Tennant Co (TNC) 2007 Q1 法說會逐字稿

Welcome and thank you for participating in Tennant Company's first-quarter teleconference.

All lines have been placed on listen-only until the question-and-answer session. (OPERATOR INSTRUCTIONS). Following the question-and-answer session, please remain online for closing remarks from Tennant. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

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

Good morning, everyone, and welcome to Tennant Company's first-quarter 2007 earnings conference call. I'm Tom Paulson, Vice President and Chief Financial Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO, and Pat O'Neill, our Treasurer.

This morning, we will review Tennant's performance during the quarter and provide our outlook for 2007. 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 those 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 TennantCO.com.

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

Thank you, Tom, and good morning, all.

We are very pleased to report record first-quarter net sales and net earnings today. This was our tenth consecutive quarter of double-digit earnings gains.

Contributing to Tennant's outstanding performance were increased sales in all of the Company's geographic markets, with particularly strong international results. We are confident that Tennant is well positioned to deliver further sustained profitable growth across our businesses.

I also want to say how pleased I am that Tennant was recently named by Forbes as one of the Top 100 Most Trustworthy Companies. I personally believe that being good stewards in all areas of our business is critically important to our success, and I want to commend everyone at Tennant for their role in making this recognition possible.

At this point, I will let Tom review our financials in detail. After that, I will cover the highlights of the quarter. Tom?

Thanks, Chris.

In my comments today, all reference to earnings per share are on a fully diluted basis.

For the 2007 first quarter ended March 31, 2007, we reported net earnings of $0.31 per diluted share, an increase of 29% compared with $0.24 per diluted share in 2006 first quarter.

Consolidated net sales for the quarter totaled 155.1 million, up 14.5% from strong, consolidated net sales of 135.5 million in the year-ago quarter. The Company's higher sales were fueled by volume increases in all our geographic regions and the Hofmans acquisition also contributed approximately 2% to consolidated net sales.

Favorable foreign currency exchange effects added approximately 3% to net sales for the quarter. In North America, first-quarter net sales rose 7.2% to 96.6 million, a new first-quarter record. Volume growth was driven by new products and foreign currency exchange effects were negligible in the quarter.

In Europe, our growth momentum continued with sales in the first quarter rising 26.9% to 41 million. As in recent quarters, our Hofmans acquisition was a strong contributor, adding approximately 9% to sales growth in Europe during the quarter. New products further fueled Tennant's growth in this geographic market, and favorable foreign currency exchange effects added approximately 11% to sales in Europe.

In our other international business, net sales for the first quarter rose 33.6% to 17.5 million versus the prior-year quarter. Organic growth was the primary driver for all other international sales. Our sales in Australia and China were especially strong, due to the shipment of a large order in Australia and expanded market coverage in China. Favorable foreign currency exchange effects in our Other International segment benefited net sales by approximately 2%.

Tennant's gross profit margin for the 2007 first quarter was 41.1% versus 41.9% in the same quarter a year ago, as cost reduction initiatives and price increases were not enough to offset higher material costs. Expenses associated with our manufacturing footprint consolidation and integration of the Hofmans acquisition also contributed to lower margins in the quarter. A more favorable mix of products sold in the 2007 first quarter helped offset the decline.

I do want to point out that our margins came in flat sequentially with the fourth quarter, which is particularly noteworthy, given that Tennant's first-quarter net sales are 12 million lower than in the seasonally higher fourth quarter.

R&D spending in the first quarter of 2007 totaled 5.7 million, compared with 5 million in the 2006 first quarter. R&D expenses as a percent of net sales remain the same at 3.7% for the first quarter of 2007 versus the comparable quarter last year. This is in line with our target of investing 3 to 4% of net sales annually on R&D.

Selling and administrative expenses for the first quarter totaled 48.9 million versus 45.1 million in the prior-year quarter. On a percent-of-sales basis, selling and administrative expenses were 31.5% of sales, down from 33.3% in the year-ago quarter. The improvement of the percent of sales was driven by sales leverage, as growth in sales outpaced the increase of selling and administrative costs despite the unfavorable impact of FX and the acquisitions of Hofmans and Floorep.

Our first-quarter operating profit was up 37% to 9.2 million compared to the 2006 first quarter. The increased operating profit stems from sales growth across all product categories and geographies. The quarter's operating profit includes the China expansion and manufacturing footprint consolidation cost of 1.1 million, pretax, or $0.04 per diluted share. Footprint consolidation accounted for the majority of expense and is a key part of our long-term strategy to reduce the Company's manufacturing costs.

We continue to make good progress on our operating margin in the first quarter, which improved to 5.9%, up from 4.9% in the first quarter of 2006. As we previously stated, our objective is to reach an operating profit margin of 9.5% by the end of 2008.

In the first quarter of 2007, as required, Tennant adopted FIN 48, Accounting for Uncertainty in Income Taxes. The new standard clarifies the accounting (inaudible) certain tax policies. The effect of adopting this new standard was a net increase to stockholders equity of roughly $200,000. As we expected and had communicated previously, Tennant's tax rate in the first quarter is 36%, compared with 38% in the prior-year quarter. The decrease in the effective tax rate is primarily related to the mix in expected full-year taxable earnings by country, and we continue to assume that our tax rate will be approximately 36% for the full year.

Now, turning to the balance sheet, net receivables at quarter end totaled 117.5 million compared with 95.5 million at the end of the 2006 first quarter. The difference is attributable to the timing of sales volume as the higher proportion of sales were generated in the later part of the quarter during 2007 than in 2006.

Accounts Receivable Days Outstanding remained fairly consistent at 62 at the end of the quarter, versus the prior-year period.

Our inventories at quarter end totaled 61.8 million, up from 53.6 million in the prior-year period. FIFO days inventory on hand were 93 days, compared to 90 days in the first quarter of last year.

We recognize the need to improve our working capital management. We are putting processes and metrics in place to address this and will more aggressively manage inventories and receivables going forward. The lean initiatives we have underway will help improve inventory management overall.

Our capital expenditures in the first quarter totaled 7.9 million, versus 4.2 million in the comparable 2006 period. The increase is chiefly due to expanding our European distribution center and the manufacturing footprint consolidation. As we've stated before, we expect our investment in 2007 to be between 23 million and 28 million, primarily related to our global expansion initiatives and footprint consolidation.

The Company's cash, cash equivalents and short-term investments totaled 24.1 million, compared to 39 million in the prior-year quarter. The change is many related to the timing of working capital needs, and we expect to return to normal cash flows in future quarters.

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

Thanks, Tom.

As I mentioned earlier, we are excited with the Company's strong first-quarter performance and our continued momentum. As in past quarters, the Company's revenues and profitability grew as a result of the introduction of successful new products, market expansion, and improving operational efficiency.

With our new management team and strategic plans in place, we are focused on executing on our five corporate priorities in order to drive further topline and bottom-line gains. As you know, our five corporate priorities include leveraging Tennant's cost structure through continuous process improvement and operational excellence. On the growth side, we are focused on introducing innovative new products, expanding our markets, and developing future integrated solutions.

I will briefly touch on a few highlights for the quarter, which saw a continuation of our ongoing efforts. In terms of process improvements, we are working to become better at sharing and accessing information company-wide. Our new global sales and operations planning process is an example of how we are aligning the business' financial plans with sales, production and inventory plans. The benefits of this effort include greater manufacturing efficiencies, faster delivery of goods and services, and importantly, as Tom mentioned, our efforts should provide the organization with better systems to manage our working capital. This is a priority.

Our process improvements are also generating substantial savings. You may recall that, in 2006, we rolled out portable laptop technology to our field service technicians in North America. That put all customer service and billing data online. The result is not only faster customer response but also faster billing cycles, which have improved from seven to ten days down to one to two days. That has led to over $600,000 in annual cost savings in North America alone. We are still in the process of implementing this technology globally, so we expect to achieve even greater cost savings ahead. This is just one example of our ongoing process improvements.

While still in the early stages, our operational excellence initiatives are beginning to gain traction. Let me give you an example. In the past, Tennant's products were all built on unique platforms that required separate, dedicated production lines. So, if you had six products, you needed six different manufacturing lines. Today, Tennant has a much different approach. We are designing products for manufacturing and assembly. This means we design product families that share the same platform and a significantly higher percentage of common parts. As a result, multiple machines can be assembled on the same manufacturing line. This is a major reason we will be able to reduce our manufacturing footprint by over 30% in Minneapolis.

Turning to the growth side of the equation, we are excited about the response to our new products, which helped drive sales in North America and Europe. The response was especially strong for our new Tennant T5 and Nobles Speed Scrub products for commercial applications. These were introduced in the second half of 2006 and further extend our successful, fast floor-cleaning technology platform. Notably, 30% of first-quarter equipment sales came from products that were introduced in the last three years.

We will have more new product news to share with you later in the year. We expect to introduce four to five new products weighted to introduction in the second half. Our new product pipeline remains robust, and we plan to offer an expanding number of environmentally friendly products and solutions in the future.

Our market expansion efforts continue to go well with significant opportunities remaining to grow and capture market share. Here is one highlight. The Hofmans Machinefabriek acquisition continues to exceed our expectations. As you will recall, the Hofmans line of compact, outdoor, street-cleaning products complements our current suite of products in the European market and, we believe, offers global growth potential. We are successfully expanding the Hofmans outdoor street sweepers into new markets, which contributed to strong growth in Europe. As a result, we are adding manufacturing capacity in Europe to meet demand for Hofmans' products, which have been stronger than anticipated.

Looking head, we expect 5 to 9% organic sales growth in 2007. We also anticipate another year of solid, double-digit earnings gains despite continued expenses related to our China expansion and manufacturing footprint consolidation. We remain confident in our ability to maintain our momentum and to further leverage operating efficiencies going forward. And, we also remain committed to attaining our goal of a 9.5% operating margin by the end of 2008.

Now, I will turn it over to Tom to add some specifics to our outlook for 2007. Tom?

Thanks, Chris. As a reminder, we provide annual but not quarterly guidance.

With the first quarter completed, we are maintaining our anticipated range of 2007 diluted earnings per share at $1.72 to $1.80. Our outlook includes approximately 3.5 million to 4 million pretax or $0.15 to $0.17 per diluted share of expenses related to the Company's China expansion and manufacturing footprint consolidation initiative. In addition, interest and other income are expected to be lower in 2007 than last year.

As we've said before, we expect continued pressure on our gross margins due to sustain material cost increases. Addition, the costs associated with our footprint consolidation efforts and China expansion, which are concentrated in the first three quarters, and the Hofmans integration during the year will also impact our 2007 gross margins. We do remain comfortable that we can offset these increases through pricing actions and ongoing cost-reduction initiatives.

We'd remind everyone that we face a difficult comparison to the second and third quarters of 2006. This is in part due to lapping of very strong performance in the second and third quarters, as well as the cost increases previously discussed. With that said, we remain comfortable with our full-year guidance.

In connection with the manufacturing footprint consolidation, we intend to continue to anticipate selling its Maple Grove, Minnesota facility. While the Company cannot estimate the impact of the sale on its results because of the uncertainty of the transaction price and timing, the Company does anticipate a substantial gain on the sale. The forecasted gain on the sale is not included in Tennant's earnings guidance for 2007.

At this point, I'd like to open up the call to any questions. I will turn it over to Lori.

Thank you. At this time, we are ready to begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Andrea Sharkey, Sidoti & Company.

Good morning, everyone. The first question would be on the international sales growth. It was very strong this quarter, and you highlighted that it was China and a large order in Australia. I was just wondering if you could maybe give a sense of how much was from Australia and how much was from China, just to give us an idea of I guess what is more sustainable going forward.

Well, we talk about international being strong; that's both Europe and the rest of our international businesses. Now, Europe is still the growth engine for international. The rest of international is only a $17.5 million business, so looking at 33% increase on a very small base. Australia and China still fall within that. So, I don't think that what we are seeing in Australia and China necessarily are usually material to our overall results. I think the more interesting development is the strength in our European business, which is really where we've been investing our time and our energy over the last three years, and it seems to be paying off. We are only now getting started, really, with the manufacturing facility and our sales and marketing efforts in China and the rest of international to try to grow that business more aggressively. So I think, longer-term, international outside of Europe has tremendous potential, but it's still very, very much early days.

Sure. I guess what I'm trying to get that is, you know, last quarter, you had about 17 million in sales into that other international region. This quarter, it was about 17.5. Is 17 million I guess a good sort of go-forward rate or do you think that might -- there's a couple of more lumpy items in there that it would be unfair to extrapolate 17 million (multiple speakers)?

Yes, we are really going to shy away at this time, Andrea, from giving revenue growth targets by geographical area. You know, we will continue to be very committed to the 5 to 9% organic range worldwide but as far as getting into specifics within geographical areas, we are going to steer away from that at the current time.

Okay, fair enough. Then, in terms of the expenses for Maple Grove and China, you know, you had 1.1 million this quarter and you commented it would be more heavily weighted I guess second and third quarter. Would you expect that the second-quarter amount is going to be extremely higher than the first-quarter, or is it going to be similar? I guess I'm just trying to figure out a good way to look at --.

I would expect the second and third quarter to be pretty similar to each other, and the fourth quarter would be quite nominal. You know, undoubtedly, there will be some level of spend that will dribble into Q4. We'd sure like to get it all done with in Q2 and Q3 but we probably won't, but it will be pretty evenly split.

Okay. Then I guess just looking at your margins overall, you know, 6% operating margin in the first quarter. You know, it's still relatively on the lower side I guess, going towards that 9.5% goal. Would it be fair to expect those margins to improve sequentially as the year progresses, as your initiatives kind of start to bear fruit?

The answer is yes. We would certainly like to see -- you know, we certainly expect to see sequential operating-margin improvement. As we have commented previously, though, we will see an acceleration in that improvement; it will be as we go into next year. But we do anticipate seeing levels of improvement as we go through Q2 through Q3 and Q4 this year and acceleration next year.

Okay, so there's bigger acceleration in '08?

Yes.

Okay. Then I guess just one final question and then I will let somebody else have a chance. You know, you keep talking about selling the Maple Grove facility and a large gain associated with that. I guess what do you think your plans would be for the gain that you would get from that sale? Would it be an acquisition, or you know, I guess what would be the plans for the cash?

General corporate needs -- I mean, we are not really ready to be any more specific than that. I mean, we are -- certainly continue to evaluate what we would do with our cash, and we are more serious right now about, you know, we are in the process of developing a more robust acquisition roadmap but we are not prepared to get specific at this point about precisely where the cash would go.

Okay, fair enough. Thanks a lot.

Seaver Wang, Utendahl Capital Partners.

A couple of questions -- (inaudible) can you quantify what the expenses were for the -- what the integration would be for the Hofmans acquisition? I think you alluded that it would continue into the second quarter.

Yes. If we look at what we think we will see for -- let me have that there, Pat (inaudible) grabbing it. We think it will be -- if we combined Hofmans and Floorep with the two pieces, it will be dilutive to us in '07. You know, I would say it's not going to be anywhere over $0.01 in a given quarter, so it's pretty modest for the year. But call it $0.03 to $0.04 for the year, roughly, as I look across both of those transactions.

Okay. Then you mentioned the price increases. Can you I guess quantify that and also kind of give us an idea of timing?

Yes, I will -- Chris might have something to add to this, but I mean, we have put our pricing in place. It's similar to previous years where we took pricing in Europe around the first of the year. Our pricing efforts really don't start kicking in in North America until around March 1. What we can say is, as I said in the comments, is we remain comfortable that we can offset the cost increases we are seeing with this pricing effort as we go forward in the quarters. We are not ready to give you any precise levels of increases but it's going to be similar to past years.

Okay, so it should be -- so basically the margins should stay fairly similar compared to the first quarter or is it year-over-year that you're --?

Similar to the first quarter.

Andrea Sharkey, Sidoti & Company.

Just one question I kind of forgot to touch on is that, looking at your end markets, just is there any trends that you are seeing, you know, any I guess stronger as the quarter progressed and looking at April? Are you seeing any trends, up or down, in terms of just the end-market strength?

The way we I think evaluate our end markets right now is that, across the board, it's pretty much neutral, right, it's stable. We have not seen a change in any of our key end markets. As we go forward in 2007, we expect that to be maintained.

Okay, so I guess, based on that, you would say maybe the growth that you expect to see in sales is really specific to your company, is driven by market-share gains, new products, better coverage of international region rather than being dependent necessarily on the end-market strength?

No. I think, today, we are much less dependent on end-market strength. It still influences us, but you are right; we have many more initiatives in the pipeline that we are executing against around the world, be it market expansion, new products, new business models going to market more effectively, etc. So I think we are executing better and the results show it.

I guess one follow-up -- on the new products that you mentioned that you are going to be introducing, there's four to five. Are they primarily kind of bolt-on or improvement on existing products, or will there be some really completely new type of product?

I think the products that we are launching this year I think will be extension of some of the technology platforms that we've launched in the last couple of years.

Okay. You know, one thing you mentioned about making manufacturing on the same platform -- are the products that you're introducing this year already designed that way? What about the ones that you introduced last year as well?

Right. We started this process with the products we introduced last year. So from that point on, that's the way we are designing every new product that we bring to market.

That's it. Thank you very much.

At this time, there are no further questions.

Okay. Well, thank you for your time today and for your questions. We at Tennant remain excited about a strong performance to date and our continued momentum in 2007, and we look forward to keeping you posted on our progress. Thank you all.

Thank you for participating on today's conference. The conference has concluded. Please disconnect at this time.