Engineering News

Nalco Reports Continued Strong Sales Growth, Earnings Up 30 Percent
Tuesday February 5, 5:30 pm ET

NAPERVILLE, Ill., Feb. 5, 2008 (PRIME NEWSWIRE) -- Nalco Holding Company generated a 2007 sales increase of 8.6 percent to $3.912 billion, including 4.9 percent organic sales growth.

Net earnings rose 30.4 percent to $129.0 million from $98.9 million in 2006. Diluted earnings per share increased 31.3 percent to 88 cents per share from the year earlier 67 cents. Earnings included after-tax charges of $42.3 million for business process optimization, reimbursed benefit plan contributions and unusual charges. These same items -- which are defined adjustments in deriving Adjusted EBITDA for determining compliance with the Company's debt covenants -- totaled $24.8 million in 2006. Without these charges, earnings per share would have been $1.17 compared to 84 cents a year ago. (See attachment 7B)

Adjusted EBITDA for the year increased 7.3 percent to $729.8 million from 2006 results of $680.1 million. Earnings benefited from a fourth quarter insurance settlement from the 2005 hurricanes, resulting in $12.3 million improvement to Adjusted EBITDA and $7.6 million in after-tax net earnings, or 5 cents per share.

"We generated solid sales and profit growth in 2007,'' said Bradley J. Bell, Executive Vice President and Chief Financial Officer. "While second-half profitability was constrained by continuing problems in Europe and by product and other cost increases late in the year, we are pleased with the continuing strength in demand for our product and service offerings.''

Energy Services led organic growth for the year, up 8.8 percent on continued strength in Oilfield and Downstream businesses. Industrial and Institutional Services grew 5.3 percent led by rapid growth in Asia, Latin America and several North American markets. Paper Services revenues were essentially flat. In total, every region grew at least 6.5 percent organically except the European region, which declined 0.5 percent organically for the year. Profitability in Europe declined more sharply as operating expense investments in growth areas were not offset by revenue growth and profits in other parts of Europe.

Free Cash Flow grew 9.3 percent to $200.6 million, even with a sizable, unplanned increase in receivables and a third quarter decision to accelerate pension funding.

Nalco's waste coal agglomeration, or synfuel business, accounted for $79.5 million in sales during the year and $23.3 million in Direct Contribution. In 2006, revenues were $62.0 million and Direct Contribution was $16.6 million. As a result of expiring customer tax incentives, this business does not continue into 2008. There are no asset write-offs or other charges expected as a result of the business elimination.

Fourth Quarter results

Sales growth continued to run at a solid pace in the fourth quarter, growing 9.2 percent to $1.034 billion from the year-earlier $946.8 million, with organic sales increasing 3.8 percent.

Net earnings decreased 17.9 percent to $31.1 million from the year-earlier $37.9 million. Diluted earnings per share decreased 15.4 percent to 22 cents from the prior-year 26 cents per share. Earnings included after-tax charges of $19.2 million for business process optimization, reimbursed benefit plan contributions and unusual charges -- including a $12 million, previously disclosed expense for Nalco's recently retired Chairman and Chief Executive Officer -- versus $6.9 million for the same items in the fourth quarter of 2006. These items are defined adjustments in deriving Adjusted EBITDA for determining compliance with the Company's debt covenants. Without these charges, earnings per share would have been 35 cents compared to 30 cents a year ago. (See Attachment 7A)

Adjusted EBITDA in the quarter grew 1.9 percent to $196.6 million from the year-earlier $193.0 million. Fourth quarter results were hampered by higher raw material and freight costs, profit declines in Europe, and lower absorption of fixed manufacturing costs as inventories were reduced -- resulting in higher in-period expenses. Adjusted EBITDA for the fourth quarter included a final insurance settlement from the 2005 hurricanes of $12.3 million. A significant portion of the insurance recovery was based on profitability lost due to damage and/or delay in start up of several large deepwater platforms that Nalco was either serving before the hurricane period or had been scheduled to begin serving in 2005.

Product and freight costs increased more than $20 million from the prior-year period. Actions to increase prices were taken during the fourth quarter, with most increases effective January 1.

Energy Services enjoyed organic growth of 8.4 percent in the period, led by double-digit gains in both North America and Asia. Direct Contribution dollars increased 12.4 percent to $70.8 million. Direct Contribution margins of 22.5 percent were flat to the same period of last year, primarily due to continued reinvestment in engineering resources to support ongoing growth.

Industrial and Institutional Services realized organic growth of 4.7 percent, ranging from significant double-digit growth in Latin America and high single digits in Asia, to a modest decline in Europe. Direct Contribution dollars increased 4.0 percent to $101.2 million. Direct Contribution margins of 21.6 percent were 1.5 percentage points behind last year, as declines in Europe offset modest gains in other regions.

Paper Services organic revenues were essentially flat to last year's fourth quarter. While the introduction of new technology and good spending controls drove improved Direct Contribution margin in North and Latin America, continued weakness in the European customer base and poor performance in Asia brought overall results to a 1.2 percentage point decline for the quarter and a $1.0 million drop in Direct Contribution dollars.

Free Cash Flow generation in the fourth quarter totaled $81.2 million. During the quarter, Nalco repurchased 3.1 million shares and bought an 87.5 percent interest in Mobotec USA.

The December acquisition of the Mobotec USA position, now Nalco Mobotec, added $2.5 million to sales in the final 21 days of the year and $0.45 million in EBITDA. Mobotec offers a wide range of solutions that save energy and reduce many critical pollutants, including greenhouse gases, nitrogen and sulfur oxides (NOx /SOx), mercury, hydrogen chloride and particulates. The acquisition expands Nalco's sustainable technology offerings to help customers reduce water use, energy consumption and air emissions -- adding innovative capabilities on the fire side of boilers to Nalco's boiler water expertise.

2008 Outlook

Nalco's key areas of focus in 2008 include:

* Improving growth and profitability in the Company's European business;

* Additional price increases commensurate with any further raw material and freight cost increases;

* Cost savings of at least $75 million and better leverage on selling and service expenses. Over the past four years, cost saving initiatives have led to average annual savings of $82 million, including $79 million in 2007;

* Increasing company-wide focus on generating Free Cash Flow.

"The year 2008 should be a good one for us,'' observed Bell. "Although some of the world's economies face weakening trends, we provide critical water treatment offerings that are needed almost independent of the business cycle. Our products and services generate energy and water savings that are all the more valuable in high energy cost environments. Process applications that depend more on customer production levels are highly concentrated in the strong upstream and downstream energy industries, along with the solid mining industry. Taken together, we expect continued solid top line growth.''

The Company's expectations for Adjusted EBITDA take into account the expiration of its waste coal agglomeration/synfuel business. Without synfuels, 2007 sales would have been $3.833 billion and Adjusted EBITDA would have been $707 million.

During 2008, Adjusted EBITDA is targeted to grow at an 8 percent or better pace from that $707 million base. This translates into diluted EPS growth of greater than 35 percent on a GAAP basis before considering the effect of any further share repurchase activity. "We are more cautious in our outlook than we have been in the past because of product cost increase potential, the potential for modest recession impacts and the time needed to drive improvements in Europe,'' Bell stated.

Earnings from insurance recovery in 2007 will begin to be replaced by operating earnings as Gulf of Mexico platforms approach more normal levels of activity during 2008. ``The Company also is working to replace earnings from synfuels, beginning with the exciting addition of Mobotec and with other growth strategies under development,'' Bell noted.

Free Cash Flow growth is expected to be substantial in 2008. "Importantly, we expect to have fixed our receivables challenge. Bringing down our Days Sales Outstanding to year-end 2006 levels will generate in excess of $60 million in cash,'' Bell said. "This should offset the increase in receivables that would have been expected based on planned 2008 revenue growth. Added to higher cash earnings, Free Cash Flow is expected in the high $200 million range.''

Conference Call, Annual Meeting and Record Date

Nalco will discuss fourth quarter and full-year 2007 results in a conference call and audio-only Webcast to be held on Wednesday, Feb. 6 at 10:00 a.m. ET.

The Board of Directors has set the date for the annual meeting of shareholders for Friday, May 2, at 9:00 a.m., at Nalco headquarters in Naperville, Illinois. The record date to determine shareholders eligible to vote at the meeting is March 10.

About Nalco

Nalco is the world's leading water treatment and process improvement company, delivering significant environmental, social and economic performance benefits to our customers. We help our customers reduce energy, water and other natural resource consumption, enhance air quality, minimize environmental releases and improve productivity and end products while boosting the bottom line. Together our comprehensive solutions contribute to the sustainable development of customer operations. More than 11,500 Nalco employees operate in 130 countries supported by a comprehensive network of manufacturing facilities, sales offices and research centers to serve a broad range of end markets. In 2007, Nalco achieved sales of more than $3.9 billion.

Source: Nalco Company

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