Tennant Co (TNC) 2006 Q2 法說會逐字稿

Thank you for participating in Tennant Company's second-quarter teleconference. All lines have been placed on listen-only until the question-and-answer session. Following the question-and-answer session, please remain online for closing remarks from Tennant.

Beginning today's meeting is your host, Mr. Tom Paulson, Vice President and Chief Financial Officer. Mr. Paulson, you may begin.

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

Our agenda for this morning is to review Tennant's performance during the quarter and our outlook for the remainder of this year. After that, we will open up the call for 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 risks and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties 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 the risks and uncertainties that may affect our results.

Our news release was issued this morning via BusinessWire and is also posted in the investor section of our Web site at TennantCompany.com.

At this time, I will turn the call over to Chris.

Thank you, Tom, and good morning, everyone, and welcome to our second-quarter earnings conference call.

Let me start by saying that we are very pleased with the Company's continued growth in the second quarter, which produced record quarterly earnings. Combined with our results last quarter, Tennant has had a very strong first-half performance. As a result, we're raising our full-year guidance, which Tom will review with you in a few minutes.

Our second quarter was a continuation of our success last quarter in many ways. We saw further sales gains across all of our businesses and achieved record sales in North America. Further, we expect continued long-term momentum as our strategic plans to drive top and bottom line performance remain in the early stages. We are excited about the progress we're making. I will update you on some of the highlights after Tom reviews our financials.

Thanks, Chris.

In my comments today, all references to earnings per share are to ETF on a fully diluted basis. In addition, all earnings per share data have been adjusted to reflect the two-for-one stock split effected July 26, 2006. With this stock split and the exercise of options, Tennant now has 18.9 million fully diluted shares outstanding, versus a split-adjusted 18.1 million last year. You should be aware that with our increased shares outstanding, earnings are reduced by $0.03 per share on a post-split basis.

For the 2006 second quarter ended June 30, 2006, we reported net earnings of $0.48 per diluted share, an increase of 30% compared with $0.37 per diluted share in the 2005 second quarter. The 2006 earnings include $0.01 per diluted share for the non-cash expense of stock options in accordance with the adoption of FAS 123. Year-to-date, net earnings per diluted share totaled $0.72, up 29% from $0.56 per share in 2005. The 2006 first-half earnings include $0.02 per share for the non-cash expense of stock options.

Consolidated net sales for the quarter totaled 151 million, up 10.1% from 2005's 137.1 million. The sales gain was driven by higher equipment volume growth in all of the Company's geographic areas, including record sales in North America, as Chris previously noted. Price increases also contributed as we had the full benefit of increases that took effect in March. Year-to-date, consolidated net sales increased 8.9% to 286.4 million with favorable foreign currency exchange effects reducing 2006 net sales in the first six months by approximately 1%.

In North America, second-quarter net sales rose 9.3% to 101.1 million. Contributing to our growth in North America was higher sales volume for equipment, service, parts and consumables, as well as price increases. In particular, sales of equipment for industrial applications sold through our direct sales channel and national accounts channel generated most of the growth. For the first six months, net sales in North America increased 9% to 191.1 million. Favorable foreign currency exchange effects added approximately 1% to net sales for both the second quarter and first half of 2006.

In Europe, second-quarter sales totaled 35.1 million, up 14.3% compared to the prior-year quarter. Contributing to the growth in Europe was higher equipment volumes as well as increased service, parts and consumables due to expand market coverage. France and Italy reported especially strong sales, and these are key growth markets for Tennant. There was virtually no foreign currency exchange impact on sales in Europe for the quarter. Year-to-date net sales in Europe grew 9.8% to 67.4 million compared with the prior-year period. Unfavorable foreign currency exchange effects lowered net sales by about 5% in Europe for the first half of 2006.

In our other international markets, net sales for the second quarter totaled 14.8 million, up 6.5% compared to the prior-year quarter. Unfavorable foreign currency exchange effects reduced net sales approximately 2%. Year-to-date net sales in other international markets totaled 27.9 million, a 5.7% increase versus the first half of 2005. Unfavorable foreign currency exchange effects lowered net sales by approximately 3% in other international markets in the first half of 2006.

Our gross margin for the 2006 second quarter was up 1 full percentage point to 43.6% compared to 42.6% in the same quarter last year. Gross profit margin also improved from 41.9% in the 2006 first quarter. Higher material and transportation costs and unfavorable foreign currency exchange effects on purchase materials were more than offset by price increases and operating efficiencies. Material price increases haven't been as high as we expected so far this year, but we do anticipate some rise in material costs in the second half.

For the first six months of 2006, the gross profit margin was 42.8% compared to 42.7% in the first half of last year. Selling and administrative expenses for the 2006 second quarter totaled 47.6 million, up 10.4% versus 43.1 million in the 2005 second quarter. While the increase was higher than we would like, selling and administrative expenses as a percent of net sales were 31.5% in the second quarter, which is consistent with the comparable quarter last year. There will be variations quarter-to-quarter, but we expect we can bring the S&A growth rate down in the back half of the year.

The increase in S&A expenses during the 2006 second quarter was due in part to higher performance-based incentive compensation expense, including recognition of stock option expense due to FAS 123, as previously mentioned. Higher healthcare costs also contributed as medical claims return to a more normalized level compared to the prior-year quarter. Further, we saw general inflationary increases, such as compensation and higher fuel costs for our sales and service fleet vehicles, as well as additional costs to support our strategic initiatives, including expansion in China and expanding the Company's global market coverage.

Our R&D spending in the second quarter of 2006 totaled 5.6 million, up 4.5 million -- up from 4.5 million in the 2005 second quarter. R&D spending at 3.7% of net sales was within the Company's stated range.

Our operating profit for this year's second quarter total 12.6 million, up 16.7% compared with 2005's second-quarter profit of 10.8 million. Operating profit benefited from the revenue growth in the quarter and manufacturing efficiencies. For the year-to-date, Tennant has spent approximately 1 million pretax or $0.04 per diluted share on its previously disclosed China strategy and global footprint consolidation.

Operating margin for the second quarter of 2006 was 8.3%; it improved from 7.9% in the second quarter last year. As we've said, our objective over the next three to five years is to achieve an operating margin of 9.5%. We continue to make progress towards this goal.

Tennant Company's tax rate in the quarter was 31.8% compared with 37.9% in the prior-year period. The Company recorded a one-time tax benefit in the second quarter of 2006 due to a state tax refund.

Now, turning to the balance sheet, overall, we continue to maintain a strong financial position. Inventories continue to decrease due to our lean initiatives. Even with the stronger sales gain at quarter end, inventories totaled 55.7 million, down from 56.4 million at the end of the 2005 second quarter. FIFO days inventory on hand were 84 at the end of the 2006 second quarter, versus 93 at quarter end last year.

Net receivables at quarter end totaled 106.9 million, up from 89.4 million at the end of 2005 second quarter, due to the timing of shipments. Accounts Receivable days outstanding were 61 at the end of the quarter, unchanged versus the prior-year period. The Company's cash and cash equivalents nearly doubled to 42.4 million compared to 22.3 million at the end of the 2005 first half. Debt-to-total capital is 2.1% at June 30, 2006 versus 1.7% at the end of the 2005 second quarter.

With that, I'd like to hand the call back to Chris for an update on our strategy and progress.

Thanks, Tom.

As you'll recall, our continued growth in the second quarter and first half of this year comes on top of last year's record results. Our improved top and bottom-line performance demonstrates the success we have begun to achieve with new products, expanding our markets, and leveraging our cost structure. We believe there is more to come.

In order to capitalize on our opportunities to generate further revenue growth and create greater efficiencies, we remain focused on implementing five corporate priorities. We are continuing to make 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 -- our entry into China is proceeding at a rapid pace. It was less than a year ago when we first announced that we planned to establish a manufacturing plant in Shanghai. Today, production at our China plant is already up and running. We expect to begin generating commercial quantities this month. 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. Initially, the China facility is making walk-behind floor scrubbers and sweepers for sale into the China market and also into other Asian markets. We also plan to build some products in China for sale in North America. Overall, we've made good progress in building our China organization and expanding distribution. The ramp-up of this facility has exceeded our expectations at nearly every step along the way, and I want to congratulate the great team we have working on this effort.

A second corporate priority is building a global, low-cost sourcing platform. Again, this dovetails with our China strategy. The goal here is to strengthen Tennant's profitability through a low-cost, 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 recently hired Steve [Ulve] as Vice President of Global Sourcing. Steve has an extensive background in this area. He joined us from IMI Cornelius, where he served as Executive Vice President of Supply Chain Management. Before that, he was with Caterpillar paving products, where he was responsible for the worldwide procurement strategy for paving products. Here at Tennant, Stephen is the chief architect of our long-term global sourcing strategy. We are pleased to have him onboard and since his arrival, we've established a new strategic procurement plan. Among our key strategies are the consolidation of sourcing in North America and Europe, and mitigation of inflationary price increases. Our efforts in these areas include establishing a preferred supplier list and refining our global sourcing process, among other initiatives. We anticipate realizing substantial savings through global sourcing.

Building a lean enterprise is another strategic initiative. We are in the early stages of leveraging our efficiency and profitability through the implementation of lean manufacturing principles, including our global footprint consolidation. Tom Brockley, our Vice President of Manufacturing who joined us just a few months ago, is off to a great start leading these efforts. We expect to gain increasing benefits of our lean initiatives over the next year or two. Already, we've seen a reduction in inventories as a result of this effort, as Tom noted. Workflow improvements are being instituted as new assembly lines are set up to accommodate new products and facility consolidations.

Our fourth corporate priority is continuous process improvement. This is an ongoing effort to provide superior customer service, become more efficient, better employ automation, and again, lower Tennant's operating costs. This initiative is on track, and we are seeking ways to further improve our customer service going forward. We can always get better.

In addition to leveraging efficiencies and lowering costs, we are sharply focused on generating revenue growth across all our businesses. We have made headway during the first half of the year, and we expect our growth momentum to continue through the second half as well, fueled by continued product innovation, services and market expansion.

Our new product pipeline remains robust. In the second quarter, we launched our innovative new M20 product in North America, which is our largest market. This is the industry's first combined scrubber and sweeper all in one integrated package. The M20 offers a dramatically lower total cost of ownership and initial reaction has been very positive. We are excited about this product's potential. We anticipate that sales of the M20 will ramp up this quarter.

We also have plans for several significant new product launches in the second half of this year across all of our market segments. For industrial applications, we will launch a follow-up product to the M20. For commercial applications, we plan to expand our ReadySpace carpet cleaning product line and the T series floor scrubber line, both of which have been outstanding performers for Tennant since their introduction in late 2004.

We've also identified outdoor street cleaning, especially city street cleaning in Europe, as a growth opportunity for Tennant. As a result, we announced in July the acquisition of Hofmans Machinefabriek, a $7 million outdoor equipment manufacturer, to support our growth goals in Europe. This acquisition complements our current suite of products in the European market. Additionally, Hofmans was an attractive acquisition because we believe its small, compact units for city street cleaning have global growth potential that fit our growth objectives.

Conversely, we announced plans during the quarter to discontinue production of the Centurion, which is a chassis-mounted street sweeper. We will do that by year-end. Although we believe this product offered customers superior performance, the Centurion was not a global product and lacked the potential to become one. We determined that we could not gain a leading market position in the chassis-mounted street sweeping segment without investing in the development of a full suite of complementary products. Such an investment would have taken resources away from other alternatives we are pursuing which we believe have greater potential. The decision to discontinue this product will not have a material impact on our revenue or profitability.

With our focus on profitable growth, we are also seeking ways to expand in international markets. We believe we have growth opportunities in many emerging and underpenetrated international markets. To lead and champion our international expansion, we will be hiring a Vice President of International and expect to announce this executive very soon.

We continue to believe that we are well positioned to achieve our top-line 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.

Now, I will turn it over to Tom to review our higher guidance for 2006. Tom?

Thanks, Chris.

Based on the Company's strong performance in the first six months of 2006, we are raising our outlook for the year. We now anticipate 2006 full-year earnings per diluted share on a post-split basis to range from $1.30 to $1.42, including $0.03 to $0.05 per diluted share for option expense as a result of the adoption of FAS 123 and approximately $0.03 per diluted share for integration costs related to the July acquisition of Hofmans. This outlook also includes approximately 2.8 million or $0.12 per diluted share of expense related to the Company's previously disclosed China expansion and global manufacturing footprint rationalization initiative. This is a decrease from the Company's previous estimate of 3.6 million pretax or $0.17 per diluted share for the China expansion/footprint rationalization initiative, due chiefly to an overall reduction in China expansion costs resulting from tight expense management, coupled with the deferral of certain expenses into 2007. Excluding the impact of our China and footprint initiatives, we anticipate 2006 diluted earnings per share to range from $1.42 to $1.54. This compares to $1.26 of diluted earnings per share in 2005, or an increase of 13% to 22%.

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

Although we don't give quarterly guidance, we anticipate that earnings growth in the second half will not be as strong as what we experienced in the first half. Please keep in mind that both our third quarter and fourth quarter in 2005 were very strong quarters, so our comparable numbers will be higher. We also expect inflation-driven material cost increases and acceleration of spending on our China and footprint rationalization initiatives in the second half.

At this point, we'd like to open up the call to any questions.

Melissa?

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Andrea Sharkey, Sidoti.

Thank you. Just a quick question on the tax rate -- I know you said that it was due to a kind of a one-time item you had at lower tax rate, so would you say the first quarter, you know, 38% tax rate is more -- is what you expect for the rest of the year?

That's certainly a much better indication than the second quarter of what we will see in the future.

Okay, great. I guess, just kind of talking about what you said expecting the second half to be a little bit slower, is that anything relative to demand? Are you seeing anything kind of slowing in the second half or is that just more driven by costs, you know, expenses going up?

You know, as we look at it, I mean we certainly are -- it gives us a little pause to be cautious as we hear about the economy and listen to other people talk about it. The reality of it is, as far as seeing any impact on our business to date, we are not seeing any impact at all from a demand standpoint. But we are being cautious as we look forward. And the other element that I talked about is we do expect to see some cost increases in the back part of the year, but no impact today.

Okay, great. I guess some of those costs are I would assume steel-related and petroleum-related products, things like that. Is that correct?

True. I mean, it's really fuel-based and all key metals. I mean, we are seeing -- it's pretty well documented, the level of increases that people are seeing. As I mentioned, we slightly outperformed our expectations in the back half but do expect to continue to see pressure in the back half of the year. (multiple speakers)

(multiple speakers) -- exceeded our expectations in the front -- (multiple speakers).

(multiple speakers) -- in the front half, I'm sorry.

Right. Sure, sure. I guess in terms of -- I lost my train of thought here. I guess let's talk about China a little bit. I guess I'm kind of curious. Obviously, it's great that your expenses are turning out to be lower than what you had anticipated. Kind of two questions on that is, one, what is the acceleration in the second half from? Then the second part of that was, in the press release, you mentioned that some of the expenses were being deferred into '07. So I was wondering if you could talk about what's being deferred into '07 and how large an impact that might be in into '07 expenses and costs?

Yes, I will take that, Andrea. I mean, it might not be a great way to characterize that as an acceleration in the back half. It's probably a better way to describe it would be that we are seeing some of the expenses that we'd assumed would happen in the front half happening in the back half. In turn, we are seeing some expenses being deferred into next year. We will be prepared to give a much broader perspective on what we're going to see next year from a China standpoint in our next conference call. But I think the most important take-away from a China standpoint is we are extremely pleased with what we've seen to date, and I think Chris commented on that pretty extensively.

I guess could you maybe talk specifically about, you know, what are these expenses? I mean obviously I would assume a lot of it -- that I was thinking of getting the machinery and the equipment in there to actually build the product. If you are producing already, then I would assume that those kind of expenses are already in there. So what are these expenses that are kind of coming forward? Is that more on the SG&A line and getting salespeople in there or -- (multiple speakers)?

Well, there's really two other elements to things you mentioned. One is, I mean, there's certainly some startup-related expenses also. As you're starting to produce, you're going to clearly have incremental costs that you normally wouldn't have on an ongoing basis. The other component is, to date, we've hired around 30 people and we will continue to higher further people in the back half of the year. So you know, it's really, as you put infrastructure in place from an asset and people standpoint with very limited revenue, you know we're what we would characterize as one-time expenses upfront.

Okay, sure. Then in terms of revenue, you said that you are producing -- I'm assuming that you really don't see any revenue contribution this quarter. I guess when would you expect to start to see revenue from China hit your income? Would that happen in the third quarter or maybe not until fourth quarter or have any kind of impact?

Well, I will take that. This is Chris. You know, we are already selling China, but the products we sell in China currently, we import from either Europe or North America and you now at relatively high price points that have limited our ability to penetrate some of the more price-sensitive segments of the market. So what we're doing this month is we are starting to build commercial quantities of a walk-behind sweeper and walk-behind scrubber for the China market, locally produced at the right price point. We think that's when we're really going to start accelerating sales and get access to parts of the market that we have not been able to yet. It also will enable us I think to build a broader distribution network to a lot of distributors that are interested in Tennant but are waiting for the right products to be available for them to jump on our bandwagon and support us in the marketplace. That, too, will help fuel our revenue growth. So, a lot of that's going to happen, I think, starting in the fourth quarter and then will accelerate through 2007.

Okay, great. Sounds like a very big opportunity for you guys over there. Just to clarify, I think you've said in the past it's about a $200 million market. Is that correct?

In our estimate, you know, both the outdoor and the indoor cleaning market is about $200 million. The majority of that right now is in the outdoor market, and that's why the Hofmans acquisition, for example, is so interesting, in that many Chinese cities are taking environmental concerns very seriously, and they're spending a lot more time in terms of cleaning their cities, especially in advance of the Olympics and the World Expo that are upcoming events. So the Hofmans products are -- fit that need very, very well. We haven't had -- (indiscernible) -- has done that to date, so that's another area where we think we can also generate increased sales going forward.

Then sorry to take so much of your time. I have two quick more questions. One is, Tom, could you tell me how much of the revenue growth this year came from price increases?

We have not disclosed that precisely.

Okay. Then second last final question is the M20, you guys said you have gotten a lot of good response from that. Did you break out or could you give me a sense of how much that might have contributed to revenue growth in this quarter? Was it not that significant yet or --?

Not material. I think we can report more actually on that in the next quarter. Really, the second quarter was just the ramp-up, getting the orders I think what you're going to see in the third and fourth quarter as we actually start delivering the equipment and generating revenue from it. But I mean, early results are very promising.

Okay, great. Thank you so much for your time.

Seaver Wang, Utendahl Capital Partners.

A quick question on product mix last quarter versus this quarter -- was there any change that might have helped out the gross margin? I'll let you answer that first.

There was some level of change in that we commented last quarter that one of the things that impacted our margin, comparable to the year before, was a higher level of our outdoor business, and that wasn't as prevalent in the second quarter. So, there was some mix shift that helped our gross margin as we look at the comparisons from this quarter to last.

We did have strong sales in the second quarter of our bigger riders into industrial applications, and as we have disclosed in the past, they have higher margins than the weighted average of our total portfolio.

Okay. A quick question on cash basically doubling from the amount last year -- what is the priority for cash usage? Is there any change or --?

Well, we're not really prepared to talk in details about that at the current time, Seaver. We will be commenting on that in further detail as we move forward.

Okay. Then the SG&A, you said that you could bring that down in the second half as a percentage of sales. Is that going to mostly come from just kind of just operating leverage or what is that coming from?

It's really going to come from tight management of our expense base. I mean, to be frank about it, we're not real pleased with our S&A performance on the second quarter. We've stated that we want to keep that growth, excluding incentive pay, to half of our revenue growth, and we didn't accomplish that in Q2. We're going to be more rigid in our management of those expenses in the back half of the year, because that is still our stated objective.

Beth Lilly, Woodland Partners.

Good morning, Chris and Tom. Say, I wanted to talk a little bit more about Hofmans. I know it was a small acquisition but there was an integration charge in the quarter of $0.03, which if you multiply -- I mean $0.03 a share -- and you multiply that by 18 million shares outstanding; that's about $0.5 million. Can you talk more about the purchase price? And I know you didn't say much publicly but can you provide a little more insight into the price you paid for that asset? Then I had one other question.

Let me clarify one piece of that and then I will let Chris comment further on it. I mean, it's actually $0.03 dilution in the back half of the year, so there was no -- I apologize for any confusion; there was no expense in the front half, so $0.03 dilution in the back.

We've not disclosed the purchase price yet and that's really a function of an agreement we have with the party that we purchased -- did the deal with. We will disclose that in our Q in the level of details that are required and which I think we go out on Tuesday or Wednesday next week. So, more to come on the purchase price but it's a 7 million revenue business, so you can make some pretty good guesses on what the purchase price might be.

So Tom, would that be -- so in your 8-K, that would fall into the purchases of property, plant and equipment, right, on your cash flow statements?

Yes.

Okay, so that 8.74 for the six months -- that number is in there?

No, because it was closed after the quarter was closed.

Okay, all right. So it's not in this -- it won't be -- it will be in this Q?

It will not be -- it will be disclosed from a purchase price standpoint in our Q that will go out next week, and there's actually (indiscernible) more than likely will be further details to come after that but we will disclose the absolute purchase price in the Q.

Okay. Then my other question is you've talked in the past about rolling out new commercial products I think in the coming quarters. Can you talk about where you are at with that and are there any new -- I think the last time we spoke, you talked about some commercial products being rolled out. Is that --?

Yes, and we did mention that in today and that is the follow-up to our first ReadySpace product which we launched in 2004. We have the second product coming to the market in the second half of this year; that's commercial products. Then our T series scrubbers are smaller both walk-behind and Micro-Rider scrubbers, and we have products that are extending that line as well, and that's all for commercial applications. Both ReadySpace and the T series and T series especially with [FAST] has been extremely successful, so this is building on that success, both in carpet and in hard floor.

It's interesting. In the quarter, the revenues were -- I mean, you know, that is very strong revenue growth, and that was all from the industrial side. Is that correct?

I mean, that's certainly a very important part of it, but I mean, if you look worldwide, we had strength in multiple geographies and multiple pieces of our business.

Yes, but your comment about the North American strength and I think Chris said in his prepared remarks that the industrial business generated most of the growth, right?

In North America, it was the primary component. It wasn't all of it but it was a big piece, and that was nice to see, given that that has traditionally been our sweet spot and you know, we've kind of been remiss in launching new product into that segment for a number of years now -- now the M20. I think what happens is you get the sales force really excited again in the industrial product line, knowing that new products are coming on board. I think we saw the initial impact of that in the second quarter.

Yes. Okay, wonderful. Thank you very much.

Zahid Siddique, Gabelli.

Good morning. Congratulations on a good, strong quarter. I had a few questions. First, I want to follow-up with what Beth mentioned on the commercial and industrial. What percentage, roughly speaking, of your revenue comes from industrial versus commercial?

We have not been disclosing that in recent times.

Okay. Just, when you look at the markets, there is some talk or at least some concern that the industrial activity may slow down as interest rates are going up and what not. So I'd just like to get a sense of how you feel where you are in the cycle, and how do you feel yourself next year or two years from now?

Well, right now, we're not seeing any indication that our key markets are slowing down. You know, there's some concern when you look at GDP growth being 5.6% in the first quarter dropping to 2.5% in the second quarter, but nothing that we see on the horizon indicates that we should see a slowdown in that part of the business. Now, we have traditionally been a late cycle company too though. I mean, that's worth noting.

The other thing that has happened is, you know, we talk about these machines being for industrial applications. We have increasingly, over time, started to sell our bigger equipment into our applications that are outside of our traditional manufacturing base. You know, you take a company like Costco, the wholesale warehouse company. You know, they buy a large number of those types of machines, and they would not be considered an industrial application and probably have a very different volatility, different growth trend than a manufacturing company would. So I think that has helped us as well.

But I guess, net/net, right now, we do not see any slowdown, or any evidence of it.

I would make a couple other comments there. I mean, if you do look at the back half of the year in relationship to our guidance change for the year and you account for the China spending and also the [Lucinar] acquisition, we are seeing a double-digit EPS growth in the back half. So, we continue to -- while we are being cautious, relative to the front half, we continue to still see growth that's our targeted type levels. As you look out into the future, you know we're not shying away from the ranges that we have provided around 5 to 9% revenue growth and double-digit EPS growth, so we don't want to give any indication at all that we are shying away from future expectations.

Okay, great. My second question relates to M&A. We saw the Hofmans acquisition but that really was a very small acquisition. With your cash and I guess the ability to lever up, are you looking -- and I guess your plans to grow internationally, are you looking for any larger acquisitions in the near or distant future?

Well, growth is one of our strategic imperatives, and we are actively looking at organic growth opportunities as well as acquisitions, big and small. You know, we will be very disciplined in terms of the prices that we pay and the return on invested capital is going to have to exceed our hurdle rates.

We have stated, in terms of the smaller acquisitions, that they help us expand our sales and service coverage in Europe, and we're also interested in buying into interesting new products that we think have global potential and that the Tennant system can leverage to a much greater extent and Hofmans fits into that.

We have a number of larger acquisitions that are on our radar screen; we don't divulge what those are but you know, we are actively at least looking in this area at this point in time.

Okay. Just one last question -- your CapEx for the year, is it roughly going to be around 25 million?

Yes, we've had a range of 23 to 28 and we're not moving from that range at the current time. We will provide some further details on that on the next call. As you can see, we are at somewhat above $8 million from a cash spending standpoint through the first six months.

Okay, thanks a lot.

Jim [Norris], Cook & Bieler.

I wondered if you could give me a little color on the balance sheet and specifically working capital management. I noticed that although inventories came in just fine, it looked like receivables were up. In fact, receivables were up 20% year-over-year, whereas sales were up only 10%. I wondered what was going on there. Is that an indication that maybe you had a lot of shipments late in the quarter?

Yes, let me give you -- I can give you a little bit of color flavor on that, Jim. One is it is very much timing-related. I mean, if you looked at the skew of our quarter, we had an awfully broad acceleration in our shipments over the last five weeks or so in the quarter, so if you split the quarter in half, the back half of the quarter was stronger than the front half of the quarter.

But, two other key points -- one is we are not seeing anything that alarms us from a DSO trend standpoint. If you kind of normalize the quarter, it's really not a good comparison to look at -- at last quarter or a year-ago quarter. It's far better to look at our fourth quarter, which, you know, this was a huge quarter from a revenue standpoint, very similar to a fourth quarter, and our receivable balance as of the end of this quarter versus the fourth quarter was basically right in line. So if you compare to a more normal revenue quarter, we're not concerned that anything is going on there.

Okay. Then just in general, as you look forward, I know you have made some strides in the last few years in terms of working capital management, but I'm wondering if there's more opportunity there. Would you expect to see working capital as a percent of sale perhaps trend down over time?

Yes.

Anything specific -- (multiple speakers)?

We're not prepared to get into a lot of detail in that regard. I apologize, but I mean we really believe we are at the front end of the benefits from our lean initiative, and we think, as we continued to grow our revenue base, there's definitive opportunity to leverage our working capital, and it's going to be a significant focus area for us.

Okay. Then, I also wanted to follow-up a little bit on the questions about the acquisition pipeline. I understand that you guys -- legally you cannot say anything specific and I wouldn't expect you to. But could you just comment in general about perhaps the environment that you are seeing? Are the going rate of prices for these acquisitions -- are they becoming more reasonable? Is the Hofmans acquisition perhaps an indicator that maybe activity might be picking up for you guys?

I wouldn't read too much into the Hofmans deal, other than we're very happy with the transaction. We worked at it a long time and we have high expectations and think the economics will be nice on it. But I couldn't use that as an indicator to say that the market has changed. I mean, I would say, in general, that prices are -- continue to be a little rich right now would be the indications that we're getting. And you know, we're going to be disciplined about it. We're going to be serious about doing transactions and using our balance sheet, but we're going to be very disciplined on the economics we're going to expect out of anything that we do.

Okay. Then one last question -- you mentioned that you are discontinuing the Centurion product. Am I correct? This is the same product that was launched with great fanfare and great success about three years ago?

Yes, it was launched with great fanfare, and I think it was more like 4.5 years ago, 5 years ago. You know, this is Monday morning quarterbacking, but quite frankly, if we go back, we probably should never have launched this product. While the Centurion in and of itself is very high-performance machine, you can't launched into a new segment where you don't have a reputation and expect to become a significant market player with one product. There was really no plans for follow-up beyond the Centurion, and we recognized that, to compete effectively, we would need to build a suite of products, complementary products. But when we looked at that, they fell very low on our priority list, in terms of opportunities, financially attractive opportunities that we have around the globe. I say the globe, but that's the other important point. I don't think we understood, at that time, that the Centurion was going to be a North America-only product because it is not relevant to any other market around the world as far as we could tell. We're trying to build global businesses to the extent that we can.

You know, this is a case where we made -- this is a great product, and there's a lot of emotional attachment to this product at Tennant, but maintaining it in the portfolio was not the right thing to do strategically or financially, and we as a management team took the tough decision to shut it down.

Okay. My recollection is that, initially, you got a lot of great orders and were stealing market share because it was a definite step-up technologically that you leapfrog the competition. Is it correct to assume, then, that the competition caught up and that when they caught up, then your initial sales tailed off pretty fast? Is that what happened?

Well, you know, sales haven't tailed off that fast. I mean, they've stabilized and the product remained relevant, and I still think it's the best-performing product out there. Has competition caught up? Sure, they've taken a look at what we've done. They've tried to work around our patents and come up with substitutes. But really, the issue was we could not compete, especially in the municipal government segment, with one product. They need a fleet for different applications, and they want a one-stop shop and they could get that from some of our competitors, especially Elgin, and they couldn't get it from us. That was a competitive disadvantage.

Okay. I assume that you guys are going to continue to support the products that are already out in the field?

Yes, we have an obligation to support for an extended period of time.

Okay, thanks, guys.

Kevin [Sonnet], [RK] Capital.

Thanks. You mentioned that you weren't pleased with the spending on the SG&A line. Can you just give a little more color? What areas came in above plan there?

You know, a lot of it is inflationary related and incentive related, etc., so some of it is -- you can make -- you can talk around the fact that it's difficult to take action in short periods of time against some of those pieces. But you know, it's just an area that we need to be far more focused against and ensure that we're taking very specific actions to control the expenses relative to our targeted goal, which is to grow it at half the percent of our revenue. We acknowledge that we're not going to be able to do that in each and every quarter, and this quarter got -- maybe we're being a little tough on ourselves. This quarter got a little bit away from where we would like it to be, and we're just going to pay a lot closer attention. Part of that is looking at discretionary spending -- travel, etc. In tougher inflationary times, it warrants being tighter on expenses. So, it's no monumental change; it's just an area that we need to focus against a little more diligently.

(indiscernible) this is just one quarter because, in the first quarter, we did achieve the goal. And what we're saying is that we're going to strive to get back to achieving the goal of half the rate of sales in the second half as well. But also, all of you have to realize that we are a company in transition, and we have a lot of moving parts right now as we move from the old business model to the new business model. I think you may periodically see a little bit of a blip, like you did in the second quarter. But I think, increasingly, there are going to be fewer of those blips and were going to get back to a very disciplined approach to growing SG&A at half the rate of sales.

I think you mentioned earlier your goal is to growing at half the rate of sales and I understand it won't be every quarter but on a long-term basis. I think you mentioned that excludes incentive pay, so I'm curious just roughly what portion of the overall 45-50 million a quarter is incentive pay.

We have not historically disclosed that, so I'd be reluctant to do that at this point.

How do we measure the progress toward your goal without knowing roughly what percentage is incentive pay that could grow with sales versus the other portion that should grow at half the rate over time?

Our intent would be we're going to need to do a better job of disclosing that as we go forward to ensure that we're making progress like you guys would expect. So, we're just not prepared to break that out at the current time. But we will take that under advisement; it's a very good point.

Okay. I think, last quarter, you mentioned you got 3% of your growth from price increases. I'm just curious what percent came from price this quarter and if you could just talk to that kind of generally, the timing of the price increases. Is the environment still conducive to allow you to get a few percent of price each year, in your opinion?

Yes, I think we talk what the relative level of price increase was on a percentage basis last quarter. The timing of that was Europe would have been in January and North America was in February. We did not disclose the absolute dollar amount of that and we are hesitant to get in and quantify that for competitive reasons as we look into this quarter.

Okay, but you still, in the back half, should get the benefits -- (multiple speakers)?

Yes, what we are seeing from a pricing standpoint I think is an important point is it's sticking. I mean, we took the price and we have been able to hold it. Our intent is, you know, we will -- we don't intend to take further pricing actions this year but if costs go the wrong direction, honest it's something we will always evaluate. We're going to look at the economics of that decision, but as a general rule, we prefer to take it in the first quarter of the year and just make sure that it holds on until the following year.

Okay, okay. Two more if I could? You mentioned earlier the strength on the industrial side. I'm just curious about the opportunity to take market share in both the commercial and the industrial segment. I think, just given your later entry into the commercial side of the business, I'm imagining you have a better opportunity to take market share globally there. But I wonder if you can just comment a little bit in both segments on your opportunity to grow faster than the market and take share from some weaker players.

You know, you assume that we are -- we have for a number of quarters now grown faster than the market. Our estimate is that the market grows at the rate of GDP, so we have been growing substantially above that. We do have much higher market shares in industrial, but I think, with these new product launches -- we have a number of them coming out this year and over the next couple of years as well -- that we should be able to take some market share in industrial. But the real opportunity is in commercial, because the commercial business on a global basis is bigger and significantly bigger than industrial. We still have a very small share, because we are relatively new to it. It's only recently that we've had right products -- starting to have the right products to compete effectively in commercial applications. So hospitality, retail, education, healthcare and markets like that are real opportunities for us, both from a product standpoint but also in terms of the way we go to market.

Are those commercial end markets growing a bit little more quickly than the industrial end markets?

You know, I don't know if we have -- the thing is, in our industry, it's very hard to get definitive information. So it would be my judgment, from gleaning a lot of -- (technical difficulty) -- information is that they are growing faster.

Okay. Just lastly, as you mentioned, there are a lot of moving parts here so I just want to make sure I understand the guidance today as it relates to the guidance last quarter. If I kind of adjust for a number of different things, such as, last quarter, you didn't have the $0.03 hit, obviously, for the integration of Hofmans -- (multiple speakers).

Correct.

(multiple speakers) -- July. But then if I also think about the one-time tax benefit this quarter, as well as the China expansion coming in a little bit ahead of plan, it looks to me like the guidance is about the same as it was last quarter, taking out (indiscernible) China, taking out the tax benefit, maybe even taking out -- it looks like your estimate, your estimation for option expense might be $0.01 less now. Is that about right?

It's nominally up. I think that, without getting into all the details of the pieces, that if you looked at the high side, it's slightly up and we've lowered the bottom side, so we've really tightened the range in both of those areas.

Okay. I will follow-up with you on that.

I'm showing no further questions at this time.

If there are no further questions, let me just thank you for your time today and your questions. We are excited about Tennant's strong performance through the first half of this year, and we have high expectations for fiscal 2006. We expect that Tennant will outperform last year's record-breaking results. Finally, we look forward to keeping you posted on our progress. Thanks a lot.

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