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the Weekly
Q&A - Ownership and Direction
With the recent sale of additional shares, a majority of
Nalco is now owned by shareholders other than our Sponsors. The Weekly conducted
an interview with Bill Joyce, Bill Roe and Brad Bell to raise questions asked by
some employees in recent weeks about our ownership and direction.
the Weekly: Our Sponsors
have made a significant amount of money from Nalco. Why should they be making
this money when employees are dealing with job cuts and other reductions?
Bill Joyce: Before answering the question about the Sponsors,
let me address the point about job reductions. We have eliminated several
hundred positions in the past two years and expect to continue to make smaller,
targeted reductions in areas where we can be more efficient. The reality of
business today is that we need to perform better every year or risk losing our
position in the marketplace. Given what most people would think about private
equity firms, you may think these savings go to our shareholders. However, we
told investors in June that, of our $83 million in expected cost reductions and
efficiencies this year, we are reinvesting $78 million of that money in Nalco.
We are increasing our investment in sales and service employees, expanding R&D,
increasing compensation and benefits, and addressing some inflation and one-time
costs, such as Sarbanes-Oxley compliance. That means that well over 90 percent
of our savings efforts this year are directly used by the business, and most of
that goes to employees. The remainder is used to pay debt.
Now, as to the Sponsors making money on their investment,
there is no question they made a smart deal and benefited from good timing. In
the 2003 sale, Suez gained what they needed most, which was to reduce debt
quickly. Since the deal was completed, our customer markets have improved and
the overall financial market has gained as well. Most importantly, we delivered
results. As a company, we hit our double-digit EBITDA growth target while
investing in our future. That helps everyone involved in the company, including
our Sponsors. A company that can grow earnings at 10 percent or better while
investing to ensure that growth is sustainable is valuable to investors. The
returns Sponsors and others are making now come in the form of share price gain,
not something that comes from the company. The Sponsors are like any other
shareholder.
the Weekly: Why don't
employees benefit as much as the Sponsors from our performance?
Bill Roe: In countries where we can do so, we try to link a
portion of employee performance to profit-sharing programs. This allows most of
us to benefit personally from strong Company performance that we help to create
as we invest our intellect, energy, hard work and enthusiasm. We also gave as
many employees as possible the chance to participate in the Initial Public
Offering, in countries where national laws and our scale allowed, in
order to give employees the chance to share in improvements from an ownership
perspective. Since the IPO, our stock price was up more than 20 percent prior to
Hurricane Katrina. Ownership stakes are at risk, “ meaning that shareholders can
make money, but may also lose the entire amount of their investment. Since the
Hurricane, Nalco's share price has declined, showing the risks that come with
stock ownership.
When it comes to investing, it is standard that higher
rewards go to those taking larger risks because those investments are entirely
at-risk. For example, we all expect lower returns from government-backed bank
savings than we do from investing in the stock market. Keep in mind that our
sponsors only benefit from our performance as they sell their shares. They
receive no dividend or any other fees from Nalco.
the Weekly: Competitors
and some publications have talked about Nalco's debt load as being high. What
impact does this have on our ability to hit our targets and be successful
long-term?
Brad Bell: As a company that generates a significant amount
of cash in our day-to-day operations, Nalco was an obvious candidate for a
leveraged buy-out. Owners of companies with solid, consistent streams of cash
flow know that there are financial benefits to using debt to supplement equity
in financing. For Nalco, because of our financial strength, the current debt
levels need not be a concern. As a William Blair & Company investment analyst
told the Chicago Tribune
recently, Nalco can handle a significant amount of debt. In addition to
making our interest payments, we are paying down principal on our loans far
ahead of when that principal becomes due. Because of this, our next significant
debt reduction requirement is in 2010. By the time we reach 2010, we expect to
have even eliminated most, or all, of this principal payment requirement.
the Weekly: We are
working hard to make money, but it seems like all of our cash is going to the
Sponsors.
Bill Joyce: Since Nalco does not pay a dividend, the cash
generated by the Company remains inside for us to use to improve our business
whether by making capital investments, paying down debt, expanding research
projects, or adding sales engineers and service technicians. The money made by
our Sponsors with their secondary offering of their shares in August comes
entirely from outside the Company. Clearly, shareholders gain when the company
gains, because a company that improves its performance is far more valuable than
a company in decline.
The Weekly: How much did
Nalco's debt position change when the Sponsors sold shares in August? Did we get
any cash as part of the sale?
Brad Bell: When the Sponsors sold stock in August, this was
simply a transaction between them and the broader stock market as new investors
bought shares previously held by the Sponsors, and the Company was not a
participant. This was unlike our IPO in November of 2004, when the Company did
raise new cash and used it to pay off a portion, more than $160 million, of our
most expensive debt. This time around, we chose not to raise new money. Quite
simply, stock financing is more expensive than debt financing, so as long as we
and the market are comfortable with Nalco's ability to generate cash and
properly service our debt load, and we have no new need for funding, we should
not be selling new shares. Management has always had that comfort and, in the 20
months since our purchase from Suez, the investment community has been able to
see our performance and gain a similar level of comfort. They were willing to
invest over $600 million, buying shares from the Sponsors, because of the
confidence they have in Nalco's business model and people to deliver results.
the Weekly: Why should I
care to make more money for our Sponsors if I am not getting a bigger cut?
Bill Roe: We should care about making our company perpetually
successful, because when we do, everybody wins.
Whenever we have asked groups of employees whether they want Nalco to be
recognized as a world-class company, there is universal agreement that this is a
worthy goal. >From a business perspective, the standard for being recognized as
world-class is to deliver at least 10 percent earnings (or EBITDA) growth. From
a customer perspective, it is having customers rate us as better than our
competitors and very
good or excellent across the span of products, operations and services we
provide. With our employees, it is making sure that we grow our company so we
can provide more career development opportunities while being competitive in our
total compensation. The outside world most clearly sees our sales, earnings and
cash flow growth as key indicators of our success. When we do well on these
measures, recognition as a world-class company is our reward.
From an internal perspective, we want to improve because we
want to be successful. Success is its own reward, but avoiding failure is
another powerful motivator. Companies that fall short of world-class performance
are easy targets for buyers who believe they can get the company on a
world-class track and reap rewards from that improvement. By consistently
delivering results at a world-class level, we tell the outside world that we
collectively are the right people to run this Company. It does not guarantee
that someone might not buy us, but proving ourselves every day puts us in the
best position to control our future.
the Weekly: Why are we
always changing? When can we get back to just running the business?
Bill Joyce: World-class companies that seek to grow and
remain competitive are always changing. Surviving and prospering through
constant economic, technological and political change is not easy. Only 74 of
the original S&P 500 companies in 1957 were still on the index 40 years later,
and what is more telling, only 12 actually outperformed the index. Companies
that stand still ultimately are absorbed by others or fall apart completely. So
even if we feel good about where we stand today and we do have many
strengths that start with an outstanding team of employees as we need to
continue to get even better. If we were perfect already, I would be concerned.
But we have significant room to improve our internal operations and to expand
the technology and services we offer to customers. Having that room to improve
means we can get better and remain competitive.
the Weekly: Who owns
Nalco now?
Brad Bell: Like any publicly traded Company, we are owned by
our shareholders. With their recent sale, our Sponsors remain our three largest
shareholders, but are no longer majority owners. The vast majority of our
ownership is through mutual funds that individuals, potentially including our
employees, have invested in. Even the funds that the Sponsors used to buy Nalco
are funded through numerous groups, such as public employee retirement systems,
college endowments, pension plans and insurance companies. Some in management
have also invested a significant amount of their own money to acquire an
ownership stake.
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