Tennant Co (TNC) 2005 Q4 法說會逐字稿

Good morning and thank you all for standing by. Thank you for participating in Tennant Company's fourth-quarter and full-year earnings teleconference. Beginning today's meeting is Patrick O'Neill, Treasurer for Tennant Company. Mr. O'Neill, you may begin. Thank you.

Good morning, everyone, and welcome to Tennant Company's fourth-quarter 2005 earnings conference call. I'm Patrick O'Neill, Treasurer and Principal Financial Officer of Tennant Company.

As you know, in the fourth quarter of 2005, we initiated a search for a chief financial officer. We expect to complete this search in the first quarter of this year. Until then, I will fulfill this role.

With me on the call today is Chris Killingstad, Tennant's President and CEO. After our review of the quarter and a discussion of our outlook for the future, we will open up the call to your questions.

Before we begin, please be advised that 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 risk 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 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 these documents, particularly our Safe Harbor statement, for a description of risks and uncertainties. Our news release was issued this morning via BusinessWire and is also posted in the Investor Relations section of our Web site at 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 2005 fourth-quarter and full-year GAAP results and our 2004 GAAP results, which results excluding unusual items. We believe presenting the non-GAAP measures in addition to the GAAP measures permits a more meaningful comparison of our operating results.

At this time, I will turn the call over to Tennant's President and CEO, Chris Killingstad. Chris?

Thank you, Pat. Good morning, everyone, and again welcome to our fourth-quarter earnings conference call.

After my initial comments, Pat will provide a more detailed review of the financials and then I will return with an overview of our strategy and outlook for the future. Since this is my first earnings call as Tennant's CEO, I want to say how excited I am to be leading this company at this point in time.

2005 was another record-breaking year for Tennant in terms of fourth-quarter and annual net sales. For both the quarter and the full-year, net sales grew by 9% from the respective prior-year period. In the fourth quarter, net sales totaled $152 million compared to net sales of 139.4 million in the fourth quarter of 2004. For the full year 2005, net sales aggregated 552.9 million, up from last year's record of 507.8 million.

For the full year 2005, diluted EPS totaled $2.52, a 73% increase from the as-reported 2004 results.

The 2005 results were driven by new products, organic growth and price increases. In 2004, we launched a record 20 new products. Many of these products targeted commercial applications where Tennant has an opportunity to capture additional market share. In 2005, we focused on getting these products into our distribution pipeline and selling them with great success. These new products are receiving rave reviews from our customers.

Playing an important role in the acceptance of our new products is our execution of world-class marketing practices. Frankly, I'm excited to see Tennant operating more like a marketing driven packaged goods company than a Legacy industrial equipment manufacturer. We will continue to implement world-class marketing to support our growth goals.

During the past year, we focused on reigniting our growth engines in our largest market, North America. Starting 2005 with a suite of new products, we began expanding our market coverage into areas where we have not been a dominant player. This would include vertical markets, such as healthcare and retail commercial spaces, as well as geographic markets where we were not seeing the penetration we would like. By leveraging both our direct and distributor sales channels, we began to see strong results, primarily from the traction of our new products. For example, our growing strength in products designed for commercial applications allowed us to more deeply penetrate the national accounts business. Together with our distributors, we also implemented an aggressive program to drive growth through cross-selling of machines, coatings and service, which we believe contributed to a rise in sales and profitability in North America. We believe this strategy will continue to be successful for our North America business.

Much of the new business we won in 2005 was due to growing acceptance of our proprietary FaST floor scrubbing and ReadySpace carpet cleaning technologies. This reinforces our commitment to R&D spending to support our position as an innovator in our industry.

Going forward, Tennant's business in North America is well positioned for continued growth. We believe Tennant continues to have a competitive advantage as the industry's only player that can offer national mobile service as a channel for maintenance, repair and parts and consumables. We also believe that the combination of a strong direct channel and distribution network will allow us to reach our target customers more effectively and successfully. By our estimation, we hold a commanding share of the market in North America. Globally, we believe we have a very strong competitive position and our prepared to capture more of the $5 billion worldwide market. Based on available sales data, we estimate that Tennant holds approximately a 10% share of the global market. Our top four global competitors combined account for about 20% of the market share with all other players holding fragments of the remaining 70%. We view that 70% as our greatest opportunity, especially in international markets.

To drive performance in markets outside of North America, we focused on increasing organic growth in Europe, particularly in the United Kingdom, France and Spain. European customers want small, maneuverable cleaning machines and we designed and introduced the new T3 and T7 floor scrubbers, keeping the European Mark market in mind. As we intended, these products have appeal in North America and other markets as well. We also added sales and service personnel in Europe. As a result of these actions and the continued benefit of the 2004 Walter Broadley acquisition, 2005 sales in Europe grew substantially. Going forward, we will continue our effort to build a profitable growth platform in Europe and accelerate our growth in Japan. We also plan to selectively expand into key emerging markets such as China, Eastern Europe, Brazil, India and Mexico. We believe these markets hold tremendous growth potential for us.

I'm enthusiastic about our future and will share more details on our strategic direction following Pat's overview of our financial performance. Pat?

Thanks, Chris.

In my comments today, all references to earnings per share are to EPS on a fully diluted basis. In addition, our results for the prior year included an unusual item, a net severance charge related to the workforce reductions we implemented in the 2004 third quarter. For the year, that charge totaled 2.3 million pretax, 1.5 million or $0.16 per share after-tax. The financial impact of this action 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 unusual items using the figures in the columns labeled excluding unusual items on the consolidated statements of earnings pages.

For our 2005 fourth quarter, we reported net earnings of $0.70 per share, up 11% from $0.63 per share in the 2004 fourth quarter. For the year 2005, net earnings per share totaled $2.52, up 56% from $1.62 per share in 2004. Earlier in this call, Chris reported a 73% increase in 2005 earnings per share on a year-over-year basis, including the net unusual charge in 2004.

Consolidated net sales for the quarter totaled 152 million, up 9% from a strong 2004 fourth quarter which included significant sales from new products introduced in the second half of 2004. The increase in 2005 fourth-quarter net sales resulted from new products, organic growth, price increases and a large order for a new customer in Europe.

As Chris noted, new products, such as T-Series scrubbers and our ReadySpace carpet care offerings, continue to generate strong sales contributions. Foreign currency exchange effects reduced net sales approximately 2% in the quarter. For the year, consolidated net sales increased 8.9% to $552.9 million with foreign currency exchange effects having a negligible impact.

In North America, fourth-quarter net sales increased 10.4% to $101 million. This growth rate reflects comparison against a very strong 2004 fourth quarter and includes equipment sales growth of almost 14%. For the year, net sales in North America increased 8.2% to $370.1 million. In Europe, sales for this year's fourth quarter totaled $36 million, up 9.4% compared with the 2004 fourth quarter. New products and a large order to a new customer helped drive double-digit growth in equipment sales. This strong volume growth more than offset a significant negative foreign currency exchange effect which reduced 2005 fourth-quarter net sales in Europe by about 9%. For the year, net sales in Europe totaled $126.9 million, up 10.4% compared with 2004. The 2005 net sales include an unfavorable for entrance exchange effect which reduced net sales by approximately 1%.

In our other international markets, net sales for this year's fourth quarter totaled 15 million and are flat compared to fourth quarter of 2004. Unfavorable foreign currency exchange effects reduced net sales approximately 3% in the fourth quarter. For the year, net sales to other international markets increased 9.6% to 55.9 million with favorable foreign currency exchange effects accounting for approximately 1% of the increase.

Our gross profit margin for the 2005 fourth quarter was 41.6% compared with 40.2% in last year's fourth quarter. The factors behind the 140 basis point increase include price increases implemented in 2005 that have neutralized the impact of higher steel costs that were a significant drag on the fourth-quarter 2004 gross margins, lower net logistics costs, lower fixed costs resulting from last year's work force reduction, our adoption of lean enterprise principles and other cost reduction initiatives and a favorable sales mix resulting in higher equipment volume sold through direct sales force. Several factors had a negative impact on gross margin in the quarter, including higher production costs, higher material costs and unfavorable foreign currency effects.

Our R&D spending in the fourth quarter of 2005 totaled $5.4 million, up from 4.5 million in the 2004 fourth quarter, and is consistent with our target level of 3 to 4% of net sales.

Selling and administrative expenses for the 2005 fourth quarter totaled $48.5 million, up from 43.1 million in the comparable 2004 period. As in the preceding quarters, a major component of the increase is higher performance-based incentive compensation cost. The increase in this area results from our significantly improved economic profit performance and our cost for performance shares, which have substantially replaced stock options in our performance-based compensation system.

The second component in the 2005 fourth-quarter S&A increase is senior management transition costs. As stated in our earnings release, these total approximately $700,000 after-tax. Relative to the various leadership changes that have transpired at Tennant since the announcement of Janet Dolan's retirement in 2005, Tennant has had contractual obligations under certain management agreements and has incurred recruiting costs associated with senior management executives. Specifically in fourth quarter 2005, we accrued for contractual obligations with respect to payments that will be owed to our Vice President and Managing Director of Europe when he leaves the Company later in 2006 or early 2007. Other obligations include payments to our former Chief Financial Officer, whose retention agreement was previously disclosed in November, and payments for various recruiting fees for senior management positions. As you know, we are currently searching for a CFO replacement as well as executive leadership in the areas of global procurement, manufacturing and international operations.

Components making up the balance of the increase in S&A expenses were bad debt expense due to higher customer collection risk, inflationary influences in areas such as compensation and higher fuel cost for our sales and service vehicles, and increases in other selling and service expense. S&A costs were 31.9% of net sales in the 2005 fourth quarter, compared with 30.9% of net sales in the 2004 fourth quarter.

Our operating profit for this year's fourth quarter totaled $9.4 million, up 11.9% compared with last year's fourth quarter. Operating profit benefited from the revenue growth in the quarter and the previously mentioned 140 basis point gross margin improvement, partially offset by the higher S&A expenses. Operating margin for the fourth quarter of 2005 was 6.2%, up of from 6% in the fourth quarter of 2004. For the full year 2005, operating margin is 6.3%, up from 4.6% in 2004. For the year, operating profit was up 47.9% to $34.9 million.

Our tax rate in the quarter was 32.2% compared with 36.8% in the fourth quarter of 2004. The lower rate in the 2005 fourth-quarter results from the resolution of certain foreign tax matters.

Turning to cash flow from the balance sheet, for 2005, cash flow from operations totaled $44.3 million compared with $36.7 million in the same 2004 period. Our inventories at quarter-end totaled 52.7 million, down from 55.9 million at the end of 2004. FIFO inventory days on hand were 82 at 2005 year-end compared with 87 at year-end 2004. Net receivables at year-end totaled $105.9 million, up from 97.5 million at the end of 2004, primarily because of the increase in net sales in 2005.

Accounts Receivable days outstanding were 61 at the end of 2005 versus 60 at the end of 2004.

Our capital expenditures for 2005 total $20.9 million and we project capital spending in 2006 to be in the 23 to $28 million range.

Our debt to total capital ratio at year-end was 2% compared with 5% at the end of 2004. Our current debt was down by more than 5 million from the end of 2004 due primarily to our final scheduled debt payment on a private placement note we have had in place since 1994.

To conclude my remarks today. I want to comment on our outlook for 2006. We anticipate earnings per diluted share to range from $2.45 to $2.75, including approximately $0.09 to $0.11 per diluted share of stock compensation expense as a result of the adoption of FASB 123R. Our guidance also includes approximately 3.6 million pretax, or $0.35 per diluted share of expense related to our China expansion strategy and our previously disclosed global manufacturing footprint rationalization initiatives. Part of the expenses associated with China and footprint rationalization will have negative impact on our 2006 gross margin. We also expect inflation driven cost increases and unfavorable foreign currency exchange effects to negatively impact our gross margin in 2006. Partially offsetting these impacts will be continued savings from lean and other initiatives.

During 2005, we had a number of favorable resolutions of state, federal and foreign tax matters that we do not expect to repeat in 2006. Also, our tax rate will be higher due to our startup losses in China. Excluding the impact of our China footprint initiatives, we anticipate 2006 diluted earnings per share to range from $2.80 to $3.10 a share. This compares to $2.52 of diluted earnings per share in 2005, or an increase of 11% to 23%.

In connection with the manufacturing footprint rationalization, the Company anticipates selling its Maple Grove, Minnesota facility. While the Company cannot estimate the impact of selling this facility on 2006 results because of the uncertainty of the transaction price and timing, the Company anticipates a substantial gain on the sale.

With that, I would like to hand the call back to Chris for an overview of our strategy.

Thanks, Pat.

First, we continue on the course we set three years ago. As demonstrated by our 2005 performance, we're seeing the positive results of our key strategies around marketing excellence, market expansion, product innovation and rationalization of our cost structure. We remain committed to transforming Tennant from good to great and instilling a culture of excellence. To ensure we succeed, we have set five corporate priorities. They are -- China, global procurement, lean enterprise, continuous process improvement and last but not least, growth. These five priorities will be critical to our success in 2006 and beyond.

First, China -- in November 2005, we announced plans to establish a manufacturing plant in Shanghai, China. This facility will serve two very strategic purposes, global sourcing and establishing a foothold in China's growing marketplace. Let me give you some insight into what this means for Tennant. Our China facility will enable us to broaden and fortify our global sourcing capabilities and improve our margins. This strategic initiative has the potential to significantly increase the Company's long-term profitable growth. Initially, our China facility will make walk-behind floor scrubbers and sweepers for sale into the Chinese and other Asian markets. In China, our goal is to produce high-quality competitively priced floor cleaning machines in order to gain a significant share of that country's growing industrial floor cleaning products market, which is estimated to be $210 million in 2005 and expanding rapidly. Although we already had a sales presence in China, our decision to manufacture products locally strengthens our competitive position in this important market. The emphasis on China also fits with our global strategy to enhance operational efficiencies and manufacture products close to our customers.

Timing is important to strengthening our competitive position in China. For example, key international events are coming to China, the Olympics in 2008 and the World Expo in 2010. As the country develops and enhances its infrastructure in preparation for these major events, there is growing opportunity for the products and solutions that Tennant brings to this market. Construction of Tennant leased facility is complete with initial sales of Chinese manufactured products expected to begin in the second half of 2006. Our products will be sold in China primarily through a network of independent distributors.

A second corporate priority is global procurement. This dovetails with our China strategy. We have a tremendous opportunity to strengthen Tennant's profitability through a global procurement strategy. Today, roughly 70% of our cost of goods comes from parts and components that we purchase from outside vendors. We can significantly cut these costs by sourcing from low-cost regions, primarily China. To lead and champion this important initiative, we commenced an international search for a Vice President of Global Procurement.

A third corporate priority is lean Enterprise. We are in the early process of creating a lean enterprise, which requires building quality into and taking waste out of everything we do. We began implementing lean manufacturing concepts by redesigning Tennant machines to reduce the number of parts per machine and by creating common product platforms. For new products, we are focused on designing for efficient manufacture and assembly from the start. This allows the manufacture of different products on the same assembly line, boosting our efficiency and lowering unit costs. Beginning in 2007, when Tennant's first platform designed product family is released, our goal is to reduce parts per machine by 20%. We are also targeting a minimum of 50% commonality of parts. Further, we will enable an entire family of products to be built on one manufacturing line.

Our fourth priority is continuous process improvement. We are constantly looking for better ways for our customers to do business with us. As a result, our process improvement efforts involve both customer facing and internal processes where we can become more efficient, better employ automation and lower Tennant's operating costs. Initial target areas include sales and service automation in North America and Europe. We are also introducing customer relationship management tools early this year that will help us be more efficient with our interactions with our customers. Other areas where we are applying continuous process improvement include our global supply chain and financial systems capabilities.

Now, I will touch on our final corporate priority, which is growth. We expect product innovation, services and market expansion to continue to fuel Tennant's revenue growth. Our new product pipeline is robust and we plan significant product launches in 2006 for all market segments. We are particularly excited since, for the first time in six years, Tennant will introduce new products for industrial applications, our historical stronghold. We have shown, through ReadySpace and FaST technologies, that our investment in advanced product development is paying off.

We also plan to grow by expanding our business model. Our goal is to move Tennant from a machine-centric business to a flexible solutions business. This won't happen overnight and machines will always be core to what we do, but services will take on increasing importance. More and more, our customers look to Tennant to deliver solutions. This year, we are preparing to provide integrated solutions to our customers, wrapping service into a bundled equipment offering. With our nationwide mobile service capability, Tennant has the competitive advantage of being the only company in our industry capable of offering this level of service. In addition, customers are demanding access to more data on equipment usage that will enable them to better manage labor costs, productivity levels and anticipate maintenance and repairs. Technological enhancements to our future products will address this.

Finally, we have begun a robust exploration process to begin migrating Tennant over time from a nonresidential floor maintenance company into a leader in environmental cleaning solutions. You may have heard that Tennant wants to get off the floor. We are exploring ways to do that, although this will take a committed effort over the next several years. In the end, this effort will enable the Company to identify and expand into new and growing markets.

Tennant is in a unique position to achieve the top and bottom-line objectives that we have laid out for you. The combination of our China expansion project, our global manufacturing footprint rationalization initiative, continued traction from new products, our expanding market coverage and our ongoing emphasis to increase operating efficiencies has positioned Tennant well for the future.

We look forward to updating you on our progress in the coming quarters. We will focus our strategy on doing the right things, not necessarily the easy things, and executing with excellence. Yes, we are raising the bar and we can never lose sight of our customer as the reason we are in business.

Thank you for listening today. Operator, I would now like to open the call up to questions.

Thank You. (OPERATOR INSTRUCTIONS) . David Taylor, David P. Taylor & Company.

Thank you. Could you tell us whether these charges of what I guess about $0.06 a share in the fourth quarter for management transition and the $0.35 a share forecast for '06 in China are recurring in nature? It seems to me you've got a lot of people you want to bring onboard but it is going to be more management transition expenses, it would seem to me. When you open new plants in new territories, these expenses take more than one year in many cases. So is the $0.06 and $0.35 all we are going to see or is there more?

I will take that one. This is Chris. I think that anytime you have a transition to new leadership, when a new CEO comes onboard, I think it is not unusual to see some management changes. We've disclosed previously that Tony Brausen, our CFO, had chosen to resign. And we talk today about Anthony Lenders, the head of our European business, is going to be leaving at the end of 2006 or early 2007. I think that, coupled with the fact that we are looking for some new people -- we have indicated that we're looking for a VP of Global Procurement. We need to strengthen our manufacturing operation and I'm looking for new leadership in our international business, because we need that talent in here if we are going to achieve our commitment to execute our strategy with excellence.

I would not foresee, going forward on the management transition side, that we would see anything at this level going forward. Obviously, businesses over time do have changes in management but I think, especially when you have a change in leadership, it is more concentrated as it was in the fourth quarter. So I do not foresee that expense of that magnitude showing up and our financials again going forward.

The second question was on China and you're absolutely right. I mean to set up an operation in China, sales marketing, distribution, procurement manufacturing -- this is not a one-off deal. I think what we're looking at here is $0.35 that relates both to China and to rationalizing our global manufacturing footprint and that is for 2006 . But we think that we're also going to incur some expenses in 2007 and with both initiatives, what we're looking for is to start seeing the benefit flow through to the bottom line in 2008 and beyond.

So you see declining expense in 2007 from these international initiatives and then a positive impact in '08 ? Am I correct?

That is correct. This is Patrick O'Neill. That is correct. As we disclosed previously about our global manufacturing rationalization, we disclosed that we expect to spend monies, both in 2006 and 2007, to make that transition happen with favorable results starting in 2008.

Thank you very much.

[Jim Norris], [Cooke & Dealer].

I was wondering if you could update us on where things stand in terms of the raw materials cost inflation and how much of that you have been able to offset with pricing?

Jim, as you know, the fourth quarter last year, we had significant impacts from steel increases. We raised prices in 2005, which we believe has essentially offset those increases. In the fourth quarter of 2005, we started to see some increases from call it oil and gas driven inflation. They hit our raw materials purchases; they had our factory costs. They impacted our freight costs, both inbound and outbound. As we look at 2006, we expect those inflationary pressures to magnify and have included that in our guidance for 2006.

Any further price increases planned to offset that?

Well, as we do every year, we have an annual price increase, which is effective in the March time frame for our North America operations and at other times of the year I believe it's the first of the year for our international operations. So yes, our price increases will attempt, where possible, to offset those cost increases but we are in a very competitive nature around the world and we may not and do not expect to fully offset all of those cost increases.

Okay. Then one last question -- as I'm looking at the margins and the potential impact on the margins, two things stand out to me that I would like for you to comment on and maybe give us a little bit of color. One is the R&D cycle. R&D expenses have stepped up the last couple of quarters. I was wondering where we stand there, how much further -- obviously you've got more product introductions coming and so perhaps that continues for a while but I would like some comment on that.

Then the second thing perhaps impacting margins is the fact that you had a lot of new products that were introduced in '04 but which you ramped up in '05. Obviously there are some learning curve issues there. There are some perhaps upfront costs in terms of getting those to market. I'm wondering if you could comment. I suspect you cannot get real precise on this but to the extent possible, give us some color on how much you think margins were impacted by these two things, the new product costs, the ramp, as well as the R&D cycle?

Well regarding the R&D cycle, we stated publicly before that we are comfortable of having our R&D spending in the range of 3 to 4% of sales and for the near-term, we expect to stay in that range. As Chris talked about, our new products develop and it ramps up and as we introduced these. We're comfortable with the 3 to 4% range. Regarding the cost for the new product introduction, you know, that is a -- we will not disclose that type of information but clearly, it is included in our increase in costs.

Can you give me any kind of color at all as to order of magnitude, how much we are talking about?

What I would say on that is that the new products, generally speaking, that we launched in 2004 -- now, there were about 20 of them -- have higher average margins than our weighted average portfolio. So that has been a positive to our gross margin picture. I think that the majority of the launch costs, because they occurred really in the third and fourth quarter of 2004, were in 2004 and the costs associated with getting deeper penetration of our distribution channel was just really part of our ongoing business expenses and not unusual in any way. If you look at the R&D expense in the fourth quarter, remember that we did not launch any new products in 2005. Our expectation is that in the second half of 2006, we are going to be launching seven new products, including the new products for industrial applications for the first time in six years we have done that. So I think that a lot of the development expenses related with those have shown up as an increase in the fourth quarter.

Beth Lilly, Woodlands Partners.

I was wondering if you could just spend a minute -- you're taking all of these different steps in terms of procurement and lean and you're spending this money for this plant over in China, all of this ultimately leading to, one, faster growth, but two, more importantly I think, higher operating margins, higher operating profitability. So can you talk about where you see the organization going longer-term in terms of operating margins? Because if you're taking all these costs out and you're moving over to China, it seems to me that, over time, your operating margin should be higher than they have been historically.

Well, Beth, we said publicly over the last three or four months that our goal is to grow our revenues by mid to upper single digits, to grow earnings per share in the double digits and to get back to a 9.5% operating margin in the next three to five years. If you remember, 9.5% was our high watermark in the year 2000. All right? So if you look at our plan for 2006, we are tracking in that direction and we fully expect to meet those commitments.

So what I think you have to do right now is to say okay, let's look at the investment that Tennant has made over the last three years, take out China and footprint rationalization and see what the underlying business improvement in terms of margin looks like. It looks pretty good based on our 2005 performance. Our expectation is that China and footprint rationalization will also significantly exceed our cost of capital going forward and will indeed improve -- help improve the margins.

So we're at a point right now where we have the ability to improve our performance both through operational excellence initiatives and through growth coming from innovation, expanding our market coverage. But I would think that the majority of the shareholder value creation that we generate over the next three to five years is going to come from our operational excellence initiatives, which is why China and the footprint rationalization projects are so crucial, because they drive a lot of that improvement.

So that 9.5% that you're talking about getting back to in the next three to five years, in that number is -- then that assumes the China plant, the continuous process improvement, all these things you have talk about today?

Absolutely.

Okay, because what I'm struggling with it just seems to me that 9.5 is low; 9.5% is low compared to -- I know that's the high watermark for the Company but if you're doing all of these things that have not been done in the organization before, it just seems to me that you should be able to exceed that 9.5% number.

We'd very much like to but I think that our philosophy needs, at this point in time given, we are so early in this process, we have just gotten started with these projects, is that we need to underpromise and overdeliver. I'm not sure we really know yet what is possible. I think, as time goes on and we get more and better traction from these initiatives, we should be able to update you and hopefully the update would be in a positive direction. But I think for now, given that it is still early days, 9.5% is a good goal to have.

Okay. Just so I can better understand -- so China, you said the -- how big is the market over in China?

Our estimate in our industry, it is very hard to get really accurate sales data, but our estimate based on various sources is that it's about $210 million today and growing rapidly.

Do you have any sales into that market yet at this point\?

We do but very small because we have been importing equipment into China at price points that very few people can afford, which is why this initiative of building machines in China -- initially walk-behind scrubber and a walk-behind sweeper -- with very high-quality but at price points where we can start to generate some sales and grow our market share.

Who would you consider to be your main competition over in China then?

Well, I think our global competitors are all there and there are some local Chinese competitors as well, but at this point in time, I think everybody is feeling their way forward. Nobody has really broken out and so I think it is an open playing field and we are well positioned to take a leadership position.

So there's no dominant competitor over there?

It is pretty wide open at this point.

Okay. Just two other questions, they both have to do with personnel issues. Can you talk about -- kind of can you update us on the CFO search to replace Tony Brausen and then talk about what you're looking for in terms of a European leader?

In terms of the CFO search, we are in the eleventh hour and I fully expect that we will come to a successful conclusion by the end of March the latest.

Okay.

Okay? So we are almost there on that one.

In terms of Europe, we're looking at changing the way we manage our international business. Instead of having a head of Europe and a head of all other international markets, we're looking at the idea of bringing in a real heavy hitter who will manage all of our business outside of North America, you know, has the entrepreneurial instincts and the experience in growing business aggressively in Asia, in Europe and ideally in Latin America too. We base that position in Europe. I want -- the international business has so much potential. I think one of the problems we have had historically is that we have treated international a little bit like the 51st state. Most of us who have worked internationally know that if you do that, you don't make much progress. So I would like the leadership and the support functions to a great extent to be based out of Europe and away from the mother ship of Tennant in Minneapolis to really give us an ability to see how far or how high is up in international markets. We believe that the potential is significant.

Okay . Then my last question is the Maple Grove facility, any sense of what proceeds in the sale of that?

Well, this is Patrick O'Neill. We have engaged a professional broker to help us market and review options with us. We won't comment publicly but we expect a substantial gain. We don't want to basically reveal any potential because we believe it could hurt our (indiscernible) position but we do believe we will have a substantial gain on sale of that property.

How many acres do you own?

I think it is 30 acres, 32 acres plus our manufacturing facility, so there's excess land around the manufacturing plant.

What I was going to say is that the level of interest has been very high.

Great. Well, that is helpful. Thanks, guys.

Andrea Sharkey, Sidoti & Company.

A lot of my questions have already been answered. I guess just talking about the $0.35 in expenses for China, is there a frontloading to that where that is going to be kind of maybe more at the beginning of '06 and petering out a bit as the year goes on and then into '07 or is that going to be kind of evenly split throughout the year?

I will have Patrick answer that but before he does, the $0.35 is both China and our manufacturing footprint and rationalization project. All right, so only part of that is China just so we are clear.

Clearly there will be some front-end loading to that. Obviously we need to do some developmental work for the products that we will manufacture in China, including engineering activities. Those will be concluded and obviously will not be repeated. Those will transition into starting up the manufacturing facility, bringing people on board, things like that -- that when those are complete and we are making inventoriable products, those costs will obviously be capitalized into inventory and sold as normal cost of goods sold. So those expenses will be incurred basically ratably over the year but they will start to go in different lines of the P&L as we start to capitalize those costs into inventory. Then lastly is our sales and marketing expense for the China marketplace, which will again be incurred ratably over the year and will obviously hit our S&A all year long.

Okay. Then just a second quick question -- I'm not sure. I've seen a lot of aluminum prices going up. Does that have any impact on you guys? Do you use aluminum significantly at all?

Well we use aluminum in our products, parts of our components. I cannot tell you how much we use. We don't buy raw aluminum but it is included in the componentry that we buy for our products.

Okay.

But I don't think it is a -- if you get a list of the top 10 commodity costs that we purchase either directly or through our components, I don't think it is a material number.

Okay great. That is all I have. Thanks a lot.

[Jim Norris], [Cooke & Dealer].

I had a couple of questions about the balance sheet. You guys have done a great job in managing inventory and receivables. There has been a lot of improvement there over the last couple of years and I would like some commentary on how much further you think that could go?

Then the second question about the balance sheet would be with regard to your capital structure. You obviously have very low debt and a lot of cash. I'm just curious about what your thoughts are there and to what extent the new CFO is going to have any kind of a mandate with regard to the balance sheet?

Well, Jim, I will address those. Clearly, we have made progress on our working capital. We are pleased by that progress so far but clearly we are not done. As we implement lean activities and the concepts around lean, we clearly believe there's further opportunities ahead on working capital reductions. Keep in mind that we have got an economic profit or an EVA-based compensation incentive system that incents us to reduce that working capital. So while we are happy with where we are, we still think there is room to improve.

On the capital structure, you have hit it right. We have got essentially no debt. We have got a lot of cash. We continue to evaluate our options. Our first priority clearly would be to invest that money in organic growth or projects that will basically be higher than our cost of capital and those would include organic projects or potential acquisition candidates.

Also on going forward, the new CFO will definitely be looking at this. We have gotten so many questions on our capital structure. Also in the road trips we have made in December and in January, many institutional investors have been asking if we're starting to consider returning cash to shareholders. It is a valid question and I don't think we have any answers yet but our new CFO will definitely have this on his or her plate to review and come to a recommendation on.

At this time, there are no further questions. (OPERATOR INSTRUCTIONS). There are no further questions at this time.

All right, well then thank you.

I guess we will sign off.

Thank you. That concludes today's conference call. All lines may now disconnect.