Tennant Co (TNC) 2006 Q1 法說會逐字稿

Good morning and thank you for participating in Tennant Company's first quarter teleconference. (Operator Instructions). Beginning today's meeting is Mr. Tom Paulson, Vice President and Chief Financial Officer. Mr. Paulson, you may begin sir. Thank you.

Good morning everyone and welcome to Tennant Company's first-quarter 2006 earnings conference call. I'm Tom Paulson, Vice President and Chief Financial Officer of Tennant Company. With the on the call today is Chris Killingstad, Tennant's President and CEO, and Pat O'Neill, our Treasurer.

Since this is my first conference call as CFO, I want to begin by saying that I hope to meet and talk with each of you personally over the upcoming weeks, and I also want you to know that obviously I'm extremely excited to be on board.

A couple of thoughts. I joined Tennant because I really felt strongly that the Company had a rare mixture of enormous short-term opportunities to leverage efficiencies and create shareholder value as well as significant long-term growth opportunities. Also, because of my past working experience with Chris, I knew this would be a great team. Since I have arrived, I found the opportunity is even bigger and the quality of the people even better than I had expected coming in.

Our agenda this morning is that after our review of the quarter and a discussion of Tennant's 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. These risks and uncertainties include factors that affect all companies operating in global markets, as well as matters specific to our company and are described in today's news release and documents we file with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement for a description of risks and uncertainties. Our news release was issued this morning via Business Wire and is also posted in the investor section of our website at tennantcompany.com. I will at this time turn over the call to Chris.

Thank you, Tom. Good morning everyone, and again, welcome to our first quarter earnings conference call. I would also like to formerly welcome Tom. As you know, he recently joined over management team from publicly-held [Innovex], a technology company where he was responsible for the financial, legal and IT areas. And prior to that, Tom and I actually worked together when we were both at Pillsbury. We are very unfortunate to have him as part of the Tennant leadership team. He is a great strategic thinker as well as an excellent finance executive.

Tennant's year is off to a great start as you saw from our first quarter earnings announcement. We reported strong sales gains for the quarter across all of our businesses which led to a double-digit earnings increase, and we expect continued momentum throughout the year. Further, our strategic plan to drive top and bottom line performance are on track. I will say more about this in a moment.

As a result of our confidence in the Company's growth prospects this year, the Board has approved a two-for-one split of Tennant's common stock. This action should make the stock more attractive to a wider range of investors, thereby enhancing the stock's liquidity and trading volume. Details regarding the split are included in this morning's release. At this point, I would like Tom to provide a detailed review of our first quarter financial performance, and then I will update you on our strategy and outlook. Tom?

Thanks, Chris. My comments today and all references to earnings per share are EPS on a fully-diluted basis. For the 2006 first quarter ended March 31, 2006, we reported net earnings of $0.47 per diluted share, an increase of 21% compared with $0.39 per diluted share in the 2005 first quarter. The 2006 earnings include $0.02 per diluted share for the non-cash expense, non-cash expensing of stock options in accordance with our adoption of FAS 123. Consolidated net sales for the quarter totaled 135.5 million, up 8% from the 2005 first quarter total of 126 million. Unfavorable foreign currency exchange effects reduced net sales approximately 2% in the quarter. The increase in 2006 first-quarter net sales resulted primarily from strong volume gains across all of our businesses, as Chris just noted. Price increases only accounted for approximately 3% of the quarter's sales gain.

In North America, first quarter net sales rose 8.9% to 90.1 million. Contributing to the 2006 first quarter growth in North America was higher sales volumes for equipment, services, parts and consumables.

In Europe, sales for the year's first quarter totaled 32.3 million, up 4.9% compared with the 2005 first quarter. Revenues rose due to increase demand for existing and new products, such as our T-Series scrubbers and Ready Space carpet care offerings. We're pleased to report especially strong sales in France which is a key growth market for Tennant. The volume growth more than offset a significant negative foreign currency exchange effect which reduced 2006 first quarter net sales in Europe by roughly 9%.

In our other international markets, net sales for the year's first quarter totaled 13.1 million, up 4.8% compared to 2005 first quarter. Unfavorable foreign currency exchange effects reduced net sales approximately 4% in the quarter. Korea and Southeast Asia were particularly strong sales markets for us.

Gross margin on a worldwide basis was 41.9% for the first quarter of 2006 compared with 42.9% reported in 2005. Gross profit margins were unfavorably impacted by the effects of foreign currency translation and the mix of products sold during the respective periods. Higher material and transportation costs were more than offset by the benefit of selling price increases between periods.

We noted in our year-end conference call that we expect to experience challenges in our gross margins this year, but that we anticipate offsetting margin declines with lower selling and administrative expenses as a percent of sales. Selling and administrative expenses totaled 33.3% of sales in the first quarter, down from 34.4% in the year-ago period. On a dollar basis, selling and administrative expenses for the first quarter totaled 45.1 million, up from 43.4 million in the 2005 first quarter.

We spent approximately 400,000 in the first quarter on China and the footprint consolidation. For the quarter, our total selling and administrative expenses were up just 3.9% on 8% revenue growth. As in the proceeding quarters, a major factor in the rise is higher performance-based incentive compensation costs. The increase in this area results from our significantly improved economic profit performance and our costs for performance shares which have substantially replaced stock options in our performance-based compensation system.

Components making up the balance of the increase in SG&A expenses were as follows -- one, inflationary influences in areas such as compensation and higher fuel cost for our sales and service vehicles; two, impact from the adoption of FAS 123; and last of all, increases in other selling and service expense.

Our R&D spending in the first quarter of 2006 totaled 5 million, up from 4.5 million in the 2005 first quarter. R&D spending at 3.7% of net sales was consistent both with the range we had previously forecasted and its historical levels as a percent of net sales. Our operating profit for this year’s first quarter totaled 6.7 million, up 10% compared to 2005 first quarter profit of 6.1 million. Operating margin for the first quarter was 4.9% of net sales compared with 4.8% in the first quarter of last year. Operating profit included 3030,000 for the adoption of FAS 123 as previously mentioned, and approximately $400,000 for China and footprint consolidation initiative. Excluding the impact of these two items, operating profit would have been 7.4 million, or 5.5% of net sales. Please recall that our objective over the next three to five years is to achieve an operating profit margin of 9.5%, and we feel we are making nice progress towards that goal today.

Tennant's tax rate in the quarter was 38.4% compared with 39% in the first quarter of last year. The decrease results from the mix of earnings by country compared with the first quarter of 2005.

Now I'd like to turn to the balance sheet. We continue to maintain a very strong overall financial position. Our inventories are substantially lower due to lean initiatives. The quarter end inventories totaled 53.6 million, down from 59.2 at the end of the first quarter of 2005. FIFO inventory days on hand were 90 at the end of the 2006 first quarter versus 103 in the first quarter last year. Net receivables at quarter end totaled 95.5 million, up from 89.8 million at the end of 2005 first quarter, which was actually in line with our revenue growth. Accounts receivable days outstanding were 61 at the end of the quarter, unchanged versus the prior year period.

Cash flows related to operating activities swung from 1.1 million utilized to 3.1 million provided. The Company had 39 million in cash and cash equivalents, which was down slightly from year end, but up significantly from 11.3 million at the end of the first quarter a year ago. Debt to total capital declined to 1.9% from 2.3% at the end of the 2005 first quarter.

Now I would like to turn to our expectations for 2006. Overall, our outlook remains unchanged. We anticipate earnings per diluted share to range from $2.45 to $2.75. This includes approximately $0.09 to $0.11 per diluted share of stock compensation expense as a result of the adoption of FAS 123. Our guidance also includes approximately 26 million pretax, or $0.35 per diluted share of expenses -- 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 a 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 saving from lean and other initiatives.

Excluding the impact of our China footprint initiatives, we anticipate 2006 diluted earnings per share to range from $2.80 to $3.10. 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, Tennant anticipates selling its Maple Grove, Minnesota facility. While we cannot estimate the exact impact of selling the facility in 2006 results because of the uncertainty of the transaction price and timing, we do anticipate a substantial gain on the sale. With that, I would like to hand the call back to Chris for an update on our strategy and progress.

Thanks, Tom. Again, we are very pleased with our continued growth in the first quarter on top of the Company's record results in 2005, and I am also very excited about our momentum and our future prospects.

Last quarter, I outlined the five corporate priorities that we were pursuing in order to further strengthen our top and bottom line performance. We're making steady progress in all areas. I will give you a brief update on each.

First, our China initiative, which consists of expanding our market coverage and establishing a manufacturing base there. As you will recall, in November 2005, we announced plans to establish a manufacturing plant in Shanghai. This facility gives us a foothold in China's growing marketplace. It also fits with our global strategy to enhance operational efficiencies and manufacture products close to our customers. Already, we've completed construction of our China manufacturing facility and our top management team in China is substantially in place. Now we are preparing to bring the facility online. We expect production at our China plant will begin in the second half of 2006, as planned. At this point, we are very pleased with how quickly our expansion into China is progressing. We have a great team working on this effort.

Initially, the China facility will walk-behind floor scrubbers and sweepers for sale into the Chinese and other Asian markets. Our products will be sold in China, primarily through a network of independent distributors.

A second corporate priority is building a global low-cost sourcing platform. This dovetails with our China strategy. We see tremendous opportunity to strengthen Tennant's profitability through a low-cost, high-quality global procurement strategy. Our China facility will enable us to broaden our global sourcing capabilities and improve our margins.

To lead and champion this important initiative, we are currently engaged in an international search for a Vice President of Global Procurement. We hope to fill this position by this summer.

A third priority is building a lean enterprise. We remain in the early stages of implementing lean manufacturing initiatives. This requires building quality into and taking waste out of everything we do. We will begin to reap the benefits of our lean initiatives over the next year or two as we introduce more efficiently designed machines and common product platforms. Our first platform designed product family is scheduled to be launched in 2007.

I am happy to announce that on March 20, we hired Thomas [Broccoli] as our new Vice President of North American manufacturing. Tom has vast lean manufacturing experience, as well as an outstanding operations background. He joined us from Illinois-based Case-New Holland, and before that, General Electric.

Our fourth corporate priority is continuous process improvements. This is an ongoing effort to provide superior customer service, become more efficient, better employ automation, and as a result, lower Tennant's operating costs. One of our key process improvement initiatives in 2006 is the deployment of Service Link in Europe which automatically and electronically dispatches our field service technicians and feeds our customer response. We have already implemented Service Link in the United States, which has enhanced our repair order processing and service and created better inventory management to control costs.

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 planned significant product launches in the second half of 2006 for all market segments.

We are particularly excited about the new products we will introduce this year for the industrial market, Tennant's historical stronghold. These will be our first new products launched for industrial applications in six years.

And, we are committed to further investment in advanced product development to generate future growth. We are starting to partner with outside companies to capitalize on new and innovative technologies. Among the areas of current exploration are how to, one, and reduce and eventually eliminate chemicals in many cleaning applications; two, cut down water and energy usage in our cleaning processes; three, displace manual cleaning tasks with simple but efficient automation; and four, leverage communication and information technology to improve customer productivity, enhance asset management and lower service costs.

All of these areas of exploration are consistent with our vision of helping to create a cleaner and safer world, and our long-term goal of becoming an environmental cleaning solutions company. Tennant's focus on delivering innovative product and service solutions to the market, along with our industry-leading service capabilities bodes well for our future competitiveness.

In a highly fragmented industry, Tennant holds a leading but still relatively small share of the $5 billion global market. We believe that we have a significant opportunity to increase our share, particularly through further expansion into underpenetrated international markets. As such, we will be hiring a Vice President of International to lead and champion this effort. We expect the executive to be on board by this fall.

Tennant remains very well positioned to achieve our top and bottom line performance objectives. Due to the combination of our China expansion project, our global lean manufacturing and footprint rationalization initiatives, continued traction from new products, our expanding market coverage and our ongoing emphasis on increasing operating efficiencies, I remain very excited about Tennant's future.

So at this point, we would now like to open up the call to any questions, so operator?

(Operator Instructions). Seaver Wang.

Just have a few questions, the first one being about the product mix. Can you give us a little bit more detail about product mix for the quarter? And then when you introduce the new industrial products in the second half and how that's going to affect the product mix?

I will take that. In the first quarter, we did extremely well in our outdoor products and in service, both of which have lower margins than our weighted average margin for the entire product line. So that is the mix issue in the first quarter.

In the second half, when we launched these new industrial application products, they are high-margin products, which has always traditionally been the case in that part of our product line. And they should actually help our margin picture going forward.

So it will have an immediate positive impact in the second half or the third quarter?

Assuming we meet our sales goals on those products, they will, yes.

Okay. And then can you give more detail for the breakout for the 3.6 million for the manufacturing, footprint rationalization and the China expenses per quarter maybe?

We haven't given any of the quarterly breakouts of that. What we can say is that, out of the 3.6 million pretax, a high percentage of that is related to China, roughly around the $3 million range. The balance of it is related to footprint. And as you can see, it's somewhat back-end loaded as we didn't see a lot of those expenses comes through in the first quarter. But we remain on track to incur the 3.6 that we've talked about for the year.

Okay. And my last question, kind of give us some kind of guidance for what we can expect for the tax rates to be for the next quarter? Because it tends to jump around a little bit from quarter to quarter, I'm just trying to figure that out a little bit better.

We would expect our tax rate to remain in the range that we saw in the first quarter. Obviously, it depends on what we call mix of earnings, depending on what legal entity or country that we get those profits from. But as we sit here today, we would expect the tax rate to be similar to what we saw in the first quarter.

Thank you very much.

Andrea Sharkey.

Seaver asked most of the question I was going to ask, but just a couple. What do you expect your CapEx to be for the full year?

We are still thinking it's going to be in the $23 to $28 million range, Andrea.

The only other thing I'm thinking about is, it seems like steel prices might be kind of creeping up again, and maybe just kind of get your thoughts. I know in '04, that was an issue for you guys and getting the price increases out to cover that took a little while. I just wanted to get your thoughts on where you see steel going and how you're looking at that going forward.

We, like everybody else, are concerned about commodity price increases, oil and steel, and we watch them extremely carefully. In 2004, we actually took a steel surcharge because the price jumped so much. We would prefer not to do that because it's a little disruptive and not really appreciated with our customers. But I think we will look at it, and if we feel that commodity costs get to a point that they are at an unsustainable level and we have to take some action in our pricing, we're prepared again to institute a surcharge at some point this year. But right now, we do not have any plans to do so.

Okay. So at the level -- if they stay at the level that they're at now, commodity prices, do you guys feel pretty comfortable that it won't be squeezing your margins?

I will comment on that, Andrea. We remain committed to the fact that we intend to have gross margin expansion as we move forward. So at current levels, we still believe we can accomplish that.

Okay, great. I think those are the only questions I have. Thank you guys.

Thank you.

Thank you. At this time, we're showing no further questions. (Operator Instructions). Sir, at this time, I'm showing no further questions.

Okay, well then why don't I just conclude with some closing remarks. We want to thank you for taking time out today to join us and for your questions.

In our 2005 annual report, which hopefully most of you have seen and read, our theme was delivering visible results. We mean visible results through our financial performance and our products. In the 2006 first quarter, we posted strong sales and earnings growth. Tennant's innovative technologies are making a noticeable difference to our customers' environments, making them safer, healthier and cleaner.

Also, we are on track to meet our top and bottom line performance goals this year. We expect that Tennant will outperform yet last year's record-breaking results and we look forward to keeping you posted on our progress. So thanks very much to all of you.

Thank you. That does conclude today's conference call. Thank you all for joining. You may disconnect at this time.