Tennant Co (TNC) 2003 Q4 法說會逐字稿

Thank you for participating in Tennant Company's fourth quarter earnings teleconfrence. Begining today's meeting is Miss Janet Dolan, Presiden and CHief Executive Officer for Tennant Company. This confrence call is being recorded, if you should have any objections you may disconnect at this time. Miss Dolan, you may begin.

Thank you very much. Good morning everyone. This is Janet Dolan. Welcome to our fourth quarter results confrence call. With me for this call is Tony Brausen, our Chief Financial Officer. Thank you for joining us this morning. Welcome also to all of you who are participating in the web cast for this call. Before we proceed, I'll ask Tony to provide our Safe Harbor Statement.

Good morning everyone. Our remarks this morning and our answers to your questions may contain forward looking statements regarding the company's expectations of future preformance. Those statements are subject to risks and uncertanties and are The risks and uncertainties include the factors operating in global markets, as well as matters specific to our company and our actual results may differ materialy from those contained in the statements. The risks and uncertainties include factors that affect companies operating in global markets, as well as matters specific to our company and are described in today's news release and in the documents we filed with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor Statement for a description of risks and uncertainties.

Our news release was issued this morning via PR news wire and is also posted in the investors section of our website tennantco.com. The information required to be disclosed by disclosed about non-GAAP measures discussed during this call is available in the news release, which includes schedules that reconcile our GAAP results with our results excluding unusual items. We believe presenting the non-GAAP permits a more meaningful comparison of our operating results and it is consistent with the way we measure the business internally.

Tony will review our financial reports for the quarter in detail in a moment. I'll begin with some general comments on the quarter. We're pleased to have ended the year strong with our 5th consecutive quarter of year-over-year growth in earnings per share. As in our third quarter, we benefitted from favorable foreign currency exchange rates, volume growth outside North America and increased sales of equipment to customers in the North American industrial sector. The fourth quarter was the second consecutive quarter in which North American sales for equipment in industrial cleaning increased compared to the prior year period, an encouraging sign. Offsetting the recovery demand for industrial cleaning equipment, however, as we discussed last quarter, has been a slowdown in demand for equipment used in commercial cleaning. This slowdown has been particularly pronounced in the public sector where the effects of the economic downtown are resulting in tighter budgets among units of federal, state and local government including school districts.

We're responding by focusing our sales team on other opportunities in the wider market for commercial cleaning equipment. After the close of the quarter, we completed the acquisition of Walter Broadley Machines Limited. With this acquisition, we significantly expand our revenue base and our service resources in the United Kingdom. I've have more to say about the strategic importance of this acquisition later on in this call and we'll also update you for our outlook for 2004. I'll now turn you back to Tony for a recap of our fourth quarter results. Tony?

Thank you Janet. Our reported results for the 2003 fourth quarter include earnings of .56 cents per diluted share on net sales of 120 million. That compares to earnings of .44 cents per diluted share on net sales of $113.8 million in last year's fourth quarter. For the year, we reported net earnings of $1.56 per share on net sales of $454 million, compared with net earnings of .91 cents per share on net sales of $424.2 million in 2002. As our news release indicates, there were unusual items affecting our full year results for both 2003 and 2002. The financial impact of these items is noted in a separate column on the earnings statements we included in our news release.

The rest of my discussion of our income statement will be excluding the unusual items in both the 2003 and 2002 full year periods. When I discuss our full-year results, I will be referring to the columns labeled "excluding unusual items" on the consolidated statements of earnings page. As you can see from the statements, excluding unusual items, we reported 2003 earnings per diluted share of $1.50 on net sales of $447.6 million compared with earnings per diluted share of $1.31 on net sales of $424.2 million in 2002. Consolidated net sales for the 2003 fourth quarter totaled $120 million, which is up 5.4% from the fourth quarter of the prior year. Favorable foreign currency exchange effects added about 5% to net sales for the quarter and price increases benefitted net sales by about 2%. For the year, consolidated net sales excluding the 6.4 million of deferred revenues recognized in the first quarter, were 447.6 million, up 5.5% over 2002. Favorable foreign currency exchange effects added about 5% to the 2003 net sales for the year as well.

I'll now provide a recap of our results by region. Starting with North American. Sales for the 2003 fourth quarter totaled 82.1 million, about flat with the 2002 fourth quarter. And as Janet noted, we again saw an increase in equipment sales to customers in the North American industrial sector. Our service and after market parts revenues also grew. But as in the third quarter, the growth in these areas was offset by a decline in sales of equipment for commercial cleaning compared with the prior year. The decline reflects, in part, a comparison against a relatively strong 2002 fourth quarter during which we were completing commercial equipment shipments against two large orders. Also, as Janet noted previously, we continue to see a slowdown in revenues from customers and state and local governments, including schools, because of budget constraints in the public sector. Our 2003 fourth quarter net sales in North American also reflect a smaller number of Centurian shipments than in the 2002 fourth quarter, which, as we've indicated in the past, was an extremely strong quarter for Centurian Deliveries. For the full year, however, Centurian sales increased more than 30% compared with 2002. Favorable foreign currency exchange effects added 1% to net sales in North America for both the fourth quarter and the year.

Turning to Europe. Sales for the fourth quarter totaled 25.4 million which is up 21% compared with the 2002 period. Favorable foreign currency exchange affects added about 18% to net sales for the quarter. Despite business conditions that were difficult in many European economies, in large part as a result of the strong Euro, we generated real volume growth in Europe during the fourth quarter. We attribute it to growth primarily to our earlier investments in expanding sales and service coverage in certain markets as well as to the introduction of new products, such as scrubbers equipped with our fast foam activated scrubbing technology. For the full year sales in Europe totaled 88.8 million, up 20.5% over last year. Favorable foreign currency exchange effects added about 19% to 2003 net sales in Europe.

Turning to our other international markets, net sales for the 2003 fourth quarter totaled 12 1/2 million up 19% from the prior year's fourth quarter. For the full year, net sales were up about 18%, compared with 2002. Favorable foreign currency exchange effects added about 12% to net sales in the quarter and 8% for the full year. This was our 5th consecutive quarter of solid volume growth in our other international markets. We're benefitting from the strength in the economies in key export markets particularly in the Middle East and parts of Asia, as well as strong customer interest in our new products. Our gross profit margin for the fourth quarter was 40.5% up 39.6% in 2002's fourth quarter. Favorable foreign currency exchange effects are primarily responsible for the increase.

For the year, our gross profit margin was 40.2%, that's up slightly from 40.1% in 2002. Our R & D spending in the fourth quarter totaled 4.2 million, up $200 thousand from the prior year's fourth quarter. For the year, our R & D spending totaled 16.7 million or nearly 4% of sales. Our plan is to increase our R & D spending at about the rate of sales growth going forward. Selling and administrative expenses for the 2003 fourth quarter, total of 36.8 million which is up 2.4 million up from the prior year's fourth quarter. About a million seven of the increase is attributable to foreign currency exchange effects. The balance of the increase results from profit related incentives. Foreign exchange effects increased fourth quarter EPS by about 12 cents per share and full year EPS by about 29 cents. As we've mentioned before, there's about a three month lag between changes in the Euro exchange rate and its impact on our gross margin. Our results also benefitted from strengthening of the Canadian and Australia dollars and Japanese Yen, relative to the U.S. dollar.

Our operating profit for the fourth quarter, totaled 7.6 million, compared with 6.7 million in the 2002 fourth quarter. We benefitted in the 2003 fourth quarter from revenue growth and the favorable effects of currency translations on gross profit. Operating margin was 6.3% in the 2003 fourth quarter and 5.9% in the year earlier period. For the year, operating profit totaled 21.7 million, compared with 20.6 million in 2002. Our 2003 operating margin was 4.8% compared with 4.9% in 2002. Our tax rate for the fourth quarter was 33% and for the year was 37%. This lower full-year rate, compared with the 2002 effective rate of 40%, results from a favorable non-U.S. tax audit settlement, which we mentioned last quarter, as well as a more favorable mix of taxable earnings by country. In 2004, we expect our tax rate to be 41-42%. 2004, we will not have the beneficial impact of the favorable tax settlement I just mentioned. In addition, our 2004 tax rate will include the one-time affect of tax structuring associated with our acquisition of Walter Broadley, which, Janet will discuss shortly.

We had a very strong year-over-year improvement from a cash flow perspective. Cash flow from operations for 2003 totaled 30.5 million, which is up 59% compared with 2002. The improvement results primarily from a decrease in inventories, coupled with the increase in our net earnings. Also, our focus on economic profit, which is operating profit, less tax -- operating profit after tax less a charge for net assets employed in the business, has helped us drive better asset utilization. Since December of last year, we have reduced inventories by about 8 million excluding the foreign exchange impact. A portion of these declines resulted from bringing inventories down to more appropriate levels company-wide following the build-up that occurred as we were transitioning parts inventories to locations managed by our third party logistics service provider. Inventory days on hand declined seven days from 105 days to 98 days on a [inaudible] basis.

Our capital expenditures for 2003 totaled 10 1/2 million. Depreciation and amortization for the year totaled 14 million. And for 2004 we're currently planning capital expenditures 18-23 million. Among the capital products we have planned for 2004, are investments in a powdered paint system, that offers cost, quality, and environmental compliance benefits compared to our current system, as well as an automation project in our service business. accounts receivable at year end totaled 85.6 million, that's up 7.8 million from the end of 2002. The increase resulted from the growth in sales and the effects of currency translation.

Accounts receivable day sales outstanding are down one day from 63 to 62 days. Over the course of the year we retired 5 million in debt. And we ended the year with cash and equivalence totaling 24.6 million, that's up 50% compared with the end of 2002. Our cash net of debt is increased by about 21 million since the end of 2002. Our debt to total capitalization ratio December 31 of 2003 was 4%, compared with 11 1/2% a year earlier. That concludes my overview of the quarter and I will turn it over to Janet now to update you on the state of the business and our outlook for 2004.

Thanks Tony. As I said earlier, we are pleased to have ended the year with a strong fourth quarter performance. Furthermore, given business conditions that remained unfavorable through much of 2003, we are delighted to be reporting both top and bottom line growth compared to 2002. In many respects, our fourth quarter played out as a continuation of trends, both favorable and unfavorable, that we saw in our third quarter. Among the favorable trends, first, we continued to manifest from favorable foreign currency exchange effects, which, as Tony has noted, contributed significantly to our year over year sales and earnings growth More importantly, the continuation of a second trend, these favorable currency effects were magnified by real volume growth outside North America.

In Europe, we're benefitting from our past work to lower our costs, streamline our infrastructure and improve or market coverage. For instance, worldwide, we now have approximately 600 service representatives. In our other international markets, strengthening regional economies and the success of new products helped drive growth. A third favorable trend, that continued from the third quarter into the fourth quarter was increased demand for cleaning equipment from the industrial sector customers in North America. For the full year, our sales of equipment for industrial cleaning were still down compared to 2002 but, volume began stabilizing in the second half of the year, and we are encouraged by two consecutive quarters of year-over-year increase, in industrial sector demand.

The unfavorable trend, that continued for the third quarter, into the the fourth, was the weaker demand for cleaning equipment from North American commercial sector customers. As we pointed out in our third quarter call, the impact of the economic downturn has begun to affect public sector customers. This is resulting in budget constraints, that are dampening demand from units of federal, state, and local government, including schools. We are responding by redirecting our sales team towards other opportunities, in the overall cleaning equipment market, and by continuing to emphasize our FaST system.

FaST is our patent protected, foam activated scrubbing system. It uses less water than conventional scrubbers, which has the benefit of making cleaning personnel more productive. They have to dump and fill tanks, less often. And leaving scrubbed floors practically dry. FaST is gaining real momentum in the market place because of the combination of cleanliness, safety and environmental benefits it offers. Those benefits are especially compelling in environments where customers are concerned about the preventing slip and fall accidents on wet floors. Such as retail and health care, among others. An increasingly higher percentage of our equipment, shipped in 2003, included the value-added FaST technology. This percentage is likely to further increase in 2004, as we extend the use of FaST to riding scrubbers, which will enable its use in other applications, such as factory and warehouse cleaning.

Turning now to 2004 developments. In our outlook for the new year. As you know, in early January, we announced the acquisition of Walter Broadley Machines Limited. A cleaning equipment company based in the United Kingdom. The Company had a fiscal 2003 sales of about 13 million dollars. This acquisition is key to our efforts to further expand our opportunities in Europe. By combining Walter Broadley's sales and service resources with ours, we quickly established what we believe is an optimal level of sales and service coverage in the U.K. We also established a strong channel through which we can bring Tennant's broad product line more effectively to the U.K. market. In addition, Walter Broadley focuses on serving comercial cleaning customers, and, in particular, building service contractors, serving major U.K. retailers. That focus, complements Tennant's U.K. resources, which have, historically focused on industrial customers. And it strengthens our position, in faster growing portion of the equipment market.

Walter Broadley is a well-known, and well-respected name in the U.K. market. We, therefore, plan, to operate our combined businesses under the Walter Broadley name, with key Walter Broadley employees, in important leadership roles. The Company's direct service is considered the best in the U.K. market. And we plan to move swiftly to integrate the sales and service organizations to benefit from the company's reputation with customers. In addition, we will continue to sell Walter Broadley products under Walter Broadley's Challenger and Optima brand names. As we introduced new products, however, we expect to use the Tennant brand name. We will begin to update the Walter Broadley product line with Tennant's new European products in 2004. As we noted when we announced this transition, we expect this acquisition to be dilutive to earnings in its first year. The dilution results from certain restructuring charges, the tax-related cost Tony mentioned earlier, and the short term impact on profit margins that is required under the purchase accounting rules. Longer term, we expect this acquisition to provide an excellent platform for growth in the U.K. and to be a net contributor to earnings beginning in 2005.

Turning now to our outlook for 2004. As noted in our fourth quarter results announcement, we currently expect to report 2004 net earnings per share of $1.55 to $1.85. This guidance includes an expected dilutive effect of up to eight cents per share, resulting from the Walter Broadley acquisition. All of the dilutive impact is expected to occur in the first half of 2004. The range we are providing for our expected 2004 earnings reflects as couple of factors. First, we continue to find forecasting permanence challenging. Ours is a short-cycle business. Our quarter-end backlogs, typically, represent less than two weeks of revenue. Our quarterly results are, therefore, tied to a near-term order trend and we continue to experience considerable order volatility within our quarters. In fourth quarter, for instance, November was slower than we expected, but December came in very strong. We saw comparable intra quarter volatility throughout most of 2003.

Second, as we have mentioned previously, the impact of a recovery in the industrial sector capitol spending, on our order volume for North American industrial sector customers, typically lags the onset of recovery by one to two quarters. The reason industrial sector downturn was particularly severe and long, making the timing and the magnitude of a recovery and its impact on our business especially hard to predict. With that said, we remain confident that Tennant is well-positioned for growth this year. Our prior efforts to approve our operating effectiveness, optimize our global sales and service coverage, and develop innovative new products enabled us to deliver top and bottom line growth in 2003. Despite a less than favorable environment. In 2004, our performance should benefit from the steady stream of new products we have scheduled for introduction this year, and from our expanded sales and service coverage in Europe. That concludes our remarks. We will now be happy to take your questions.

Thank you if you would like to ask a question, please press *1. You will be prompted to record your name. Our first question from Gary Giblen of C.L. King.

Hi, good morning Jan, Tony.

Good morning.

Good morning.

Hi, to pick up on the last sentence of your remarks, Janet about the new products, are there any potential blockbusters in there or are they more on the incremental side?

Well, Gary, as you know, we've announced -- we've made it clear in the past that we intend to step up our commitment to innovative products. So yes, I can tell you we have a good mix of products, both innovative but, also, very important extensions of our current product line.

Okay. And, the -- the -- on Walter Broadley, the release from a couple of weeks ago, said that it would be mildly dilutive in '04 and I guess, depending on the color you put on it, eight cents seems like it's more than mildly. So, in other words, did you discover anything further in due diligence or is it just a -- are we just splitting hairs on wording? Did anything new develop on Walter Broadley?

No Gary, this is Tony. I would say no, nothing changed. You know, mildly, I think in this case, eight cents, and by the way its up to eight cents is the way we phrase it,

Right, right.

Mildly, in this case, if you look at the range of earnings it's in 4-5% of earnings guidance for the full year so I'd still consider that mildly.

Sure. Okay, and the -- you're saying that the public sector markets are getting, actually getting worse, not just remaining weak, but weakening further? I mean, is that the right message? I think that is -- it's a continuation. Janet, you may want to add to that.

Yeah, I would say that they are experiencing much the same pattern that we saw in the industrial sector, which, while they lag, they are continuing to go into a deeper slowdown. Until they get some visibility to a recovery and the tax revenues coming back to levels that they've seen in the past.

Uh-huh. Okay. And, the -- I mean, how much margin expansion, let's say operating margin expansion, could occur if you brought Walter Broadley up to our Tennant's European operating margin? What are we talking about? A 10 percentage point improvement or, you know, what sort of -- what sort of range are we talking about?

I'm not sure I understand stand the question, Gary, when you say how much operating margin improvement do we expect?

Oh, well -- yeah. I mean, the idea, are you seeking margin improvement of Walter Broadley or is it just a sales add-on to enhance your presence in Europe and so forth?

Sure. It's -- you know, it's certainly an acquisition where we've added a revenue base but also we expect to benefit from synergies and the synergies will come in the form of improved leverage on the buying side, so that would appear in the gross margin but we expect synergies in the selling and administrative areas as a, I think, Janet mentioned, we're planning to consolidate the sales offices in the U.K. And I think it's fair to tell you that that -- that that business, in the U.K. is profitable now.

Right. Well, okay. So, I guess -- I'm getting at, what I know synergies could occur here in terms of the profitability of the whole--

Sure.

-- combined operation.

Those are the synergies really focused on what's called the operating margin, which is the question you were asking. But we also believe, and I think Janet touched on them as well earlier, we think we've got substantial synergies within the U.K. because of the fact that Walter Broadley services very well, I might add, but serves a marketplace that Tennant previously hadn't had much success in the U.K. in serving; and that's more the commercial side, particularly the retail sector and the building service contractors that service the retail sector. That is their strength and so we think there are going to be some synergies because, in part the breadth of the product line, which we can now bring to that party, but, also, just other synergies within the combination opportunities of the two sales forces and service forces.

Okay. I understand. Couple more. Is the -- I mean, are we saying that the North American environment for industrial is, I mean I understand its still extremely volatile, but is it kind of a rising curve with zig-zags within the curve or is it -- in other words is it the current environment somewhat better than in the third quarter conference call or is it the same and volatile?

We've tried to be as specific as we can, Gary. I think we would say the second half, we saw what was, what I would call a coming to life of the prospects in our pipeline for industrial. That is translated into stronger order volume throughout the second half, but it has been erratic , it has been stronger one minute and then slow. But I think that's to be expected after a really, really long slowdown like we had. The recovery line is just not a straight line.

Sure. Okay. And, then, on tax rate, the -- just, I mean, what is a good tax rate to use next year? Because -- okay 40, 41 is still the right number?

Yeah, 41-42 is what I mentioned and that's higher, obviously, in '04 than it was in '03 because of the one-time nature of the tax item I mentioned.

Okay. In 2004.

Plus, there are some additional tax costs associated with the tax structuring related to the acquisition.

Okay. Okay. That's it. Thanks very much.

You're welcome.

Once again, that's *1 to ask a question. At this time, I show no further questions.

Okay.

Okay. Well, that concludes our call. We look forward to a successful 2004 and we thank you for your continued interest in Tennant. Thanks and good-bye.