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Nalco sales up sharply, Debt payments total $45 million; Announces Introduction of Tech-Bond® Sol-Gel Nanotechnology

Published on 2006-05-19. Author : SpecialChem

Naperville, Illinois -- Nalco Holding Company (NYSE: NLC) delivered rapid sales growth and good cash generation to repay debt in the first quarter, but those results did not immediately translate into improved quarterly net income or Adjusted EBITDA. Nalco is on track, however, to meet its full-year expectations as the fundamental business is strong and several issues that dampened first quarter results are not expected to be with us the balance of the year.

First quarter sales grew 9.2 percent to $849.4 million, including 11.0 percent organic growth partly offset by negative foreign currency impacts of 1.8 percent. Higher interest and business process optimization expenses decreased net income to $8.8 million from $11.0 million in the first quarter of 2005. Earnings per share were 6 cents versus 8 cents in the year-ago period. Net earnings include after-tax charges of $4.9 million for business process optimization, reimbursed benefit plan contributions and unusual charges such as costs related to a secondary share offering in March. Adjusting for such charges, earnings were essentially unchanged from last year's similarly adjusted results.

Adjusted EBITDA of $144 million was similarly unchanged. Solid Free Cash Flow enabled the company to make debt reduction payments of $45 million, even with a sizable use of cash in expanding inventory in preparation for the summer cooling water season.

"Real sales increased at a higher rate than our expectations for the year, benefiting from a year-ago quarter weakened by moving sales ahead of a January 2005 systems conversion. Pricing continues to improve, but we did not sell the mix in the quarter we had expected. We also have an opportunity to improve our management of selling and service expense. Still, we are moving in the right direction and we have an Energy Services business that is on a path to generate 2006 sales in the $1 billion range," said Chairman and Chief Executive Officer Dr. William H. Joyce. "Importantly, our three primary segments improved their earnings contribution at an 11 percent pace. The business is in sound fundamental shape and ready to start delivering significant year-onyear earnings growth."

Real sales growth, excluding price, was 4.9 percent and price contributed 6.1 percent or $48 million to growth. Purchased material and freight costs were about $34 million higher than the year-ago period. Since mid-2004, cumulative purchased material and freight cost increases have totaled $229 million versus about $197 million in increased price.

"Although we are now running price ahead of cost on a year-on-year basis, we obviously need additional increases to get us even with the total costs we have absorbed since raw material and freight cost increases began. This is particularly true in our Energy and Paper segments," Dr. Joyce noted. "It is far too early to declare victory over raw material costs – particularly with the recent run-up in crude oil prices – so we need to maintain a strong focus on capturing price."

Hurricane-related lost sales and pre-tax losses are estimated to have been $5 million and $3 million in the quarter respectively. Energy Services incurred the largest portion of these impacts due to Gulf of Mexico customer rig curtailments. A few continued raw material supplier problems contribute to higher costs and some Industrial and Institutional Services customers have also not yet reopened.

New Technology Introduced

Nalco announced the introduction of Tech-Bond® Sol-Gel Nanotechnology, a revolution in corrosion protection for aluminum that provides improved cost, quality and environmental performance over existing hexavalent chromium and other chrome-free technologies. "This breakthrough technology should expand our industry presence in a wide range of markets – with applications that include aerospace, car and truck parts, outdoor furniture, skyscraper construction, boats and electronic equipment," Dr. Joyce said.

Nalco's testing confirms that its Tech Bond products can meet military specifications for bare corrosion protection and aerospace, automotive and architectural specifications for painted aluminum surfaces.

"Because of our diversity of end markets and applications, no single product dramatically shifts our financial performance outlook. With Tech Bond, however, we have created innovative, differentiated, patent-protected technology that improves the value we can create for customers and is expected to be an important contributor to our growth for many years to come," Dr. Joyce said.

Segment Review

"Industrial and Institutional Services performed well in the first quarter delivering a strong increase in direct contribution based on good price increase activity and solid expense control. Energy Services delivered exceptional sales growth, but earnings did not keep pace due to lower-than-planned price increase efforts and abnormal levels of expense. The Paper Services segment continues to be our greatest challenge with a weak competitive pricing environment and raw material costs for Paper-specific products that appear likely to continue increasing," said Dr. Joyce.

Nalco's segment reporting has changed in the first quarter to reflect capital charges on each of the segments. These charges for their investments in receivables, customerconsigned inventory and equipment are intended to ensure that business managers recognize the full costs of each business decision and manage the balance sheet accordingly. The change will result in reduced direct contribution and direct contribution margin levels for the segments, offset by an elimination adjustment in consolidation.

Debt Reduction and Pension Funding

Debt payments of $45.1 million included the retirement of the remaining $31.9 million dollar-denominated portion of Term Loan A. Nalco also made its only required 2006 principal payment of $3.2 million on the Euro-denominated portion of Term Loan A and paid down $10 million of its Term Loan B obligations that come due in 2010. During the first quarter, lenders agreed to reduce the interest rate on Nalco's Term Loan B obligations by 25 basis points to 175 basis points over LIBOR. Free Cash Flow in the first quarter was $42.5 million.

In early April, Nalco added $45 million in funding to its first quarter U.S. pension plan contribution of $13.5 million, completing its 2006 U.S. pension funding requirements ahead of schedule.

2006 Forecast Update

Nalco maintained its financial performance forecasts for 2006 – expecting 12 percent growth in Adjusted EBITDA and $170 million in Free Cash Flow. Our earlier projected Earnings Per Share of 65 cents is now reduced by the impact of business process optimization charges.

"In the first quarter, we developed strong positive momentum in our business and are confident that we will have a very good year and deliver on our commitments," Dr. Joyce concluded.

About Nalco

Nalco is the leading provider of integrated water treatment and process improvement services, chemicals and equipment programs for industrial and institutional applications.

The company currently serves more than 70,000 customer locations representing a broad range of end markets. It has established a global presence with more than 10,000 employees operating in more than 130 countries, supported by a comprehensive network of manufacturing facilities, sales offices and research centers. In 2005, Nalco achieved sales of more than $3.3 billion.

This news release includes forward-looking statements, reflecting current analysis and expectations, based on what are believed to be reasonable assumptions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from those projected, stated or implied, depending on many factors, including, without limitation: ability to generate cash, ability to raise capital, ability to refinance, the result of the pursuit of strategic alternatives, ability to execute work process redesign and reduce costs, ability to execute price increases, business climate, business performance, economic and competitive uncertainties, higher manufacturing costs, reduced level of customer orders, changes in strategies, risks in developing new products and technologies, environmental and safety regulations and clean-up costs, foreign exchange rates, the impact of changes in the regulation or value of pension fund assets and liabilities, changes in generally accepted accounting principles, adverse legal and regulatory developments, including increases in the number or financial exposures of claims, lawsuits, settlements or judgments, or the inability to eliminate or reduce such financial exposures by collecting indemnity payments from insurers, the impact of increased accruals and reserves for such exposures, weather-related factors, adverse changes in economic and political climates around the world, including terrorism and international hostilities, and other risk factors identified by the Company. Accordingly, there can be no assurance that the Company will meet future results, performance or achievements expressed or implied by such forward-looking statements. This paragraph is included to provide safe harbor for forward-looking statements, which are not generally required to be publicly revised as circumstances change, and which the Company does not intend to update.

Source: Nalco Holding Company


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