Saturday, January 21, 2012
Good News From Ecolab
Back in July, we felt that Ecolab was being overly conservative about potential 2012 synergies from the integration of Nalco. We wrote,
"Nalco management gave itself a target of $75 million in annual cost savings from streamlining its operations. Nalco recently embarked on a hub-and-spoke operation for its water treatment offices in the Midwest in order to squeeze smaller, local and regional competitors. This build out can probably be stopped or reversed to fit into Ecolab's structure, depending on the most efficient way to serve the new customers. Nalco also looked to enhance its sales people's offerings by partnering with companies like U.S. Filter and Johnson Diversey. These partnerships can either be scaled up, or rationalized with Ecolab's partnerships. Buying power is now substantially enhanced. ECL management is looking for $150 million in synergies, of which $30 million are said to be gained in 2012. If Nalco's targets of $75 million were real, then the $30 million should be a slam dunk."
In last week's news release, the company gave detailed adjustments to their earnings forecast for 2012 and for the effects of the post-merger restructuring. The company noted, "...Ecolab has increased its cost synergy target for 2012 to approximately $75 million from the previous forecast of $35million." It seemed fairly obvious that Ecolab's first estimate was too conservative.
The company also acknowledged the benefits from the combined purchasing power of both organizations.
There was also a trade journal release about the sales forces of both Ecolab and Nalco winning awards for the top rated sales organizations to sell for. Back in July we also noted that ultimately the success of this merger wiould rest on the effectiveness of the combined sales force. We take this as a confirmation that the integration of two strong sales forces shows great promise and longer-term upside.
Overall, the financial update to 2012 estimates is very helpful for analysts in building their models to account for all the moving parts, including restructuring charges, other one-time items, share buybacks, and tax rates. Everyone is suggesting headwinds on raw materials prices, so this shouldn't be a negative surprise to estimates as the year unfolds. This company makes it easier for analysts to develop their GAAP and non-GAAP estimates of corporate performance, which is a judicious use of effective disclosure.