Tennant Co (TNC) 2004 Q4 法說會逐字稿

Good morning and thank you for participating in Tennant Company's fourth-quarter earnings teleconference. (OPERATOR INSTRUCTIONS) Also, the conference is being recorded today. If you have any objections, you may disconnect at this time. To begin today's meeting is Ms. Janet Dolan, President and Chief Executive Officer for Tennant Company. Thank you, Ms. Dolan. You may begin.

Thank you very much. Good morning, everyone. This is Janet Dolan, and welcome to our fourth-quarter results conference call. With me for this call are Tony Brausen, our Vice President and Chief Financial Officer, and today Chris Killingstad, Vice President of North America. Thank you for joining us this morning. Welcome also to all of you who are participating in the webcast of 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 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 the statements. The risks and uncertainties include factors that affect all companies operating in global markets, as well as matters specific our Company, and are described in today's news release and the 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 investor section of our website, tennantco.com. The information required to be disclosed about non-GAAP measures quantified during this call is available in the news release, which includes a schedule that reconciles our 2004 fourth-quarter and full-year GAAP results and our 2003 GAAP results with results excluding unusual items. We believe presenting the non-GAAP measures in addition to the GAAP measures permit a more meaningful comparison of our operating results. Janet?

Thank you Tony. Tony will review our financial performance for the quarter in detail in a moment. I've also invited Chris to join this call to talk about some of the North American marketing initiatives and how we have enhanced our market coverage there, as well as talk about some of our exciting new products. First, though, I will provide an overview of our results.

When we reported to you on our third-quarter performance, we said that we were beginning to see volume growth return in most geographies as the quarter was ending. We also noted that we expected our fourth-quarter results to benefit from demand for new products we were launching in the latter part of the year. Both of those expectations proved out in the fourth quarter. We had double-digit revenue growth in all geographies as economies in most regions strengthened. We also benefited from healthy demand for new products, particularly recently-introduced smaller scrubbers and our ReadySpace carpet care system. In fact, our 2004 net sales set a new record for Tennant and surpassed the $0.5 billion for the first time in the Company's history.

We are pleased with the revenue growth we generated in the 2004 fourth quarter. But we did not get comparable earnings leverage on increased sales. As in our third quarter, higher costs, primarily in three areas, are responsible for that.

The largest component of these higher costs was our fourth-quarter accrual for performance-based incentive compensation. As we noted in the past, our performance-based incentive plans are based on improvements in economic profit. This is an internal metric, based on a net operating profit after-tax, less a charge for net capital employed. We use this metric because of the high correlation between growth and economic profit and increases in shareholder value over time. Economic profit is a more complete measure of financial performance because it takes into account balance sheet components, including asset utilizations.

Improvements to economic profit results not only from growth in net earnings, but also from improvements in cash flow and balance sheet items such as inventory of receivables and payables; that is, in metrics that aren't immediately evident in the economic statement. We have made great progress in these areas in 2004. Our cash flow from operations in 2004 totaled $36.7 million, up 20 percent following a 59 percent increase in 2003. Economic profit increased by $3 million.

As a result of these improvements, we have seen an increase in the necessary accruals for performance-based incentives. However, our systems are designed to reward continuous improvement, not just repetition. Therefore, to earn incentive compensation payouts in 2005 we must exceed our 2004 economic profit performance.

The other cost areas affecting our profitability in the fourth quarter included higher steel and petroleum related materials costs and costs associated with Sarbanes-Oxley compliance requirements. The latter is now an ongoing cost of doing business for all public companies. With respect to the former, we continue to work at diminishing the impact of higher material costs on our profitability. We had a second selling price surcharge in place for certain products during the fourth quarter for sales and North America. In 2005, we have taken price increases in Europe and the other international regions.

While the benefits are not yet fully evident in our fourth-quarter operating profitability, we strengthened the Company substantially in 2004 and we enter 2005 with significantly more earnings power. For example, we reduced our cost by an expected 2 to $3 million in 2005 as a result of the reduction in force we initiated at the end of 2004's third quarter. We also continued to expand our sales and service coverage in Europe and in other international markets. In North America we completed a transition from a territory-based sales structure into one more closely aligned with customer segments and particular industry segments such as healthcare, education, and building service contractors. We are supporting our sales force in the field with smarter marketing anchored in research and evident in better coordinated programs, more collaboration with distributors, and improved systems for generating and tracking leads. Perhaps most important, we have given our sales force a lot more to sell; about 20 new products in 2004, many of which were launched in the latter part of the year. Together, these achievements position us for a strong improvement in Tennant's overall earnings power. You'll hear more about the products we're making and market coverage and with new products from Chris. But first, Tony will review our fourth-quarter and full-year results.

For our 2004 fourth quarter we reported net earnings of 66 cents per diluted share on net sales of 139.4 million. The quarter's results include an unusual after-tax benefit of $300,000 or 3 cents per share resulting from a change in the estimated severance accrual for the actions we initiated late in the 2004 third quarter. Excluding this unusual item, net earnings for the 2004 fourth quarter were 63 cents per dilute a share, which is up 12.5 percent compared 56 cents per share in the 2003 fourth quarter.

For the year, net earnings were $1.46 per diluted share on net sales of 507.8 million. Our reported net earnings for 2004 include a net unusual charge of 16 cents per diluted share for the severance costs related to the workforce reduction we announced in October. Excluding the charge, our net earnings for 2004 were $1.62 per diluted share.

For 2003, we reported net earnings per share of $1.56 on net sales of 454 million. As we have previously reported, our GAAP results for 2003 included two unusual items from the 2003 first quarter. The first was the recognition of 6.4 million of previously deferred revenues resulting from the amendment of a contract, which resulted in a benefit up 20 cents per share. The second was a charge of 14 cents per share related to the dissolution of a joint venture. Excluding the unusual items, our net earnings per share for 2003 were $1.50 on net sales of 447.6 million. The effects of these unusual items on our results are noted in separate columns on the earnings statement we included with our news release. Excluding the unusual items in both years, our net earnings per share for 2004 increased 8 percent compared with 2003 on net sales growth of 13.5 percent.

The rest of my discussions of our earnings statement will be excluding the unusual items in all periods. With respect to these periods, I will be discussing the results in the earnings statement schedule in the columns labeled "Excluding Unusual Items".

Consolidated net sales for the fourth quarter totaled 139.4 million, which is up 16.2 percent from the fourth quarter of 2003. Favorable foreign currency exchange added about 3 percent to net sales and price increases primarily in the form of surcharges to offset higher materials costs, added about 4 percent. Contributions from Walter-Broadley added another 4 percent with volume growth accounting for the balance of the fourth-quarter sales growth.

For the year, net sales increased 13.5 percent. Favorable foreign currency exchange and price increases each added about 3 percent to sales. The Walter-Broadley acquisition added about another 3 percent, with volume growth accounting for the balance of the 2004 revenue increase.

In North America fourth-quarter net sales increased 11.4 percent to 91.5 million. Equipment and service parts and consumables revenues increased at double-digit rates compared with the prior-year fourth quarter. Equipment revenues benefited from the introduction of several new products which Chris will speak about shortly, as well as the surcharges to offset higher steel and other materials costs mentioned previously. In addition, business conditions in the 2004 fourth quarter were more favorable than in the prior-year period as the economy continued to strengthen. For year net sales in North America increased 6.9 percent to 341.9 million.

In Europe sales for the '04 fourth quarter totaled 32.9 million, which is up 29.5 percent. Real volume, however, was about flat with the prior-year's fourth quarter, due to continued weakness in certain European economies and the related effect of the strong euro. Favorable foreign currency exchange added about 11 percent to fourth-quarter net sales and contributions from Walter-Broadley added about 18 percent. For the full-year, sales in Europe totaled 114.9 million, which is up 29.4 percent from 2003. Foreign currency exchange added about 12 percent to net sales in Europe for the year and the acquisition added another 14 percent. The balance of the increase is attributable to volume growth, and in particular a large first-quarter order.

In our other international markets net sales for this year's fourth quarter increased 20 percent to $15 million. Favorable foreign currency exchange added about 2 percent to net sales in the quarter. Volume growth in all regions accounted for the rest of the increase. For the full-year sales to other international markets increased 12.1 percent to 51 million, with foreign currency exchange accounting for about 6 percent of the increases.

Our gross profit margins for the 2004 fourth quarter was 40.2 percent compared with 40.5 percent in the prior-year fourth quarter. During the quarter, higher materials costs and a slightly unfavorable product mix offset the absorption benefit for the volume growth and the favorable foreign currency exchange effects. For the year, our gross profit margin was 39.9 percent which is down 30 basis points from 40.2 percent in 2003.

Our R&D spending in this year's fourth quarter totaled 4.5 million. That is an increase of 7 percent from the prior year's fourth quarter. For the year our R&D investment totaled 17.2 million or about 3.4 percent of sales, which is consistent with our long-term target for R&D spending of 3 to 4 percent of sales. We strive to be the innovation leader in our industry, and our new products introduced this year are representative of our commitment to innovation and maximizing the return on our R&D dollars. Chris will be elaborating on some of our new offerings shortly.

Selling and administrative expenses for the fourth quarter totaled 43.1 million compared with 36.8 million in last year's fourth quarter. The increase results from the higher sales volume in the 2004 quarter, the accruals for economic profit performance-based incentive compensation mentioned previously, as well as the foreign currency exchange effects, the Walter-Broadley acquisition, and costs related to Sarbanes-Oxley compliance. Selling and administrative expenses were 30.9 percent of sales in the 2004 fourth quarter compared with 30.7 percent in prior year's fourth quarter. For the full-year, selling and administrative expenses were about flat at 31.8 percent of sales compared with 31.7 percent in 2003.

Our operating profit for this year's fourth quarter totaled 8.4 million. That's up 10.5 percent compared with prior year's fourth quarter. In the quarter, the benefits of higher volume and favorable foreign currency exchange were partially offset by the higher cost in the areas cited previously. For the year, operating profit totaled 23.6 million compared with 21.7 million in 2003, which is up 8.8.

The operating margin for this year's fourth quarter was 6 percent. That's down about 30 basis points from 6.3 percent a year ago. The decline results from the higher costs we've been discussing.

Our tax rate in the quarter was 36.5 percent compared with 32.9 percent in the year-ago period. This reflects the benefit in the 2003 period of a favorable non-US tax settlement. And for the year, our tax rate was 37.4 percent compared with 37 percent in 2003. We currently expect our 2005 tax rate to be between 39 and 41 percent. That's up from the 2004 rate as we benefited in 2004 from the resolution of various state and federal tax matters and the reversal of a deferred tax allowance on a capital loss carryforward.

Turning to cash flows and the balance sheet, for 2004 net cash flows from operations totaled 36.7 million. That's up 20.3 percent from 30.5 million in 2003.

Our inventories at year end totaled 55.9 million, which is up just 1 million 2 from year-end 2003, despite the higher sales volumes, the inventories of acquired with the Walter-Broadley acquisition, and some buildup related to new product introductions in the second half of the year.

Our FIFO inventory days on hand are down to 87 at year end compared with 98 in the prior year end. That's a decline of 11 percent. The inventory days on hand improvement reflects the implementation of lean manufacturing principles including a move closer to a true build-to-order approach for larger equipment, revisions to the order-of-quantity formulas for parts, and adjustments to purchase part lot sizes.

Net receivables at year end totaled 97.5 million, up from 85.6 million at the end of 2003, and that is because of the increase in net sales in 2004. However, our accounts receivable days sales outstanding decreased to 60 at the end of 2004 compared with 62 at the end of 2003. Our accounts payable days increased 14 percent at the end of 2004 compared with the end of 2003. The improvement in inventory days on hand and in receivable days outstanding, along with increases in accounts payable and accrued expenses, were key contributors to the improvement in economic profit we generated in 2004 and reflect overall improvements in operating effectiveness and efficiency.

Our capital expenditures in 2004 totaled 21.1 million. In 2005, we currently expect our capital spending to range from 15 to 20 million.

Our debt-to-total-capital ratio at the end of 2004 was 4.8 percent compared with 4.2 percent at the end of 2003.

That concludes my overview of the quarter. Back to Janet.

Those of you who listened to our quarterly updates for the past few quarters know that we have been focusing on four key strategies at Tennant. They are -- becoming a world-class marketer; being the industry's innovation leader; extending our market coverage, particularly with cleaning pros; and leveraging our cost structure. I mentioned earlier the cost savings we expect to realize in 2005 and beyond as a result of the actions we took to resize our workforce to 2004. In the balance of this call we will talk about the progress we are making on the other three core strategies, all of which are aimed at growing our top line.

With respect to becoming a world-class marketer, we continue to harvest insight from the extensive and comprehensive market research we undertook earlier to help guide and drive innovation in our products and the way in which we go to market.

With respect to our go to market strategies, we are segmenting our customers more precisely and getting closer to them through improved market coverage. In some cases this has meant putting more feet on the street, and in others realigning how we deploy our sales resources against our opportunities.

In Europe, for instance, we significantly expanded our sales and service organization in the United Kingdom and the January 2004 acquisition of Walter-Broadley. The acquisition not only increased our market presence, but also complemented the existing Tennant market presence. Tennant has historically had a strong presence among industrial customers in the UK, while Walter-Broadley enhanced our reach with building service contractors and cleaning pros, especially retailers. We believe our enhanced market coverage in Europe was helpful in growing volume in Europe moderately, despite the continuing economic weakness in most market.

In our other international market we have enhanced our market coverage with the addition of more sales representatives in certain markets.

In North America, our largest market, we have focused on realigning our sales resources to better win and serve the opportunities in the region. Chris Killingstad, Vice President, North America for Tennant, will give you an overview of what we have done to enhance our market coverage in North America, and he will update you on the new products we introduced in the latter half of the year.

Thanks, Janet, and good morning, everyone. As many of you know, in 2003, as part of our marketing excellence initiative Tennant completed the most comprehensive study ever of how our North American customers and prospects maintain their environments. We have been using the study findings to improve our understanding of what drives buyer behavior, where there are undeserved opportunities in our markets, and how we can better position Tennant to be indispensable to the professionals charged with maintaining commercial and industrial facilities of all types.

Among other things, the study helped us segment our customers much more precisely than we ever had historically. While we identified multiple customer segments, we are currently focusing on two. One we call cleaning pros, and the other facility maintainers. It is important to note that these are attitudinal segments that exist within and across multiple industry categories. I will talk first about facility maintainers.

This segment includes many of our core customers in industrial environments, as well as other customers for whom plant maintenance is viewed essentially as a cost of doing business and a matter of environmental or regulatory compliance. These customers want to work with a company that can help them make facility maintenance relatively easy and painless. Tennant has held a strong leadership position among facility maintainers for years, and we will continue to serve these core customers extraordinarily well.

The other customer segment commanding our attention is a segment we call cleaning pros. Cleaning pros are customers who have an intrinsic high concern for the cleanliness, attractiveness, health and safety of the people and places in their care. As a result, they tend to highly value combinations of product innovation and service quality that translates into performance, productivity, and health and safety benefits. These are the most demanding customers in our markets. Our thinking is that if we can serve them really well we will benefit from a halo effect that will translate into success in other customer segments as well.

Something else that we have learned is that both cleaning pros and facility maintainers increasingly demand more than just good cleaning equipment; they want cleaning solutions. For us that means equipment marketed and sold in conjunction with services that help make facility maintenance easier and more cost effective. Tennant is ideally positioned to provide these services to the industry's only national direct sales and service network, a strong distributor network, and our information systems capability.

As part of the effort to establish this brand-of-choice positioning with cleaning pros we are working to enhance our market coverage in North America. This is a three-pronged effort that includes -- first, reorganizing ourselves to be less territory focused and more customer focused; second, integrating our sales channels, namely direct sales, national accounts, and distributors so that they complement each other and help us go to market and win as Tennant; and third, building greater flexibility into the way we deploy local sales and channel resources so that we accommodate differences in local markets more effectively.

For example, national accounts represent a huge opportunity for us. We have been very good at establishing the critical national or headquarter level relationships. But these relationships are essentially just door-openers. The big upside for us is in leveraging that headquarters relationship to win a larger share of each customers' total business. That comes from building relationships, dealing with issues, and executing flawlessly one location at a time at the local level. In fact, in 2005 we are increasingly organized as teams with expertise and experience in the maintenance challenges unique to particular customer environments such as healthcare, retailing, and building services. Also, our direct sales force and our distributors in North America will be held accountable for local execution and follow-up for a significant number of our national account customers.

With respect to new products, 2004 was a standout year. In the second half of the year we completed one of the most concentrated periods of new product introductions in Tennant's history. Several of these new products were a part of a concerted effort to extend our leadership in the maintenance of hard surface floors to carpet care. This represents an enormous opportunity for Tennant as there are nearly as many square feet of carpeted floors in the world as there are hard floors. In 2004, we made the strategic decision to drive toward being the clear carpet care leader in our industry.

We realized that to succeed our strategy had to be about more than just new products. Accordingly, we launched a broad and well-coordinated set of initiatives in carpet care. These initiatives included the launch of two new carpet care products, the completion of one of the biggest sales training efforts in Tennant's history, the hosting of more than 20 product introductions and customer carpet care training seminars throughout the Company, and the development of a suite of marketing programs to build awareness and early adoption of the new products, and a concerted effort to earn product endorsements from leading carpet mills.

Thanks to this program I believe that we are now viewed as a knowledgeable and highly credible carpet care partner. We have scores of sales personnel certified as carpet care technicians by the International Institute of Carpet Restoration and Cleaning, a recognized authority in carpet care. No other competitor in our industry has a comparable core of certified technicians.

New product introductions under our carpet care leadership initiative began last May, with the launch of a new line of upright commercial vacuum cleaners under both the Tennant and Nobles brands. These are the lightest vacuums in the category and operators are reporting noticeably less strain on their forearms and their lower backs as a result. The single motor models are also 50 percent quieter than the leading competitive alternatives, making them suitable for use in noise-sensitive environments. These new vacuums feature dynamically balanced brushes that spin at nearly twice the speed of competitive products for maximum soil pickup.

In an industry first, this line of commercial vacuums offers completely interchangeable parts across all configurations. That means that all accessories and service parts above the base can be easily used on any size model, whether single or dual motor. Additionally, any given brush size can be used on either the single or dual motor model. This unprecedented product integration is an industry innovation that saves stocking times and service and inventory costs, increasing ease-of-use for our customers.

As Janet told you, in our third-quarter conference call the centerpiece of our carpet care offering is an innovation we call ReadySpace, which I believe is the first true innovation in carpet care in 20 years. In essence, ReadySpace technology is to carpet care what our FaST system is to hard surface floor care, a cleaning system that leaves cleaning carpets dry and usable in much less time than conventional methods. With ReadySpace, cleaned areas are typically ready for use within 30 minutes after cleaning, compared with 10 to 15 hours or more of drying time for conventional methods of cleaning heavily soiled carpets. This means that more frequent cleaning is possible because cleaned areas don't have to be taken out of use for long period until dry. This is critical to customers in hospitality, for example, where traditional cleaning times mean lost revenue.

ReadySpace also means longer intervals between expensive and time-consuming restored extraction cleaning because frequent ReadySpace use removes dirt before it penetrates carpeting deeply; it means reduced risk of mold and mildew formation and related indoor air quality issues because carpets are not wet for prolonged periods; it means carpets last longer.

Our ReadySpace technology is currently available on machines that also offer the industry's best extractor. We use the term Dual Technology for these machines because they can be used for both highly-effective cleaning in time-sensitive situations thanks to the ReadySpace innovations, as well as periodic deep extraction cleaning. In other words, we are not asking customers to purchase an additional piece of equipment to take advantage of ReadySpace's benefits. They can have one machine suitable for both frequent cleaning on a quick turnaround basis, as well as periodic deep cleaning.

In addition to our new offerings for carpet care, we also introduced two new automatic scrubbers incorporating our FaST technology during the 2004 fourth quarter. The Tennant T-Series includes new walk behind and riding scrubbers. In addition to offering our FaST system, these scrubbers are compact, simple to use, with intuitive operator controls, maneuverable to permit cleaning in tight spaces, and small enough to fit on standard elevators. All operate at the lowest noise levels in the industry -- up to 75 percent quieter than existing products -- which makes them suitable for use in noise-sensitive environments such as healthcare.

In another innovation, these new T-Series scrubbers also feature hygienic tanks. This is an improvement in tank design that allows operators quick and easy access to solution and water recovery tanks so that they can be sanitized to prevent the mold, bacteria, and other contaminant accumulation that can occur in enclosed tanks. This feature makes these scrubbers particularly attractive in applications where facility hygiene is a high-priority, such as hospitals and healthcare facilities, food and drug processing plants, grocery stores, and educational institutions.

We are pleased with the way all these new products are performing in the marketplace and expect them to contribute significantly to further profitable growth in 2005 and beyond.

Going forward, Tennant is committed to becoming the clear innovation leader in our industry. We have a new, long-term product and technology strategy in place. We are determined to improve our performance in the markets we are currently serving and to exploring ways to expand our opportunities, looking into markets we don't currently serve today. As we do that we will keep our focus on what we do best and look partner with others to add products, technologies, and services that could enlarge our opportunities. Our goal is to fuel profitable growth while being recognized as the clear leader in helping our customers create clean, attractive, healthy, and safe environments for the people and places in their care.

I will turn the call back over to Janet for some concluding remarks.

To wrap up today's call, I want to comment briefly on our outlook for 2005.

As I hope our remarks today made clear, we believe we have substantially strengthened the fundamental earning power of our business thanks to the progress we're making on our core strategy. Entering 2005 we have lowered our costs, we've improved our market coverage, we've mined a comprehensive study of our largest markets for valuable insights into customer needs, and we've introduced about 20 new products. As a result, we believe we are well positioned for profitable growth this year.

For 2005, we currently expect earnings per share to range from $1.80 to $2.10. This guidance includes about 15 cents per share of cost to expense previously issued but unvested stock options, as required by accounting rule changes that are effective beginning in 2005, as well as expenses for performance shares which we plan to use to replace stock option grants in 2005. Had we expensed stock options in 2004, our pro forma net earnings per diluted share would have been 15 cents less than reported.

Going forward we plan to replace the current employee stock option plan with other forms of long-term incentive-based compensation, most notably performance shares. Considerations driving this decision include the number of shares available for incentive compensation usage under our existing plan, a trend away from options in the compensation marketplace generally, and the tighter links to attainment of specific goals and long-term shareholder interest that performance shares provide. Performance shares are grants of actual Tennant shares that vest only if specific performance criteria are met. We believe this form of equity-based compensation provides a compelling incentive for our people, while being less dilutive than conventional options for our shareholders.

That concludes our remarks. We will be happy to take your questions now.

(OPERATOR INSTRUCTIONS) Shelly Henbest (ph), CL King & Associates.

I'm sorry if you already talked about this and I missed it, but I'm wondering why the accrual change in the quarter, and is it just related to an error of estimate? Or what exactly was that?

Tony Brausen I think you're referring to the accrual for performance-based incentive compensation. And that relates to -- it's not an error at all in the quarter. That relates to an increase associated with the improved economic profit performance of the Company, which is the primary metric we use in our incentive compensation plan.

Okay, you did say that. I just wasn't really understanding exactly what you were saying. Then what line item does that come under? Is that part of other income?

No, that would be in selling and administrative expense.

Okay, great. I guess my next question would be to what extent you think you've really been able to pass on the increased raw materials cost, specifically steel and energy. I know you did say that to some extent you really have been able to pass a lot of that on. But do you think there's still room there?

I'll begin. We were not able to fully pass on those cost increases in the fourth quarter and certainly had an impact -- as we talked about earlier in the call, as well as the earnings release, we had an impact in the fourth quarter from the influence of those cost exceeding our ability to pass that on. And I will tell you that we certainly made progress through the course of the year. In our fourth quarter situation was much better than it was in earlier quarters, but we're still not at the point as of the end of the year where we're fully passing on the costs of higher steel, as well as oil-related and other material cost increases.

Great. I guess my other question would be were there any marketing expenses in the fourth quarter that you would consider to be sort of nonrecurring as it might relate to the launch of new products. I think you talked about that in Q3, that there were maybe about 300,000 in marketing expenses. I'm wondering how that played out in the fourth quarter.

Yes, you're correct. That was an influencer in the third quarter as we launched many of those products that Chris talked about. But it really was not a factor of any significance in the fourth quarter. Those launches occurred earlier in the year.

Okay, great. Thanks.

Gary Giblen, CL King & Associates.

I thought we would double-team you today. What kind of revenue growth is built into the EPS guidance? It looks like it's bouncing around per quarter. This quarter looked good at 16.5 percent revenue growth, but second quarter was 16, and third quarter was 9. So the questions really are is there a more visible trend than the lumpiness that had existed before? And what kind of revenue growth are you thinking of?

Revenue growth that is built into the guidance we've given is in the upper- single-digits -- in a range within the upper- single-digits.

And in terms of the lumpiness, certainly as we have signaled in the past, I think we will continue to experience some lumpiness in our revenues. As we talked about, more and more of our customers are consolidating; more of our customers are national accounts placing large orders. That's not just in true of North America, but that's true in our other geographies as well. So we have been experiencing, and we expect to continue to experience, some lumpiness quarter to quarter from that perspective.

And the other thing I wanted to point out I think related to your question, and that is during 2004, and certainly in the fourth quarter, but in 2004 we had some growth factors in the revenue line, Walter-Broadley in particular, as well as the steel and the oil situation, that were actually increases to revenue but decreases to earnings. As you know, the Walter-Broadley acquisition was dilutive for the year. And of course the steel situation was also dilutive to our net earnings for the year as well. Yet both of those were factors that caused revenue to increase.

I would also add that after a long slowdown, which we saw, the trajectory of line coming out is obviously not going to be a straight line up. We have said that Tennant is the kind of company that really sees its greatest growth in the second year of a recovery, which we're entering into now in '05. So we have -- you see a little up and down, up and down as the economy is trying to get its sea legs and recover from a very long slowdown.

That helps a lot. Thanks a lot.

Patrick Flavin, Flavin, Blake & Co.

Tony, let me just get this right. We're looking at for the year ahead a revenue gain of slightly less than 10 percent, and yet we're looking at an earnings increase from $1.46 to $1.80 to $2.10. And on a comparable accounting basis, $1.46 would have been 15 cents lower, so you're looking for $1.30 to $1.80 to $2.10. In other words, you're looking for an extraordinary margin increase on less than double-digit revenues. Is that correct?

One correction to your thinking, and that is the 2004 number we view as $1.62, because we're really looking at it before the unusual charge which included the severance costs. But you're thinking is correct. So we're looking at in our approach going from $1.62 before unusuals to the $1.82 to $2.10, as you suggested.

And I think it's the factors that we talked about earlier in the call, as well as in the news release. One is the momentum we have from our new products that we launched in 2004. Another factor, as Janet has been talking about, are stronger economies in most of our marketplaces with the exception currently of Europe. And also we took -- and that's what related to that 16 cent charge I just alluded to. In the third quarter we took a charge for a reduction in force, which is, as we talked about earlier in the call, will benefit results by 2 to 3 million pretax in 2005. So a confluence of those factors are giving us the optimism we have in terms of the guidance we're providing.

Also I would say that we are looking for a continuing recovery of our large equipment, which we know slowed down significantly in the economic slowdown. And that really improves profitability for us because of the plant utilization. We're looking for continued reduction of our operating costs. And we have initiated lean principles, but those pickup momentum with each year as we keep moving forward. And we have implemented even more stringent S&A leverage initiatives to get greater leverage out of the S&A expenses. So all of those are in place and helping to drive what should be a very strong 2005.

I will add just two other factors as well. One is the Walter-Broadley acquisition, which, as we indicated earlier, was dilutive in 2004. And we expect that to be mildly accretive in 2005. As then I said earlier, the impact of steel and oil, which was certainly a major negative to our results in 2004, with some additional price increases that we're taking in 2005 we expect that situation to improve as well.

Believe me, I'm not complaining. I'm just trying to understand how this all works.

Absolutely, all the levers (ph).

Let me give this one more shot. So if we use $1.62 as a base and we adjust the earnings for the expense that will be recorded in 2005 on a comparable basis for performance years, that make that $1.47. And you're looking at an earnings range of $1.80 to $2.10, which is a minimum of a 20 percent plus gain on a revenue gain of less than single digits. Presumably you're also in this forecast not looking for any increase in raw materials costs and presumably you're looking at a flat dollar?

We're not suggesting necessarily we would not experience further increases in raw materials costs. What we're suggesting is we think we will have a better bottom-line outcome with some additional price increases; some we have taken as of the first of the year in some parts of the world, and others that are coming as of March 1.

In terms of exchange, we're not in a position obviously to predict exchange rates. But certainly built into that range of guidance is a range of foreign exchange outcomes.

Okay, from your lips to God's ears. Thank you.

Shelly Henbest, CL King & associates.

Just a couple of follow-up questions. In the past you guys have mentioned that the commercial market has been highly price competitive. I'm wondering why that is and if you see that continuing to be the case.

I will answer that. The reason is because there are many more competitors in the commercial marketplace, and historically there's been much less differentiation between the offerings of those many competitors. And therefore, it was much more competition on price. So what we're trying to do in the commercial marketplace, and you've seen that with our ReadySpace technology and with our FaST technology, is to differentiate ourselves and take Tennant up the value chain so that we can command the pricing and the margins that are necessary to fuel our long-term growth.

That sounds great. How about in terms of municipal budgets? Do you see a clear uptick there, a possible uptick in municipal budgets, now that they're probably set for the year?

We have not seen a discernible uptick yet. And I think if there's going to be an uptick it will most likely be in equipment that is more price-competitive, because they do still have squeezed budgets. With the Centurion, which is our main offering in the municipal marketplace, we play at the top end of the price spectrum and the value spectrum. I think there is going to still be some sensitivity at that end, although we're still experiencing good results for Centurion so far.

Sorry to bombard you with questions here, but just my last question I guess would be what you think the effect of Sarbanes-Oxley will be in the coming year. Do you think it will be pretty much even with 2004 or do you see an increase possible there?

I would certainly hope that there won't be an increase in the costs. Certainly I think with most companies, particularly those of us on the smaller cap end of the spectrum, the cost has tended to be much higher than we anticipated entering the year and as the compliance requirements sort of developed. But certainly we would expect that very first year to be more costly than the second year, but I would tell you that for the most part the major components of the cost, which include the documentation of those controls, the testing of those controls by the Company and its internal auditors, and then the testing by the external auditors, that all occurs year after year given today's requirements. So the vast majority of those Sarbanes-Oxley costs will continue unless the rules change.

Okay, thanks.

Kevin Richardson, Prides Capital.

I have three questions. One, can you quantify the oil and steel cost increase, and how much you have offset with price in this fiscal year? So maybe a gross or a net number just so we can understand the impact.

The net impact we estimate to be 15 cents a share.

And the price increases will continue hopefully to go through so that net will be better next year and maybe even have a net benefit as we kind of cycle through or just catch up?

We will hope to at least catch up, let's say. But at this point, of course, again, as I said earlier, we can't make predictions about cost. And of course stick rates with pricing is always a question mark as well. But we're going to do our best and work hard to try and get that to at least an offset.

Did you break out a number for the new products introduced as a percent of revenue? I know there were a lot of introductions and was just wondering how much of the top-line growth came from those versus older products.

We do measure that, Kevin, and we measure that in terms of equipment sales that in the current year, in 2004 in this case, as a percent -- I should say equipment where the products were developed and launched in the prior three years as a percent of the 2004 sales. That number was 36 percent. So again, 36 percent of our equipment sales in 2004 were from products launched in the prior three years.

This past year being the most significant from an introduction standpoint?

Yes, and one of the most significant ones in a long time, if not for all-time, for Tennant. Very strong year for product launches.

I would say, though, that the majority of them were introduced in the last half of the year; some of them even in the fourth quarter. The real uptick in terms of volume from the new products for a full year will be in '05.

The final thing was on getting rid of options and going to the performance shares. Kudos on that. I was wondering if you could share some of the performance criteria. Is it stock price based or is it a continuation of the economic value-add type vesting schedule?

Yes, we use the economic profit as our metric for how well we're performing, and that will continue.

Will that be what triggers the vesting of the performance shares?

Yes it is. It will be strictly performance-based, based on the financial metrics. And that is what triggers whether or not you receive and how many you receive.

Thank you very much guys.

Beth Lilly, Woodland Partners.

I have a couple of questions. I was wondering if we could dig into your guidance for 2005. I understand that you say revenues are going to grow in the upper- single-digits. Could you talk about as we go down the components in terms of what you expect? It sounds like you will experience some -- given the fact that your earnings are going to grow at the rates that they're going to grow, clearly your margins are going to have to expand. I was wondering if you could dig into that. Do we see gross margin expansion occurring? It sounds like with the costs that you have taken out, SG&A which ran at about $162 million for the full year will come down. Will R&D stay around 3 to 4 percent as a percentage of sales?

I'll take that. First of all, in terms of gross margins, certainly, and as we've conveyed I think in the past, we continue to work hard to improve our gross margins. We certainly had some setbacks in 2004. We have talked a lot about the cost of steel and oil and the ability to pass that on and the timings associated with that. But certainly we would expect, and we talked about it in the past, a 30 basis point annual improvements from cost reductions. And we have that target again in 2005.

On the S&A line we've talked already about the 2 to 3 million benefit from the reduction in force taken at the tail end of the third quarter. And that 2 to 3 million benefit in 2005. So that would be a benefit on that S&A line. So those would be some of the more significant things we've talked about in terms of influencing the guidance for 2005.

So we will see gross margins expand and SG&A come down then as a percentage of sales?

That the goal.

And then I wanted to ask -- and this is probably directed to Chris -- which is you guys launched 20 new products in this past year. How many new products is Tennant hoping to launch this year?

(inaudible) to a little bit of a higher level and kind of address what we're doing with the product and technology plan. And directionally where we're going is that we're starting to look beyond five years in our product development efforts really for the first time. We are becoming much more customer-insight and market-insight driven in terms of the types of products we develop. We have made space to both play the current game better and to explore new game opportunities as we go forward. We are being much more proactive in searching the world for existing or emerging technologies that are relevant to what we do. And we are also being more proactive in searching out partnerships for products, technologies, and services that can expand our opportunities.

So we have an a fairly robust new product pipeline in place for the short and medium-term. But 2005 really is all about taking the 20 products, most of which were launched in the second half of last year, and many of them in the fourth quarter, and making sure that we get the penetration geographically and by channel that we need to drive sales. So it's really -- 2005 is focused more on flawless execution of the new product launch that occurred in the third and fourth quarter of 2004.

So we really didn't see in the top line the full impact of all these new product launches in '04 then?

Not all. In fact, many of them came late in the year with the expectation that '05 would be the year to really get the full -- optimize then payback from them.

I would just add we have a steady introduction of new products. We don't identify what they are or how many until we (indiscernible) them, as you would expect. But we don't very often have a period of concentrated introduction of new products like we had in the last three to four months of '04. And it really is unusual for us, and so we have really a great opportunity to absorb all of those throughout the year.

Those are all my questions. Thanks so much.

I'm showing no further questions at this time.

If there are no other questions, then that concludes our call. Thank you all for calling in, and we look forward to reporting to you our first-quarter results. Take care.

That concludes today's conference. You may disconnect at this time.