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Nalco Reports Strong 2010 Financial Results

Nalco (NYSE: NLC) reported 2010 sales of $4.25 billion, a 13 percent growth rate versus prior year and an 11 percent organic growth rate. 2010 revenue of $4.16 billion, excluding one-time dispersant sales, recovered to pre-financial crisis levels.

Net earnings of $196.2 million resulted in diluted earnings per share (EPS) of $1.4 compared to $60.5 million or 44 cents per share in the prior year. After adding back restructuring and unusual items, adjusted EPS was $1.71 in 2010, an 86 percent increase from 92 cents in 2009.

Adjusted EBITDA of $747 million increased 13 percent above 2009 adjusted EBITDA of $659 million. Productivity gains of just over $120 million helped offset raw material headwinds and growth investments.

"Our strong 2010 sales were driven by a recovery of the global economy and our differential investment in BRIC+ growth regions,” said Erik Fyrwald, Nalco Chairman and Chief Executive Officer. "Water scarcity challenges intersect with high industrial growth in these geographies, creating significant opportunities for Nalco to add value by deploying our proprietary technologies and services.”

Energy, Paper and Water Services segments increased sales organically by 16, 9 and 7 percent, respectively, and direct contribution margins increased by 90, declined by 60, and increased by 20 basis points, respectively. Geographically, respective reported and organic percentage sales changes were as follows: Asia (+20, +12), North America (+16, +14), Latin America (+14, +7), and Europe, Africa and Middle East (+5, +6). BRIC+ growth was approximately 30 percent organically.

Gross profit margin of 45.0 percent declined 50 basis points from 2009, reflecting limited price recovery of increased raw material costs in mature markets and higher growth in lower margin end-markets.

Free cash flow of $185 million included a modest working capital days improvement and one-time sales of dispersant product, and was used to reduce net debt by $73 million.

The effective tax rate was 32 percent on an adjusted basis.

"It is a testimony to the talent and hard work of the Nalco team that we had an excellent finish to the year,” Fyrwald said. “Our growth strategies are clearly working as is evident by our double-digit top- and bottom-line improved results.”

Fourth Quarter Results
Fourth quarter sales of $1.12 billion, a record quarter for the Company, were up 11 percent compared to prior year (10 percent organically). Net earnings were $55 million, or 40 cents per share, compared to $39 million, or 28 cents per share in the prior year period. Adjusted EPS nearly doubled to 56 cents, compared to 30 cents in the prior year period, supported by a lower tax rate. Adjusted EBITDA was $189 million, compared to $190 million in the prior year period.

Energy Services, Water Services and Paper Services organic sales increased 12, 8 and 8 percent, respectively. Reflecting increased raw material costs, direct contribution margins declined 160, 200 and 330 basis points from the prior-year period. Paper Services margins were atypically high in fourth quarter 2009.

Geographically for the quarter, respective reported and organic percentage sales changes compared to the prior-year period were as follows: Asia (+20, +14), North America (+16, +14), Latin America (+5, +2), and Europe, Africa and Middle East (-1, +2). Global upstream markets drove strong Energy Services sales growth while in Water Services heavy markets grew at twice the global rate of light markets. Paper Services sales growth was led by greater than 20 percent growth in Asia Pacific, followed by high single-digit growth in both Latin and North America.

Gross profit margin of 43.9 percent, down from 46.1 percent in the prior year period, continues to reflect a challenging price recovery environment and the increase in lower margin end-market sales discussed above.

Free Cash Flow was $74 million in the quarter, $36 million lower than prior year period, due mainly to increased capital investments in the business. The fourth-quarter effective tax rate was 14 percent on an adjusted basis.

2011 Expectations
“I’m pleased with our progress to date,” Fyrwald said, “and heading into 2011 our mission is to continue growing our footprint of customers around the world by providing them with integrated solutions that improve their sustainability profile and reduce their total cost of operations."

Nalco's performance objectives for 2011 include meeting our stated goal of achieving 6 – 8 percent organic sales growth and delivering productivity targets that are again set at $100 million. Before divestitures, adjusted EBITDA is expected to be roughly $760 million and adjusted EPS to be roughly $1.70. On a normalized basis, before divestitures and one-time items, we expect Free Cash Flow to be roughly $175 million, despite a measurable increase in capital expenditures to support accelerated growth.

Including divestitures and one-time items, we expect Free Cash Flow to be roughly $85 million, adjusted EBITDA to be roughly $735 million and adjusted EPS to be roughly $1.65. We expect normalized 2011 adjusted EBITDA growth of approximately 10 percent and normalized adjusted EPS growth of approximately 17 percent.

Our normalized growth rates and other details can be found in our 4Q 2010 Investor Supplement available under Quarterly and Other reports in the Financial Reports section of our website