It can move around year-to-year but that's our assumption. And we would be delighted to be proven wrong on the raw material inflation part of that scenario for us.
Robert Walker
Then there's a question or two, if I can, on cash and pension. On pension, the $100 million contribution you mentioned, do you expect the benefits of that to be largely offset by lower discount rates?
And if you could expect the tailwind, how much do you expect? And what are your expectations for pension funding in 2011?
And I'm not sure if I caught your expectations for CapEx in 2011, if you could roughly break that out, kind of roughly by region?
Douglas Baker
In terms of pension, -- yes, I mean, it's going to be a $10 million benefit this year. In terms of stuff we've done and part of it clearly is $100 million, right, contribution as we go in.
CapEx, I'm not sure what the question was on CapEx?
Robert Walker
Did you mention what your CapEx expectations are for 2011? And if we can roughly...
Michael Monahan
[indiscernible] for CapEx.
Douglas Baker
For model standpoint, we basically said, use kind of a consistent standard, you're going to be safe.
Operator
Our next question is from David Begleiter of Deutsche Bank.
David Begleiter - Deutsche Bank AG
Doug, just in your -- can you comment a little bit on just the Q1 sales expectation being flat? And longer term, given the transformation, what is potential for Europe top line sales?
And do you need to make anymore changes in the sales force, in terms of structure, to drive that top line growth?
Douglas Baker
Yes. I would say throughout 2010, we saw nominal improvement in our European sales volume as we went throughout the year, and we expect to have growth in Europe next year.
But I won't quibble with low [ph] because these are small single-digit numbers and, ultimately, we need to get Europe up into the mid single-digit numbers. And so certainly, continuing that, if you will resort to them in corporate account side, which we've done aggressively the last few years, it has benefited us significantly as underlying markets there improve.
When we get much more connectivity between management and the field, we believe we'll able to operate there as effectively as we do in the other regions. So certainly, that is the key part of the plan.
Meaning, you will see benefits from the restructure announcement we had almost regardless of what the sales are. However, it is much more leveraged with sales growth than without, so sales is the key component of the plan.
David Begleiter - Deutsche Bank AG
And when would you expect to gain share in Europe, Doug? Over what period of time?
Douglas Baker
Well, I would say, I'm pretty confident we have been gaining share in Europe over the last few years. It's hard to describe.
I mean, the underlying markets, particularly in Foodservice, both in Europe and U.S., have been really lousy. And we have been holding our own and outperforming all of our publicly reported competitors in those markets.
So we're pretty confident that we are gaining share.
Operator
Our next question is from Bob Koort of Goldman Sachs.
Brian Maguire
It's Brian Maguire on for Bob today. Just a couple of questions on the European restructuring.
Just wanted to clarify, is the $120 million of cost savings included the wind down of ERP [Enterprise Resource Planning] spending or implementation costs?
Douglas Baker
No. That would not be included in this.
So that is, if you will, an additional benefit. I mean, certainly, there was impact when you go through one of these ERP implementations, you have extra costs.
That's a piece of the 100 basis points this year. Because I would say, the real benefits from the restructure activity we're talking about are certainly much more in the 2012 and '13.
We've laid out what they are this year, but they're pretty minimal this year. A lot of the work this year, but the benefits accrue in '12 and '13.
Brian Maguire
And then on that note, do you kind of have an idea of what the run rate for savings would be at the end of 2011 and in 2012? And what would it be in 2013 when we hit the $420 million mark?
Douglas Baker
We haven't exactly said, but I think if you do the math of our publicly announced 100, 200 plus, you start getting that the expectation that we are going to be very close to there by that time period.
Brian Maguire
And then one last thing on Europe. Are you worried about any drop in service levels as the result of the restructuring?
And what give you confidence that you can kind of maintain the high standard you guys have set to yourselves?
Douglas Baker
Yes, I would say, one, it's always a concern and it's on the front of our planning objective. It's to make sure it doesn't happen.
I would say, this part of the Europe transformation effort has less impact than the EBS implementation or the ERP implementation simply because there, you're ripping apart, if you will, your whole central nervous system of the business. And we worked hard to mitigate service problems there.
We had some. They've been corrected.
They're behind us. And we don't anticipate having nearly the same service impact as were a result of this part of the transformation that we did with the last part.
Brian Maguire
And do you anticipate the restructuring in Europe to have any impact on your timing of acquisitions or acquisition pipeline over there? Is there anything inherent about it that would keep you from doing a deal until you guys at back office align what you'd like it to be?
Douglas Baker
I would say, it's fair that there would be certainly some deals that we may pass on if we don't feel they're going to have huge strategic advantage for us long term, that we would not want to hinder our ability to execute here for what I would call kind of a tactical nominal acquisition play. If something's fundamental and very important came along that we felt was key to long-term success, we would move ahead.
Operator
Our next question is from Dmitry Silversteyn of Longbow Research.
Dmitry Silversteyn - Longbow Research LLC
If I may recollect the discussion of European margin improvement projections, when you were going through the ERP installation, was that, once the ERP runs live, which I think took place in April of 2010, is going to take you a couple of quarters to get rid of the redundant systems, and I think it was about 400 people or some like that and margins there are going to improve about three points as a result of that. Has that taken place?
Or any of that still part of your margin improvements guidance with this new restructuring program?
Douglas Baker
Dmitry, I guess what I -- we said fairly consistently all along is that the ERP implementation was key to enabling us to get as many as the fundamental things that we needed to do because you have to be able to, right, do the accounting, do the back-office work, et cetera. And the old structure was going to prevent us from doing some of the things we needed do to manage the business.
By itself, the ERP system brings zero savings, right. So all the work that you do after the system to leverage it and the other opportunities around Europe unrelated to that system, which are also wonderful.
We talked during that time that the expectation, full system implementation, would be 100 basis points a year. We said that you would start seeing some of the benefit in fourth quarter 2010, which we did, roughly 60 basis points.
What we're saying now is that the pace has changed, the target is still the same, roughly 1,000 basis points, but the pace of change is going to be significantly accelerated as a result of this restructure. And instead of 100 basis points a year, you will see 2x that plus beginning of 2012 and certainly for 2013, and probably for '14 depending on how much we get done in '12 and '13.
So that's the best way I can describe it. I'd say it's quite consistent if you go back to the conversations we've had about this.
If anything, we do believe this is a benefit because we are bringing forward the financial benefits of these initiatives.
Dmitry Silversteyn - Longbow Research LLC
So would it be fair to say that this restructuring program and the reason that it wasn't done previously is it was basically empowered by the ERP system and the visibility that it gave you into your own operations and gave you the confidence to restructure and reduce your, I guess, scale or footprints in the region as much as you have with this restructuring program?
Douglas Baker
Yes. I wouldn't pin it all on it.
Absolutely. What I would say is we needed a new ERP system to give us the flexibility we needed to design the business around the customer needs.
And without the ERP changes, right, it would have been I guess possible but very problematic and difficult.
Dmitry Silversteyn - Longbow Research LLC
When you talked about the distributor inventory drawdown impact of $5 million in an answer to a previous question, was that a revenue impact or was that a profit impact?
Michael Monahan
Revenue.
Dmitry Silversteyn - Longbow Research LLC
When you talk about improving European margins by a point, and then you said it would -- roughly, what you agreed with the statement that roughly translate it into a 60-basis-point improvement for the division overall, the International division. Shouldn't you also see improvements in your Canadian and Latin American and Asian businesses where it's just a matter of volume leverage, and you would expect from your comments volume to continue to be pretty strong in 2011?
Douglas Baker
Yes, we would expect to continue to see margin improvement in Latin America and Asia-Pacific, also. I think I registered the heart of that question, can you take the 100, since it's 2/3 and transfer it over the whole International thing?
Yes, and then you're adding even a little better than that. That would be our goal.
Dmitry Silversteyn - Longbow Research LLC
So actually if you kind of factor all of it in, your International margins in 2011 should do better than a point improvement, maybe even closer to 1.5?
Douglas Baker
I think we're in danger of getting over our skis now. I would say, it's going to be better than the 70 basis points.
Operator
Our next question is from Jeff Zekauskas of JPMC.
Jeffrey Zekauskas - JP Morgan Chase & Co
You're letting go 900 people in Europe. What's the timing of the departure of those people?
And what do they do?
Douglas Baker
Yes. One, we haven't finalized those plans because we need to work with the Works Councils to do that, which we are in process now initiating that piece of it.
So we do not have exact specifics around who or when. What I can tell you is what's foreseen but still needs to be developed in partnership with the Works Councils is that this is principally going to be, if you will, back-office shared-service support, quite heavily in those arenas, which is areas that we believe we have a clear path towards.
And so what we're working to do, if you will, is maximize sales customer support and minimize the cost of all the necessary back-office support.
Jeffrey Zekauskas - JP Morgan Chase & Co
The Kay revenues in the United States, so the Kay sales were flat in the fourth quarter. And then the previous three quarters in the U.S., they were either high single digit or low double digit.
Is the new trend of the U.S. Kay business flat growth within 2011 or low single digits?
Or how do you see that?
Douglas Baker
I think we discussed this briefly before but not in detail that Kay business runs into its basic times. It succeeds by making outside sales when you compare it to its base.
We described it as elephant hunting versus farming. And so as a result, as they bring on new customers, you'll start seeing that business moving forward.
We are not predicting that Kay is somehow plateaued or is out of growth. It's far from the case.
But we've been through this before on Kay. And as we bring on new business, you will start seeing an acceleration of growth again.
But Kay has always been somewhat lumpy.
Michael Monahan
Jeff, if you look back in the quarter, you'll see Kay having their robust quarters, the leaner quarters. But for the year, it's usually pretty consistent on the upper single-digit growth area.
Operator
Our next question is from Mike Harrison of First Analysis.
Michael Harrison - First Analysis
Wanted to ask about pricing and, if you could, just comment kind of broadly about what you're seeing in the pricing environment in the U.S. and in Europe.
And you has talked a little bit, I guess, in previous calls about looking longer term and maybe a one-ish percent price increase per year. Have you changed that view given where raw materials are?
And can the market, at this point, bear price increases of the three- to four-ish percent range that we saw when raw materials were causing problems previously?
Douglas Baker
We're going to get to a rounding discussion. I would say, we've had upped our pricing plan as a result of the raw material moves.
I mean, they're significant, they're well publicized, they're well understood. We do not anticipate anywhere near the 3% to 4% that we were going after.
One, it's not required. Two, I don't think it would be smart for the business in terms of what we would do with customer relationships.
So we are in a much lower place. It probably still rounds to 1%.
Let's say, it's rounding down now versus rounding up.
Operator
Our last question is from P.J. Juvekar of Citi.
John Hirt
This is John Hirt standing in for P.J. In the past, you've provided us with your growth expectations for your key end markets, like healthcare and foodservice.
Can you give us a little bit more granularity on what your growth outlook is for your larger end markets for 2011?
Douglas Baker
Yes, I mean, foodservice, we still see as relatively flat as we go forward. Lodging, this year, recovered quite substantially, and we think lodging, year-on-year, is going to be in the 3% range.
Healthcare is probably low single digits as we move forward. Food & beverage in its historic norm of low single digits.
Those would be our big key markets.
John Hirt
And can you tell us how much you plan on growing your sales force this year?
Douglas Baker
Probably in the 2% range.
Michael Monahan
Thanks, everyone. There was one issue we wanted to circle back on, and that was regarding the transformation, Europe transformation expense as shown in the EPS bridge.
That is not the restructuring costs. The restructuring costs, as we mentioned, will be in the special charges.
The transformation costs in the first quarter represent some of the activities we're doing to run these projects. We'll have those costs through the rest of the year.
That will be offset by some of the benefits that we get later in the year. So that's why you see it going from $0.01 negative in the quarter to a positive -- the remaining quarters to a $0.02 positive for the full year.
So with that, that wraps up our fourth quarter conference call. This call, and the associated slides will be available for replay in our website.
Thanks for your time and participation, and best wishes for the rest of the day.
Operator
Thank you. This concludes today's presentation.
You may disconnect at this time.