Tennant Co (TNC) 2005 Q3 法說會逐字稿

Thank you for participating in Tennant Company's third-quarter earnings teleconference. I would like to inform all participants today's call is being recorded. Beginning today's meeting is Ms. Janet Dolan, President and Chief Executive Officer for Tennant Company. Thank you, Ms. Dolan, you may begin.

Good morning, everyone. This is Janet Dolan, and welcome to our third-quarter results conference call. With me for this call are Tony Brausen, our Vice President and Chief Financial Officer and Chris Killingstad, who as you know will succeed me as Tennant's President and Chief Executive Officer later this year. 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 will ask Tony to provide our Safe Harbor statement.

Good morning, everyone. Our earnings release was issued this morning via business wire and is also posted in the Investor 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 schedules that reconcile our GAAP results with our results excluding unusual items. We believe presenting the non-GAAP measures permits a more meaningful comparison of our operating results and is consistent with the way we measure the business internally.

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 the statements. The risks and uncertainties include factors that affect all companies' operating and global markets as well as matters specific to 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.

With that, I will turn it back to Janet.

Thanks, Tony. We have a number of topics to cover today. First, I'll provide a quick overview of the quarter. Tony will follow me with a more detailed look at our performance. I will follow Tony's comments with some additional remarks on our manufacturing footprint consolidation project and our outlook for the rest of the year.

We have some key management changes we will discuss towards the end of the call. You will also here today from Chris Killingstad, our future CEO. Chris will share his view of the state of the Company and our future direction.

Turning now to our third-quarter results. It was a terrific quarter, and we are very pleased with our performance. Excluding the unusual items in last year's third quarter, earnings per diluted share are up 123% on double-digit sales growth in what is typically a seasonally slower period.

As most of you know, Tennant has for some time now been focusing on four key strategies -- first, to be a world-class marketer; second, extend market coverage with particular emphasis on reaching our high-value cleaning pro customers; third, be our industry's innovation leader; and fourth, leverage our cost structure.

What our third-quarter results make unmistakably clear is that these strategies are working. We are delivering sales growth with better market coverage and innovative new products that capitalize on deep insights into customers' needs. And we are delivering more of that topline growth to the bottomline through improvements in overall operating effectiveness and by leveraging our cost structure. We believe the improvements you are seeing in our gross operating margins are sustainable.

Successful execution of our strategy has significantly strengthened Tennant's earnings power, but we are far from done. We plan to continue to drive adoption of lean manufacturing principles and other cost reduction and efficiency improvement measures across the Company to further leverage our cost. And we of course will continue to invest in new products that deliver meaningful improvements in cleaning quality, labor productivity and health, safety and environmental benefits.

In the 2005 third quarter, strong contributions from new products, especially the T-Series scrubbers and our ReadySpace carpet care offerings helped drive sales growth. In addition, net sales benefited from better market coverage in all regions. In North America, the better coverage results from the realignment of the North American sales force. This realignment improved our reach with high-value cleaning pro customers as well as our ability to collaborate with our North American distributors to target under-penetrated opportunities more effectively.

In addition, as we have discussed in past quarterly conference calls, we have invested in expanding our sales and service reach in Europe and our other international markets. I'm going to turn the call over to Tony now for a recap of 2005 third-quarter results. Tony.

Thank you, Janet. In our comments today, all references to earnings per share are to EPS on a fully-diluted basis. In addition, our results for the prior-year periods include an unusual item, and that was a charge related to the workforce reductions we implemented in the 2004 third quarter. That charge totaled 2.6 million pretax, 1.8 million or $0.20 per share after tax. The financial impact of the charge is noted in a separate column on the earnings statements we included with our news release. During the remainder of this call, my comments on our performance will be excluding the charge using the figures in the column labeled "excluding unusual items that are contained in the consolidated statements of earnings pages."

For our 2005 third quarter, we reported net earnings of $0.69 per share, which is up 123% from the $0.31 we reported in the 2004 third quarter. For the year to date, net earnings per share totaled $1.82; that's up $0.84 from $0.99 in the first 9 months of last year. Consolidated net sales for the quarter totaled 137.8 million, which is up 14.4% from a relatively weak 2004 third quarter which included the so-called soft patch in the 2004 economic recovery. The increase in 2005 third quarter net sales resulted from balanced organic growth across all products and across all geographic regions.

As Janet noted, new products such as the T-Series scrubbers and our ReadySpace carpet care offerings continue to generate strong sales contributions. For the year to date, consolidated net sales increased 8.9% to 400.9 million. Favorable foreign currency exchange effects added about 1% to net sales in both the 2005 third quarter and for the year to date.

Turning to North America. Third-quarter net sales increased 12.2% to 93.9 million. While this growth rate reflects in part a comparison against a relatively weak 2004 third quarter, we experienced strong volume growth in the 2005 period, including double-digit growth in equipment sales. As Janet said, North American sales are benefiting from new products and better market coverage. For the year to date, net sales in North America increased 7.5% to 269.1 million.

In Europe, sales for this year's third quarter totaled 29.4 million, which is up 18.5% compared with the 2004 third quarter. New products in expanded market coverage helped drive double-digit growth in equipment sales and in service, parts, and consumable sales. Strong volume growth, particularly in comparison to a weak 2004 third quarter in Europe, more than offset slight negative foreign currency exchange effects, which reduced 2005 third-quarter net sales in Europe by about 1%. For the year to date, net sales in Europe totaled 90.9 million, which is up 10.9% compared with 2004. The 2005 year-to-date period includes a favorable foreign currency exchange effect, which added about 2% to net sales.

In our other international markets, net sales for this year's third quarter increased 20.8% to 14.5 million. Again, the increase is primarily attributable to contributions from new products coupled with improving conditions in commodity-sensitive economies in Australia, Latin American and the Middle East. Favorable foreign currency exchange effects added about 3% to net sales in the third quarter. And for the year to date, net sales to our other international markets increased 13.6% to 40.9 million with favorable foreign currency accounting for about 2% of the increase.

Our gross profit margin for the 2005 third quarter was 42.9%; that compares with 39.3% in last year's third quarter. The factors behind this 360 basis point increase are basically the same as in the first half of this year, and they include lower costs resulting from last year's workforce reduction; our adoption of lean enterprise principles and other cost reduction initiatives; lower net logistics costs; better overhead absorption on the quarter's higher real volume; a favorable sales mix by both product and channel; meaning higher volume in the equipment sold through our direct sales force. In addition, price increases were implemented in 2005 that helped neutralize the impact of the higher steel costs that were a drag on last year's gross margins.

In total in the third quarter, about half of the 360 basis point improvement came from the cost-reduction initiatives. While about one quarter came from the more favorable sales mix and better overhead absorption. The rest of the improvement results primarily from the favorable comparison against the higher steel costs we were not yet recovering from via price adjustments in the third quarter of last year.

As we cautioned in our second-quarter conference call, our gross margin does not yet fully reflect the impact of higher oil prices. While there are some immediate consequences, such as higher fleet fuel costs, most of the impact of higher oil prices affects us as higher costs for resins, rubber parts -- such as tires, gaskets and hoses -- floor coatings and inbound freight. These will begin hitting earnings in the 2005 fourth quarter.

Our R&D spending in this year's third quarter totaled 4.9 million; that's up from 4.3 million in the 2004 third quarter, while consistent with our targeted level of 3 to 4% of net sales. As we have discussed previously, being an innovation leader in our industry is one of our key strategies. And therefore, we will continue to fund R&D at this targeted level. The sales growth that new products are generating for us attest to the importance of innovation as a growth driver in our business.

Selling and administrative expenses for the 2005 third quarter totaled 45.6 million; that's up from 38.7 million in the comparable 2004 period. As in the preceding quarter, the major component of this increase is higher performance-based compensation costs. The increase in this area results from our significantly-improved economic profit performance in our costs for performance shares, which as we have discussed in the past, have replaced stock options and our performance-based compensation system. Excluding performance-based compensation costs, S&A expenses for the 2005 third quarter would have grown at about half of the rate of sales growth consistent with our long-term objective of growing S&A at well below the rate of sales growth. Components making up the balance of the increase in S&A expenses were sales commissions and other volume-based costs resulting from the higher sales in the quarter and inflationary influences in areas such as compensation and higher fuel costs for our sales and service vehicles.

S&A costs were at 33.1% of net sales in this year's third quarter compared with 32.1% in last year's third quarter. Our operating profit for this year's third quarter totaled 8.6 million; that's up 95% compared with last year's third quarter. Our operating profit benefited from the revenue growth in the quarter and the previously-mentioned factors that contributed to the 360 basis point gross margin improvement, partially offset by the higher S&A expenses.

Operating margin for this year's third quarter was 6.2%; that's up from 3.7 a year ago, reflecting primarily the improved gross margin described earlier. Year-to-date operating margin is 6.4%; that is up from 4.1% in 2004. And for the 9-month period, operating profit is up 67.7% to 25.5 million.

Our tax rate in the quarter was 29% compared with 32% in last year's third quarter. The lower rate from the 2005 third quarter results from the resolution of certain state and federal tax matters. For the full year, we expect the tax rate to be between 36 and 37%.

Turning to cash flows and the balance sheet. Cash flow from operations for the first 9 months of 2005 totaled 30.1 million compared with 29.8 million in the same 2004 period. Our inventories at quarter end totaled 60.6 million; that's up from 55.6 million at the end of the 2004 third quarter and 55.9 million at year end. The increase reflects the higher volume in the quarter and some buildup in anticipation of our fourth quarter, which is typically our seasonally strongest period.

FIFO inventory days on hand were 93 at quarter end; that compares with 97 at the end of the 2004 third quarter. Net receivables at quarter end totaled 93.6 million, which is up from 84.4 million at the end of the 2004 third quarter, primarily because of the increase in net sales this year. Accounts Receivable days outstanding were at 62 at the end of this year's third quarter; that's down from 63 a year ago. And for the year to date, our capital expenditures totaled 12.9 million. For the full year, we continue to expect capital spending of 15 to 20 million. Our debt-to-capital ratio at the end of the quarter was 2% compared with 5% a year ago. Our current debt at the end of the third quarter was down by more than 5 million from the end of the 2004 third quarter.

And that concludes my overview of the quarter. I'll turn the call back to Janet.

Thank you, Tony. As you saw in our results announcement this morning based on our strong third-quarter performance, we are for the second time this year revising upward our outlook for full-year earnings. We now estimate that we will report full-year earnings per share of $2.50 to $2.70, up from our previous guidance of $2.05 to $2.30. This represents a 54 to 67% increase over last year's $1.62 per share before the 2004 workforce reduction charge. The upward revision reflects the strong momentum in our business, resulting from our success in driving topline growth while also improving our overall profitability.

With respect to the 2005 fourth quarter, we do face a difficult comparison against a very strong 2004 fourth quarter, which benefited from initial orders for the record number of new products we were introducing at this time last year. We also expect to see unfavorable foreign currency exchange effects in the 2005 fourth quarter. In addition, as Tony noted in his remarks, we are expecting some margin pressure resulting from higher oil prices.

So, while the quarter-over-quarter comparison will not be a repeat of what we saw in the 2005 third quarter, we should nevertheless end the year strong and far ahead of the expectations we had entering 2005.

I want to emphasize however that we are far from complacent about the state of our business. Tennant will continue working diligently on the core strategies we have been pursuing for several years. Recognizing that our Company must be cost competitive on a global basis, one of those core strategies is to leverage our cost structure. Toward that end, we are taking steps to optimize our manufacturing capacity. Today, we have more space than we need for our manufacturing operations. And we expect to become even more efficient about our space needs, as we proceed with implementing lean manufacturing principles, such as design for manufacturing and assembly and using common platforms across multiple products to reduce parts per product.

Accordingly, we are reallocating production among our manufacturing plants globally to reduce facilities, logistics, labor and other costs. A particularly valuable near-term opportunity is to move brush manufacturing from our Maple Grove, Minnesota plant to a facility within our national distribution center in Louisville, Kentucky. Today, about 90% of our brush and squeegee production in Maple Grove is then shipped to Louisville for distribution, so we can eliminate the transportation costs with this relocation.

Our plants in Minneapolis and Holland, Michigan can accommodate other production currently located in Maple Grove, enabling us to exit that facility in 2007. We expect to be able to sell the plant for a gain. Exiting this plant will affect about 32 positions that we expect will be absorbed by normal attrition and reassignments in other positions within Tennant. As a result, we expect no severance charges related to this plant consolidation. We do expect to incur pretax transition costs of about $1 million in each of the next two years. But our actions should generate savings of about $1.5 million annually in 2008 and beyond.

Ultimately, the oversight of this transition project will fall to our incoming President and Chief Executive Officer, Chris Killingstad. As most of you know, Chris joined Tennant in 2002 as Vice President North America with responsibility for revenue growth and profitability in our largest market as well as our global marketing and new product launch efforts. It was under Chris's leadership that we completed the comprehensive study of our North American marketplace that has driven a number of important initiatives at Tennant. With information from that study as a foundation, Chris also oversaw a more precise and meaningful segmentation of our market and a realignment of our North American sales organization to improve effectiveness and execution.

He was also instrumental in the strategy and execution of the largest new product rollout in Tennant's history, which we completed in 2004's fourth quarter and which has clearly benefited our performance to date in 2005. It is my great pleasure to introduce him to you this morning. Chris.

Thank you, Janet. First and foremost, let me say that I am both thrilled and humbled by the opportunity to be Tennant's next CEO. I want to thank Janet and the Board for their vote of confidence in me.

In 2002, we established a new strategic vision for Tennant. We confirmed our long-term aspiration to migrate from a non-residential floor maintenance company to an environmental cleaning solutions company. We committed ourselves to making Tennant more customer-focused, more innovative, more global and more profitable. As a key architect with Janet of our new vision and the four strategic pillars that support it, I am thrilled to see that the strategies are clearly working and driving significantly-improved performance.

Our Board of Directors recently approved the next phase of our strategic plan, which builds on the progress we have achieved in the last 2 years. My top priority is to successfully implement this strategic plan, while sustaining and accelerating Tennant's momentum in sales, earnings and operating efficiencies.

Our strategic plan is now firmly in place. Going forward, my goal is to devote a great deal of energy to ensuring that we have the organizational capability and the performance ethic necessary to execute our operating efficiency and growth plans with consistent excellence. I plan to fully leverage my international business experience to more aggressively build Tennant into a more global company. I will also draw on my consumer goods background to accelerate the development of a customer-centric culture, one that will clearly differentiate Tennant and be a source of significant competitive advantage over time. Finally, I plan to institute a robust process to define the roadmap that will guide us toward becoming a leader in environmental cleaning solutions.

I have the good fortune to be stepping into this new role at a time when the benefits of the actions taken on Janet's watch are becoming abundantly clear. Remember that as Tennant was facing a very difficult market and economic conditions resulting from the most severe industrial sector turndown since the Great Depression, Janet determined that the Company would not only weather the storm but emerge from it a stronger and more resilient Company. Clearly, we have done that. Under her leadership, Tennant became a more broadly-based company with a larger presence in the commercial and outdoor markets. She also helped reinvigorate and refocus our product development and articulated the clean, mean and green philosophy that continues to guide us.

This is a tough act to follow. As with all new CEOs, I have much to learn, but I have even more to contribute. I will be able to hit the ground running because I have played a pivotal role in Tennant's transformation to date. I have a proven track record of success and a deep understanding of the Company's business and culture. And I can promise you this; I will carry out my new responsibilities with great passion and integrity.

Let me conclude by saying that I am very confident that Tennant is poised for great success in the future. We have a clear vision, proven strategies, and very talented people motivated to achieve our goals.

Before turning it back to Janet for some concluding remarks, let me just say that I look forward to getting to meet many of you in person in the coming weeks and months. Janet?

Thank you very much, Chris. Well, this is my last conference call as Tennant's Chief Executive Officer. To serve as this Company's leader for the past 6 years has been an exhilarating challenge, a great privilege, occasionally a humbling experience too but mostly a wonderful opportunity to work with enormously talented, committed people at a great company. I have valued the chance to get to know many of you participating in today's call and have always appreciated your interest in our Company.

Today's call will also be the last conference call for Tony Brausen, where he will participate as Tennant's CFO. Tony Brausen, our CFO for the past 6 years, has announced his plan to resign as CFO after year end. Tony has made many contributions to Tennant's success during my tenure as CEO, including building a strong global finance team, playing a key role in Tennant's profitability improvement, and leading The company's adoption of an economic profit financial management and measurement system. Tony would like to offer some remarks. Tony.

Thank you, Janet. I echo Janet's earlier comments that I too have valued the opportunity to work with the many talented people within Tennant and those of you on the call, whom I've come to know over the last 6 years. I want you to know that this is not about Tennant, but it is about me and my desire to explore different opportunities at this point in my career. I'm very confident in the financial health of Tennant. In fact, I'm very bullish on Tennant for the future.

To assist in a smooth transition to my successor, I will stay until at least January of 2006. Therefore, I will look forward to continuing our work together over the coming months, and I thank you for your continued interest in Tennant. Chris and I are planning an investor trip for later this year, so I hope to see many of you before I depart. Janet.

Thank you, Tony. As many of you know, we also announced today that Eric Blanchard, our General Counsel, has announced that he has accepted a position with another company and will leave Tennant around year end. I want to personally thank Tony and Eric for their strong leadership as members of my executive team. And on behalf of all of us at Tennant, we extend our best to Tony and Eric.

I know I'm not alone when I comment on how pleased I am with the progress I see at Tennant. However, I am eager to move on to the next phase of my life. I firmly believe that organizations can benefit enormously from injections of new perspective, fresh thinking, and change at the top.

Tennant is in great hands with Chris as the incoming CEO, a capable team supporting him, a committed organization pulling together with him, and a strong Board of Directors representing shareholders' interests and advising Chris on strategy and direction.

I have had the privilege of working at Tennant for 20 years, including 6 as Chief Executive. It has been enormously gratifying to see the Company grow in size and strength, to weather tough times with resilience, to seize some key opportunities with determination, and to emerge today as a category leader. I am absolutely convinced though that the best is still to come for this Company. We are in a great business that offers enormous opportunities for profitable growth in the service of vision that makes sense -- helping customers create a cleaner, safer world.

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

(OPERATOR INSTRUCTIONS). Beth Willy (ph), Whittier Partners.

A couple questions -- one is, I'm a little surprised by Tony's decision to go do something else. And I am wondering about -- are you going to hire a search firm or what is management's feeling or the Board's feeling about replacing Tony?

Yes, we will hire a search firm. But we will do both an internal and external search, Beth, just to make sure we get the best candidate for the position.

And then the second question I would ask is, I wanted to clarify SG&A in the quarter. So if I -- it was $45.6 million, correct?

Yes.

Now, Tony, you said 50% of the growth over '04 was due to compensation costs. Is that correct?

Let me clarify that a little bit, Beth. It's actually more than half of the 6.9 million increase is from performance-based incentive comp. I think the half comment that you are referring to is I stated that if we exclude performance-based compensation from both periods, S&A growth would have been less than half the rate of sales growth.

So around 7%?

Correct.

Okay. So is it fair to say I can take that $38.7 million a year ago and grow it by 7%, and that's what the number should have been if you take out the incentive-based compensation?

Yes. The main factors in that increase were volume-based costs as I mentioned earlier. That includes -- as well as inflationary costs and expanded sales and service, which you've heard us talk about is one of the drivers of the sales topline growth.

So operating costs would have been $4 million less, excluding the compensation costs?

That's right.

So then the income from operations would have been 12 million, and the operating margin would have been even higher, which it was.

Right. Beth, just a quick comment on the performance-based incentive comp. There is a couple things at play there. One is, as I mentioned earlier, we've got a performance-based share plan that has replaced stock options. So in the past year, we had stock options; there was not anything for those in the income statement. So that's one of the factors. And then the other thing -- I just want to have everyone keep in mind -- the way we compensate executives here is you get paid for actual improvement year over year, and you get paid once. So once you have that progress in the resulting economic profit, you have to exceed that next year in order to have a bonus. So just keep that in mind as you think about performance-based costs and how that dynamic works.

Okay, those are all my questions. Janet, thank you for all your hard work on behalf of shareholders and the best to you. And Tony, I look forward to speaking with you in the future.

Andrea Sharkey, Sidoti & Co.

Just wanted to talk about revenue growth, it was really great this quarter. I just have been wondering, is that something you foresee going forward in say North America? There's been some concern that maybe the economy is slowing. Do you see that that -- you not being able to be -- the revenue growth you've got now to go forward?

And then in Europe, are you seeing maybe the beginnings of a recovery? Or is that just better sales coverage?

Andrea, I will turn it over to Janet and to Chris to comment, but I just want to clarify one thing. First of all, what you had in our third quarter of 2004 as I mentioned earlier, we experienced what so many other companies experienced, which is a soft patch in the economy. So you had an easier comparison in the third quarter versus third quarter. In the fourth quarter of last year, we did not have that soft patch, so the economy came back. And on top of that, as Janet mentioned, we introduced several new products and we had a real boost from those product launches and the revenue from them in the fourth quarter of last year. So I just wanted to capture those thoughts in this discussion. And with that, I will turn it over to Chris and Janet.

Andrea, thanks for your question. I will just comment quickly on Europe, and then I know that Chris will add some color commentary around North America.

In answer to your question, the big story in Europe is seeing all of the change that we have implemented in Europe all come together to produce the strong revenue results. Europe is clearly the beneficiary of our strategy of innovative new products, which have been very successful in Europe. They also are very much a key player in the strategy of expanded sales and service coverage. Both of those allow us now to really be much more competitive both price-wise and service-wise with the large building service contractors in Europe, many of whom are cleaning pros. So everything that we've been laying out in terms of our roadmap for our transformation of Tennant is clearly being exhibited in the improved success in Europe.

Then I will just turn it over to Chris for a couple comments in North America.

Well, I mean North America, I think the total business is well-positioned for sustained and profitable growth. We continue to improve our market coverage. If you look at our new product pipeline going forward, it is very, very strong. So our strategic plan, which was recently approved -- or the next phase of our strategic plan, which was recently approved by the Board calls for mid-to-high single digit sales growth and double-digit earnings per share growth for the foreseeable future.

There's one more question I wanted to ask. Talking about the Maple Grove, shutting down that facility. Is that going to have any impact do you think on your capital expenditures going forward or not really?

No, I don't expect that would. That is about 175,000 square foot facility that as we said, by the end of 2007, we expect it to close and sell. Other than call it the maintenance or essential spending associated with that facility, I wouldn't expect it to have a significant impact on our capital spending. I think part of your question is, are we having to add to our other facilities from a capital standpoint to accommodate the move. And the answer to that is no.

Janet, sorry to see you go. Good luck on -- and Tony also -- good luck on your future prospects. Chris, I look forward to meeting you.

I do as well, Andrea.

Wesley Goulet (ph), Wesley Goulet Capital Management (technical difficulty). (OPERATOR INSTRUCTIONS). Beth Willy, Whittier Partners.

I just wanted to follow up -- Chris, given your consumer products background and you came from a big organization, I was wondering if you could just kind of talk about as you take over Tennant, what you see in terms of those future prospects. You have talked about the strategic plan, where you just presented it to the Board and could you elaborate a little bit more on that mid-to-high single digit revenue growth as well as double-digit earnings per share growth? Could you talk about that; talk about the strategic plan that you've laid out to the Board?

Well I think that the next stage of our strategic plan is very consistent with the strategies we've laid out in 2002 and have been executing against. Right now, we have a clear vision; we have proven strategies. I think we have a talented team in place, who are motivated to achieve our goals.

So really my top priority is going to be ensuring the successful implementation of the next phase of the strategic plan and will be focusing on the same four strategic pillars. So it's just -- I am a big believer that companies that do have a strategic plan in place for many, many years versus going for strategy of the month or year tend to perform better. So I think it's good news that we've really been focused on the same four strategic pillars for 3 years now. And I anticipate we will focus on those same four over the next 3 years; that is what is going to drive the growth.

Sever Wong (ph), Yundong (ph).

Just a question again on the revenue or actually more on kind of product sales. Was there any kind of tendency for sales to be for larger or higher-end products or lower-end higher, smaller -- higher volume versus lower volume but higher-priced products in the quarter?

Really, we had a broad-based growth in our equipment portfolio. Our larger rider machines were up significantly as well as some of the new products that we launched like ReadySpace; the FaST technology on our smaller scrubbers, which we launched 2, 3 years ago, also performed extremely well. So the growth is really broad-based both in the higher-end industrial equipment as well as the lower-end commercial equipment.

And versus the year-ago period, Sever, we did as I mentioned earlier, some of that 360 basis point improvement to the margin; although, a small portion of it, some of it came from improved product mix and that would be the larger higher volume equipment.

I would just reiterate, Sever, what we said last quarter, which is I think been very satisfying and that is -- while we are glad to see some recovery in the larger equipment end, clearly we are seeing that in the commodity-rich countries around the world, which have stronger demand for some of our biggest equipment. We are not relying on that. We're seeing a very strong, even demand for product across all the product lines, and that's really great indication for the sustainability of the business.

And the new product lines -- new product launches -- are they also seeing a broad-based geographic kind of growth rate?

Yes, I know Chris can comment a little more on this. But yes, quarter by quarter, we get stronger and stronger acceptance of the new products. So it's been very strong and steady and increasing acceptance worldwide in all three of our geographies.

The T-Series scrubbers, remember that these machines were specifically designed for European applications, so they're doing extremely well in Europe. They are doing very, very well in the rest of the world too. But interestingly, they are performing ahead of expectations in North America.

Then you have the ReadySpace carpet care technology, which has really only been launched in North America at this point with a plan to roll it out into Europe and the rest of the world in the coming year.

Good luck to everybody.

Wesley Goulet, Wesley Goulet Capital Management.

With the change in the compensation, I'm wondering if we are -- what kind of goals we do have for operating margins. This seems to be a very different model than when we had close to 10% operating margins in 2000.

I can take that one, Wes. It's really not an operating margin goal; it is an economic profit goal, which is based on operating profit after tax. It also takes into consideration the capital usage and applies a capital charge against that operating profit after tax. So it's really not a different concept, and it is the same one we've had in place for the last 6 years.

So it makes a lot of sense. And what I'm wondering is, do we expect to see higher operative margins in the future as we meet these revenue goals?

We earned a 9.5% return on sales in 2000 (multiple speakers) high watermark. The interim goal is to surpass that.

Well, we have been shareholders for a long time, and I very much appreciate what all of you have done for us. Thank you.

Andrea Sharkey, Sidoti & Company.

I just wanted to follow up on talking about the performance shares. But also will you have to have new options expensing in 2006? I believe you will. What kind of impact is that going to have on your operating margin?

Yes, Andrea, we will have stock option expensing beginning next year. And that is the result of -- the way that accounting requirement works is you expense for stock options over the vesting period. So we have options that were granted back in 2004 and earlier that haven't yet vested. So we will have some expensing associated with those in 2006, and I estimate that to be $0.07 to $0.08 a share.

Then for Chris, I just wanted to ask you, you mentioned talking about your strategies that you want to leverage your global experience. I was just curious if you could expand on that aspect a little bit.

On my global experience?

Yes.

Before coming to Tennant? Okay, I spent 6 years in Asia based in Hong Kong, where I ran Pillsbury Asia. I was most known for starting the Haagen-Dazs ice cream business from scratch and growing it into a $500 million business that earned $80 million a year in profits in 12 Asian markets all through joint ventures, except in China where we couldn't find a partner we could trust. So we set up wholly-owned subsidiaries in Shanghai and Beijing.

And then I went from there to run Pillsbury Europe, which was a $1.5 billion food business. We restructured it quite dramatically, sold off about $1 billion worth of business. Most of those brands have migrated to private label -- and focused the attention on growing the $500 millions worth of business that remained, which were really our core global brands like Haagen-Dazs and Pillsbury and Green Orange (ph) and Old El Paso and also completely restructuring the organization and building a true pan-European business both management-wise and logistically in the way we manufactured products. I did that for 3 years, and we did have a successful turnaround.

(OPERATOR INSTRUCTIONS). At this time, I am showing no questions.

Well, that concludes our call. As always, thanks for your interest and your questions. It has been my pleasure to work with you, all of you, over the past several years. And I hope you will continue to follow Tennant because as I said earlier, I think the best is yet to come. Thank you very much.