Tennant Co (TNC) 2004 Q1 法說會逐字稿

Thank you for participating in Tennant Company's First Quarter Earnings Teleconference. This conference is being recorded. If you have any objections, you may disconnect at this time.

Beginning today's meeting is Ms. Janet Dolan, President and Chief Executive Officer for Tennant Company. Ms. Dolan, you may begin.

Thank you very much, Pat. Good morning everyone. This is Janet Dolan. Welcome to our First Quarter Results Conference Call. With me for this call is Tony Brausen, our Chief Financial Officer. Thank you for joining us this morning and welcome, also, to all of you who are participating in the webcast of this call. I'm on the road today, calling you from Australia, where it's about 1 a.m. on Friday, and Tony is in our headquarters in Minneapolis. So if Tony and I seem a little less in sync this morning than we should be, you can just blame it on the distance and the time zones between us.

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 performance. Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in those statements. The risks and uncertainties include factors that affect all companies operating in global markets, as well as matters specific to our company, and are described in today's news release and documents we file 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 Newswire and is also posted in the Investors section of our website, TennantCo.com. The information required to be disclosed about non-GAAP measures discussed during this call is available in the news release, which includes a schedule that reconciles our first quarter, 2003, GAAP results with the results, excluding unusual items. Even though under Regulation G it is more cumbersome to provide non-GAAP measures, we believe presenting the non-GAAP measures permits a more meaningful comparison of our operating results.

Tony will review our financial performance for the quarter in detail in a moment, but to begin, I'll provide an overview of our results. My comments are focused on our results, excluding the unusual items recorded in last year's first quarter. We are pleased to be off to a good start in the new year. Earnings per share for the 2004 first quarter are up 27% compared with the year-ago period, despite the three cent dilution from the Walter-Broadley acquisition. Net sales grew 12%. This was our sixth consecutive quarter of year-over-year growth in earnings per share. This improvement in performance results from several factors.

First, we are seeing a continued recovery in equipment sales to the industrial customers in North America. As we've mentioned previously, a rebound in demand from our industrial sector customers tends to lag the onset of a recovery in industrial sector capital spending by one to two quarters. It appears we are beginning to experience the recovery some other industrial companies began to see a bit earlier. Overall, we believe we are seeing growing confidence in the North American industrial sector, which is reflected in part in customers' willingness to place large equipment orders, which benefited our first-quarter results.

Second, we also saw solid increases in parts and aftermarket service revenues, as well as coating sales, compared with the 2003 first quarter. We see the growth in parts and aftermarket service revenues as another sign of an emerging recovery in the industrial sector. Growth in these areas tends to occur as equipment that was idled or lightly used is brought back into regular service.

Third, we experienced real sales growth in all geographies in the first quarter. Foreign currency exchange effects continued to benefit net sales, but we also had real volume growth in North America, Europe, and our other international markets, during the quarter. I'll have more to say about our outlook for the balance of the year after Tony provides further detail on our first quarter results. Tony?

Thanks, Janet. Our results for the 2004 first quarter include earnings per diluted share of 28 cents on net sales of $119.1m. That compares to reported results in last year's first quarter of 28 cents per diluted share on net sales of $113.1m. And as you may recall, our results for last year's first quarter included two unusual items. First was the recognition of $6.4m in deferred revenues, previously deferred revenues, resulting from the amendment of a contract which resulted in the benefit of 20 cents per share. The second was a charge of 14 cents per share, related to the dissolution of a joint venture. The combined effect of the first quarter unusual items last year resulted in a six cent increase to reported earnings per share for last year's first quarter. The impact on these items is noted in a separate column on the earnings statement we included with our new release.

The rest of my discussion of our earnings statement will be excluding the unusual items in the 2003 period. So with respect to 2003, I will be discussing the results in the earnings release schedule in the column labeled "excluding unusual items."

So to begin, consolidated net sales for the first quarter totaled $119.1m, up 12% from the first quarter of last year. Favorable foreign currency effects added about 5% to net sales for the first quarter. Our January, 2004, acquisition of Walter-Broadley Machines Ltd. accounted for about another 2.5% of the increase. Price increases accounted for about 2% of the growth in first quarter net sales.

In North America, first quarter net sales increased 5%, to $78.9m. Favorable foreign currency effects accounted for about 1% of that increase. The balance of the period-to-period improvement in North America net sales resulted primarily from the continued recovery in equipment sales to industrial customers, along with the growth in parts and aftermarket service revenues that Janet mentioned earlier.

North American sales of equipment for commercial cleaning applications declined compared with the prior year. Similar to the second half of last year, the decline is primarily the result of softness in public sector markets. In addition, we had a difficult comparison for Centurion, as our 2003 first quarter benefited from a large number of Centurion shipments. Again, the comparisons I just described exclude from 2003 the $6.4m in previously deferred revenues that were included in our GAAP results, all of which were in North America.

Turning to Europe, sales for this year's first quarter totaled 28.5m; that's up 31%. Foreign currency exchange effects added approximately 16% to net sales for the quarter, and the acquisition of Walter-Broadley added about 12%. The European industrial sector remains weak, in part as a result of the strength of the Euro compared to the U.S. dollar. But despite the difficult environment, we did generate real volume growth in Europe in this year's first quarter, primarily on the strength of a large order from a new European customer.

In our other international markets, net sales for the 2004 first quarter increased 15%, to $11.7m. Favorable foreign currency exchange effects added about 11% to net sales. The balance of the increase in the period resulted from stronger demand in Australia, Asia, and South Africa.

Our gross profit margin for the first quarter was 40.3%, which is up from 39.6% in last year's first quarter. The improvement results from favorable foreign currency exchange effects and a more profitable product mix, with higher volume in equipment for industrial customers and in aftermarket parts.

Our R&D spending in this year's first quarter totaled 4.1m, which is about flat with the 4.2m in the 2003 first quarter. We remain committed to the development of new products that can drive sales growth. An example, again, is our FAST system, as the percentage of our machines shipping with this value-added option continues to grow.

Selling and administrative expenses for the 2004 first quarter totaled 39.6m, compared with 34.8m in last year's first quarter. About 1.7m of the increase is the result of foreign currency exchange, while another 800,000 resulted from the Walter-Broadley acquisition. The balance of the increase came primarily from inflationary cost increases, along with costs associated with Sarbanes-Oxley compliance, higher marketing spending, and an increase in sales incentives on the higher sales. And as a percentage of sales, selling and administrative expenses were 33.2% in the 2004 first quarter, compared with 32.6% of sales in the 2003 period. Our operating profit for this year's first quarter totaled 4.3m, compared with 3.2m in last year's first quarter, which is a 34% increase.

The operating margin for this year's first quarter was 3.6% compared with 3% in the 2003 period.

Our tax rate in the quarter was 42% compared with 41.5% in the year-ago period.

The direct financial impact of foreign currency exchange effects, primarily the weakness of the U.S. dollar compared with the Euro, yen, and the Canadian and Australian dollars, increased first quarter earnings per share by about 10 cents. Our estimate of the direct impact of foreign currency exchange effects excludes some indirect factors that are not quantifiable. As a result, the 10-cent beneficial foreign exchange impact is likely somewhat overstated. Among these indirect factors are the offsetting effects of pricing actions, relating to the weakness of the dollar, as well as the dampening economic impact on our sales volumes in regions where the dollar is particularly weak against the local currency.

Turning to cash flows and the balance sheet, we had another strong quarter for cash flows. Net cash flows from operations for the 2004 first quarter totaled 8.6m, compared with a negative 300,000 in the year-ago quarter. And compared with December, 31, 2003, our inventories are about flat, despite a 1.4m increase related to the Walter-Broadley acquisition, and compared with the end of the 2003 first quarter, inventories are down by 2m.

Accounts receivable at quarter-end are up less than 2m from year-end, and up nearly 9m compared with the end of the 2003 first quarter. The increases reflect the higher sales volume in this year's first quarter and include 1.6m from the Walter-Broadley acquisition. Accounts receivable days sales outstanding were down to 60 in the 2004 first quarter compared with 63 a year ago. The Walter-Broadley acquisition also resulted in an increase of 6.7m in goodwill and other intangible assets during the quarter.

Our capital expenditures in this year's first quarter totaled 4.4m, and we are currently anticipating full year capital spending of 18m to 23m. Our cash and equivalents at the end of the 2004 first quarter increased to 19.9m from 10.1m at the end of the 2003 first quarter, despite our $9m acquisition of Walter-Broadley in January of '04. Our debt to total capitalization ratio at March 31, 2004, was 5%. That compares with 7% a year ago.

And that concludes my overview of the quarter. I'll turn it over to Janet now to update you on the state of the business and our outlook for the remainder of 2004. Janet?

Thank you, Tony. As I mentioned earlier, we are pleased with our first quarter performance and encouraged by signs of recovering demand among industrial sector customers in most geographies. We are, however, continuing to see difficult economic conditions in Europe, exacerbated by the weakness of the dollar relative to the Euro. In addition, globally, we are already seeing and expect to continue to see increased costs of steel. While we're working hard to offset the impact of these cost increases, we may not be able to fully offset them, through price increases or cost reductions in other areas.

Balancing the signs of recovering demand in most industrial markets, against the weakness in Europe, the continued soft demand in the United States public sector, and the cost issues I just mentioned, we are maintaining our earnings guidance for 2004, at the range we provided when we reported our year-end results. Namely, $1.55 to $1.85 per share. In 2004 and beyond, we will be focusing on four key strategies for growing our business.

The four strategies include one, being the industry's innovation leader. Two, extending our market coverage with a particular focus on a segment of the market we call "cleaning pros." Three, leveraging our cost structure. And four, developing world-class marketing capabilities.

I'll give you a bit more information on how we're implementing each of these strategies. First, being the industry's innovation leader. Those of you who have followed us for a while know that we take a distinct approach to new product development. We are emphasizing development of products that represent meaningful innovations in their categories and that offer at least two, and ideally, all three of attributes we label ``clean, lean, and green.'' In this context, we define ``clean'' to mean best-in-class cleaning performance. ``Lean'' means solutions that improve labor productivity for our customers. And ``green'' means solutions that deliver distinctive health and safety benefits.

To execute this strategy, we have maintained our commitment to R&D spending through the downturn in the industrial sector. We are also working harder to develop critical insights into our customers' needs, including latent, unexpressed needs that often provide the spark for an innovative idea. Our implementation of our strategy, to be the industry's innovation leader, is resulting in solutions that distinctly -- are distinctly -- different from competitive alternatives, and highly valued by customers. You'll see this made evident in some of our new products, planned for introduction later this year. It's already clearly evident in the success we're having with our FAST technology. FAST is our patented, foam-activated scrubbing technology. It helps leave cleaned floors virtually dry, reducing slip and fall accidents, consumes less water, and generates less waste water, and helps customers improve cleaning labor productivity by reducing dump and fill cycles. First offered on our walk behind scrubbers, FAST is now included on more and more of our cleaning equipment.

In the first quarter, for instance, we introduced FAST on more of our riding equipment, and made it standard equipment on scrubbers for industrial sector customers. In February, the floor cleaning detergents used in the system received NSF international approval for use in and around food processing areas. NSF is a non-profit, non-governmental organization that certifies the safety of products used in the food and water industries. This certification creates a compelling selling point to use with customers in food processing plants. By equipping more of our machines with FAST and extending its applications, through certifications such as that from NSF, we are growing our business by delivering what customers truly value. In fact, our FAST technology was critical to securing the major order from a new European customer that helped us achieve real volume growth in Europe during the first quarter.

Our second key strategy is to extend our market coverage, with a particular focus on customers we call ``cleaning pros.'' We have identified markets where clean facilities are deemed critically important, where cleanliness is an essential element of our customers' experience. Examples include retail and health care, among others. The maintenance professionals and the building service contractors in these environments place a high value on solutions that help them do their jobs better and faster.

To execute on this strategy in Europe, we are expanding our sales and service coverage in certain markets there. Our Walter-Broadley acquisition, for instance, substantially expanded our UK market coverage, particularly among retail customers, complementing the strong presence we already had among industrial customers.

We are also increasing our direct sales presence in Japan and building a stronger presence in China, given the migration of many manufacturing floors to that market.

In addition, we are realigning our North American sales organization to provide better focus on high-opportunity markets. This effort includes, in some cases, building industry-specific teams to pursue business in markets such as health care and retail. We've also realigned sales incentives to emphasize profitability, not just top line growth.

Our third core strategy is leverage our cost structure. We are executing this strategy by running all operations on one global ERP system, migrating more of our equipment to standardized platforms to reduce SKUs and contain customization, and by initiating other margin improvement programs, including adoption of Six Sigma and lean manufacturing principles, to further improve our operating effectiveness. Our goal for this strategy include improving our gross margin at least 30 basis points per year through cost reductions.

Our fourth key strategy is to continue to develop our marketing capabilities so that we are consistently delivering solutions that our customers will value above alternatives. In 2003, we completed our most comprehensive study ever of North America, our largest market. The findings are providing a basis for developing innovations that feed the first strategy, being the industry's innovation leader. They are also helping us segment our markets, so that we better understand what drives buying behaviors and can develop the right propositions for different customer sets.

To sum up, we are encouraged by signs of an emerging recovery in demand among industrial customers, and we are pursuing clear strategies for driving both top line growth and bottom line improvement, anchored in our commitment to top performance.

This concludes our remarks, and we'll be happy to take your questions now.

[Operator Instructions] Our first question comes from Mr. Scott Krasik with C.L. King and Associates. You may ask your question.

Thanks, and I guess I have a ``good day, mate,'' to you, Janet.

Hi, Scott. Good day to you, too.

And good morning, Tony. Good quarter.

Hi, Scott.

I guess I want to focus on this large order from a new European customer. Can you talk about sort of how that came about? Was that through the Walter-Broadley acquisition, is that an industrial customer, are you doing -- you know, selling differently to get more customers like that? If you could just give some understanding of that.

Well, I can tell you it wasn't through Walter-Broadley. It's in another part of Europe. But I will tell you, as I said in my remarks, it had an awful lot to do with FAST, it had to do with the customer was really impressed with our FAST technology and it resulted in a very successful order.

So it was an industrial equipment order, or it was commercial?

No, no, not necessarily. It was more in the commercial area.

Okay.

But it's always -- you know, it's a good size order and there's a mix of products, so it really crosses both lines.

Okay, good. And still on the industrial demand, was that, I know was up year-over-year. Was it also up sequentially?

No, Scott, from a revenue standpoint, typically if you think of the seasonality, fourth quarter has always been our strongest -- or virtually always been our strongest quarter, so I don't believe it was up sequentially, but we wouldn't expect it to be, either.

Okay. And then for the third quarter, how are just sort of internally modeling it?

I'm sorry, for the third quarter you said?

Yeah, in terms of industrial-- I mean, the macro, you know, take that demand pick-up issue -- does that flow through, you know so sequentially, the industrial should pick up in the third quarter?

Yeah, typically the industrial-- or I should say our seasonality tends to be fourth quarter is strongest, with people you know having to spend capital budgets, so generally that's been our strongest, and typically our second-strongest quarter tends to be the second quarter.

Okay.

By a little bit of an edge over the third quarter; our weakest quarter is generally the first quarter, the one we just finished.

Okay. Could you give, Janet, maybe a little bit more understanding of what the price pass-through you think you can offset, you know, what the timing of that is, on the steel? How much you know in incremental costs you've incurred already, and maybe how that potentially could flow down to the bottom line?

Well, let me answer some of those. We have targeted a date of May 1st -- we are already seeing some in the first quarter, some increases. We've done a lot of research to find out how our customers are -- how receptive, and we're certainly hearing that our customers are getting steel surcharges from other suppliers, so we don't feel that ours is going to be anything unexpected to them, which was important to us. And in terms of what -- the size, it'll depend. We're trying to do it as fairly as we can and truly base it on the steel content of the product, so it will vary from product to product, depending upon how much steel, so obviously in the bigger products, they'll carry more of a surcharge.

How long do you think this will last, sort of in your internal forecasting?

If I had that crystal ball!

Yeah, that's a tough one to know. One of the -- I guess you can call it good news, is we are -- our customers are telling us that many of their suppliers are doing the same thing we are, and that is trying to pass on the impact to them of the cost increases on to their customers. So from our standpoint, our customers aren't hearing from us for the first time that there needs to be a steel surcharge applied to what they're purchasing, not only from us, but from other suppliers that they have. And just once again, to reiterate what Janet said, you know, we're already seeing and saw somewhat in the first quarter and certainly beginning here in the second quarter the cost impact of the steel surcharges being applied to us, as we purchase steel. But it won't be until May 1 when we begin to apply surcharges to our customers, so we've got a little bit of a timing matter going there, but again, we're working very hard to do our best to offset as much of the steel impact in the full year as we can.

And will that show up in cost of goods? What was the impact, then, in the first quarter? Can you quantify that, in cost of goods?

Yeah, it was under a half million in the first quarter, and it does show up in cost of goods. That's precisely where it shows up, Scott.

Something similar, then, for whatever time period in the second quarter?

No, I think we're looking at a bigger impact for the second quarter than that, because the -- you know, certainly, like many, we had some purchases that were at lower values, plus the costs were and perhaps in some level, still are increasing fairly rapidly, so we -- and really, that impact didn't start until sometime during the first quarter, so we definitely did not have a full quarter impact in Q1 of the cost increase.

Okay. If I could switch gears a little bit, to Centurion, Federal Signal, in their conference call, talked a little bit about, you know, gaining market share in the street sweeper segment in Europe. You know, is Europe somewhere you'd like to take Centurion and you know, what's the schedule for that and is that an opportunity for you?

Well currently, we don't sell the Centurion there. The Centurion is fairly large for Europe, for the size of the streets and for the compact nature of the urban areas there. But there are a number of products in Europe. I mean, it's obviously an opportunity as we look at expanding our product line, to look at things that would be better suited for Europe. But the Centurion is pretty big for there.

Yeah, it's too big. So what's the -- okay, then in the U.S., what do you see in terms in market share and you know, I think Federal Signal has finally put out their waterless sweeper.

Yes, we're aware that they have. We don't think it's as good as ours, of course, but we continue to see growth in the Centurion. We don't see as much as we did the first 18 months out of the -- when it was introduced, but it was just brand-new and you have a lot of -- early burst of sales. So, this quarter over a quarter a year ago, it -- we had less, but we still continue to see a growth in the Centurion orders.

On plan, above plan, below plan?

I'd say near plan at this point.

Near.

Near plan? Okay. And then what's sort of the biggest encumbrance -- making people understand why they should pay more for the Centurion or you know, people just don't have the dollars? I mean, are they understanding the need for it?

Well, it's largely that we now are well into the slowdown in public spending, so those dollars are just more precious, and so no, it hasn't been really an adaption to our technology, it's more about there's a real slowdown in the public sector.

Okay, and then Tony, what percent of the revenues come from new products?

Oh, Scott, I don't have that for the first quarter, but I can tell you for 2003, about 35% of our consolidated equipment revenues were derived from products introduced in the preceding three years. That's actually something we track and we continue to focus on that percentage.

And then when you -- as you install the FAST on to all of the equipment, it's almost becoming standard equipment. Does that, then, fill another sort of razor/razor blade, where they need to keep buying the solution, even if they didn't want it to begin with?

Absolutely. That's one of the big benefits to us, with the FAST product, is that chemical that goes along with it is a proprietary chemical and that needs to be purchased from Tennant, and so that is causing a nice aftermarket revenue stream for us that is absolutely in a razor/razor blade mode.

Okay. Well, that's all I've got. Thanks, guys. Good quarter.

Okay, Scott, I just wanted to follow up on the FAST. It is becoming more of a standard on products, but that's because the market adapted and wanted it that way. You know, we ordered -- we started out by giving the market the choice, so that we could find out and make sure that the market really accepted it, and the fact that it's just become in such demand is what has allowed us to move away from having it as a dual offering.

Well, that's good. The product works, so --

Right.

Okay, thanks, guys.

You're welcome.

Thank you. Our next question comes from Mr. Jim Norris with Cooke & Bieler. You may ask your question.

Hi. I was wondering if you could maybe give us a little bit of a review of the plans on how you're going to incorporate Walter-Broadley and the, you know, perhaps timetables and so forth? And then maybe, although it's early, maybe give yourself a report card on how that's transpiring so far.

Okay, well let me start and then if Tony wants to add on, he can. We made it, I think, we have disclosed in our release, that it is a very good fit for us because there's very little overlap. They're very strong in building service contractors, particularly for the retail segment, which is a really important segment in the UK and we were strong in industrial, so there's a really good match of the markets, very little overlap. And plus, they brought about twice as many direct service reps as we had, and we're integrating those throughout the year. And we have the sales integration already done. And so I would say the report card early is that it's going very well. We're very pleased with the way it's -- the integration is going.

Okay. And then one other question -- I noticed that the tax rate this quarter was above 40%, 41% or 42%, and I know that the tax rate has kind of bounced around here recently, as earnings were depressed, but could you comment a little bit about the tax rate, where you think, on a longer term basis, this should settle out?

Tony, do you want to take that?

Yes, I will, and Jim, let me just add a quick comment to your prior question on Walter-Broadley. One of the other things we're doing, as we execute the integration of this, is bringing them on to our ERP system, and that will happen sometime late in the second quarter, early third. So that's another important element of the integration effort, and in fact, you know, we reported the dilutive impact of the acquisition in the first quarter. Probably beginning in the third quarter, we won't be able to report on that, and that's good news, because that means the business will be fully integrated at that point, and we're close to fully integrated from a systems standpoint and really combined with our existing business in the UK.

Now, to your tax question. First of all, let me explain why it's higher than the full-year rate we experienced last year. I think that was part of what you're after, and that's because last year we had some factors influencing our effective tax rates that will have a one-time nature that related to settlements of tax audits, in particular. And that took the rate down below 40%. This year it's back, as you saw, 42% for the first quarter, and at this point, that is our expected full-year tax rate. And generally, I think on a go-forward basis, the tax rate relates very significantly to the mix of earnings that we experience, and particularly with Europe, where we have some net operating loss carry-forwards. The mix of earnings is very important to the tax rate. And so we hope over time to get that tax rate under 40%, but that would mean you know, increasing profitability in Europe, which of course is our goal.

Okay, thank you.

You're welcome.

Thank you. Our next question from Ms. Beth Lilly with Woodland Partners. You may ask your question.

Good morning.

Hi, Beth.

Hi, Beth.

I was just wondering if you could -- translate into financial terms or financial metrics your strategic plan in terms of you know those four strategies that you laid out, Janet? You know, in terms of leveraging the cost structure and Six Sigma and lean and then improving the gross margins. And I would imagine, as you extend your market coverage and take the product into new markets, your top line is going to grow faster. So I was wondering if you could help us understand financially what you think the impact of these strategies are going to be?

Well clearly the cleaning pros and the marketing, and one kind of supports the other, those are clearly aimed at top line growth, and we've set out and said our goal over a economic cycle is to get to double digit growth, so those are meant to drive that. Innovation as a real driver of that, and then very specific marketing that gets us to particularly cleaning pros and other segments of the market for whom those innovative products are going to be the most valuable. So those clearly drive the top. We've made a commitment that we really want to see our margins improve at least 30 basis points a year. We -- with operating efficiency and a lot of that comes from the lean manufacturing principles, but it also comes from going to these platforms for new development and new design, to get a lot fewer variations on parts and to get a lot more commonality of parts. And then also just to bring down S&A expense over time as well, and that is, again, trying to get more leverage out of the top line growth.

So directionally speaking, I mean, do you think the gross margins can get to 41%, 42%, and SG&A can come down? I mean, ultimately, where do you think you can drive operating margins to in this business?

Beth, let me take a crack at that. I wouldn't want to put it in specific terms, in terms of the gross margin, because there's a lot of other factors that influence our gross margin, and that's product mix and you know, certain new products may have higher or lower margins that would impact that, but we like to look at it in the way Janet described it -- what is the benefit on a with and without basis, if you will, of the actions that we're taking and the goal that Janet just reiterated was 30 basis points per year, at a minimum, from these types of actions. And just to add to Janet's thoughts, some of the initiatives include, you know, really from a lean manufacturing, Six Sigma perspective, we're instituting value stream mapping, which begins when you are ready to purchase materials and it applies all the way through shipment and invoicing of the product, and it involves working to reduce lead times relating to purchasing of product as well as lead times in the production process. It works to reduce our batch sizes, to give us more efficiency. It works -- and be a true build-to-order. It gives us the opportunity to reduce inventories. We're using [Kaisan] events to make rapid changes in the factory floor in the procurement area, the engineering area, et cetera. And ultimately the goal is to move from an assemble-to-order, which is kind of the current state we're in, to a full build-to-order. All of those should bring efficiencies that help us, as I said, reduce inventories and help us improve our gross margin and we plan to measure that on a, like I said, a with and without basis, to try and isolate the impact of these and keep them apart from other types of influences on gross margin, such as foreign exchange and product mix.

Okay. So I would imagine, too, as margins improve, it sounds like your cash flow is going to improve, too?

That's the objective.

And when was this -- when were these initiatives started? Were they started at the beginning of the year or --

Yeah, we've actually changed some of the leadership in our North American operations group, including hiring a new Vice President of manufacturing and that just happened here in the first quarter, and as Janet alluded to, we're really very excited about the lean manufacturing and the Six Sigma principles that some of our changes in the group have helped bring to our company, and I can also tell you we have a number of cost reduction activities that are underway and in fact, were underway prior to these leadership changes. And -- but that these changes and the experience of the new team members will certainly help us enhance the opportunities.

Okay. Sounds great. Thank you very much.

You're welcome.

Thank you. [Operator Instructions] I'm showing no questions at this time, sir.

Okay. Well, thank you all for dialing in. That concludes our call, and we look forward to reporting our second quarter results in July. Thank you.