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Nalco Reports Second Quarter 2010 Results

Nalco (NYSE: NLC), providing essential expertise for water, energy and air, generated strong revenue and earnings growth for the second quarter ended June 30, 2010, partially aided by its role in supporting Gulf of Mexico response efforts.

Second quarter revenue grew 19 percent to $1.09 billion, largely due to 17 percent organic growth. Excluding $70 million in sales of dispersants used by the government and BP in responding to the Gulf of Mexico oil spill, sales grew 9 percent organically.

Net earnings of $57 million resulted in second quarter diluted earnings per share (EPS) of 41 cents compared to the year-ago 21 cent loss driven by restructuring charges and early debt extinguishment losses. Adjusted EPS was 41 cents in the second quarter of 2010 compared to 13 cents in the prior-year second quarter after adding back unusual items.

Adjusted EBITDA of $199 million was the Company’s best historical second quarter performance and 40 percent above 2009 second quarter Adjusted EBITDA of $142 million. The beneficial impacts of higher sales volumes and productivity gains of $35 million more than offset BRIC+ investments.

“We are on track toward doubling our base revenue growth by executing our growth strategies and driving productivity improvements. Investments in BRIC+ geographies, our water treatment automation platform and capture of new energy industry projects are among many initiatives driving sales and earnings expansion,” said Chairman and Chief Executive Officer Erik Fyrwald.

Energy, Paper and Water Services segments increased sales organically by 14, 9 and 6 percent, respectively, excluding Gulf spill activity. Energy results were driven by a doubling of the Adomite drilling-support business and 21 percent organic growth in oil field services aided by a large Middle East product sale related to the start-up of a new unit. Paper Services growth was concentrated in Asia and North America. Water Services sales expanded fastest in mining, metals, manufacturing and chemical markets that had been particularly hard-hit early in 2009.

Geographically, respective nominal and organic percentage sales changes excluding dispersant sales were as follows: Latin America (+23, +15), Asia (+18, +12), North America (+11, +9) and Europe, Africa and Middle East (+4, +6). BRIC+ growth was more than 40 percent nominally, reflecting continued benefits from the Company’s aggressive growth investment strategy in these key markets.

Free Cash Flow was $71 million in the quarter, as substantial improvement in receivable and inventory days during the quarter limited the normal working capital investment that results from substantial sequential sales growth. The second quarter tax rate of 42 percent contributes to a full-year tax rate expectation of 36 to 37 percent on an adjusted basis.

“We are growing in every region with our leading technology, commitment to service excellence and responsiveness to customer needs,” Fyrwald said. “While putting substantial effort into the 2 percent of sales this year from Gulf spill dispersants, we remained focused on driving execution excellence across our core businesses – helping industry save water, improve energy efficiency, reduce emissions, increase productivity and turn out better quality products.”

Year-to-date Results and 2010 Expectations
Year-to-date revenues increased 15 percent nominally to $2.04 billion, with organic sales in Energy, Paper and Water up 18, 8 and 5 percent respectively. Excluding dispersants, Energy Services organic sales were up 8 percent in the first half of the year, and total Company sales increased 7 percent through the first six months.

Year-to-date EPS is 59 cents compared to the year-ago first-half 4 cent loss. Adjusted EPS – adding back restructuring and unusual items – has more than doubled to 73 cents per share from the year-earlier first half 30 cents per share. Adjusted EBITDA is up 30 percent year-to-date to $363 million. Year-to-date Free Cash Flow stands at $45 million.

On the basis of this strong performance, Nalco increased elements of its outlook for 2010 performance. Including July dispersant sales of $15 million that the Company expects will conclude its support of the Gulf crisis response, organic revenues are expected to increase at a high single digit rate for the year. With organic sales up 11 percent on this basis through six months, this means second-half sales are expected to be up mid-single-digits organically. Adjusted EBITDA is expected to exceed $735 million, and Adjusted EPS is expected to exceed $1.40. Free Cash Flow is now expected to exceed $150 million.

“We correctly anticipated a slow recovery in developed country markets when we started the year. However, the actions we are taking to continue to improve our performance give us confidence in our ability to deliver against the increased guidance despite weak economic conditions in a number of markets,” Fyrwald said.

For a full review of Nalco's second quarter results, click here.

Conference Call/Webcast
Nalco will discuss second quarter 2010 results in a conference call and audio-only Webcast to be held on Wednesday, July 28 at 10 a.m. ET. Information on the conference call and Webcast is available on our website at www.nalco.com/investors.