Tennant Co (TNC) 2007 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. (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.

Thanks. Good morning, everyone, and welcome to Tennant Company's second quarter 2007 earnings conference call. I'm Tom Paulson, Vice President and Chief Financial Officer of Tennant Company. With me on the call today as usual 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 description of the risks and uncertainties that may affect our results.

Our news release was issued this morning via business wire and is also posted in the Investor section of our website at tennantco.com. At this time I'll turn the call over to Chris.

Thank you, Tom, and good morning all. We are very pleased to report record second quarter sales in earnings today. We also achieved a 20% operating profit improvement, which led to our 11th consecutive quarter of double-digit earnings gains. In fact, we reached an all-time high for quarterly earnings per share. This was accomplished against a tough comparison, as we posted a very strong quarter a year ago. Again contributing to Tennant's outstanding performance were increased sales in all of the Company's geographic markets. Based on our strong first-half results, we are raising our full year earnings guidance range, as we'll discuss in a few minutes.

Now, I'll let Tom review our financials and detail, and after that I will cover the highlights of the quarter. Tom?

Thanks, Chris. In my comments today all references to earnings per share are on a fully diluted basis. For the 2007 second quarter ended June 30, 2007, we reported net earnings of $0.55 per diluted share, an increase of 15% compared with $0.48 per diluted share in the 2006 second quarter. Consolidated net sales for the quarter totaled $165.2 million, up 9.4% from strong consolidated net sales of $151 million in the year-ago quarter. The Company's higher sales were fueled by volume gains in all of our geographic regions as well as price increases. Favorable foreign currency exchange effects added approximately 2% to consolidated net sales for the quarter.

For the year-to-date, consolidated net sales grew 11.8% with favorable foreign currency exchange effects adding approximately 3% to net sales in the first six months. Net earnings for the six month ended June 30, 2007 increased 20% to $16.3 million or $0.85 per diluted share compared to the same period in 2006. Net earnings in the second quarter and first six months of 2007 were fueled by growth in net sales and operating profit improvements partially offset by a higher tax rate.

In North America, second quarter net sales rose 6.6% to $107.8 million, primarily due to volume growth for new products, higher national accounts sales and price increases. For the first six months of 2007, net sales in North America increased 7% to $204.4 million. Foreign currency exchange effects on the Company's North American sales were negligible for the 2007 second quarter and the first half.

In Europe, second quarter sales increased 14% to $40 million. Again, our Hofmans acquisition was a strong contributor, adding approximately 7% to sales growth in Europe during the quarter. While organic growth in Europe declined slightly, we believe this is isolated to the second quarter. In addition, we had shipped a large order in Italy in the quarter of 2006 and did not have a comparable order in 2007. Favorable foreign currency exchange effects added approximately 8% to sales in Europe for the quarter. For the year-to-date, net sales in Europe increased 20.2% to $81 million due to volume growth primarily from the continued success of new products. The Hofman acquisition contributed approximately 8% to sales growth year-to-date. Favorable foreign currency exchange effects added approximately 9% to net sales in Europe for the first half of 2007.

In our other international business, net sales for the second quarter rose 17.6% to $17.4 million versus the prior year quarter. Favorable foreign currency exchange effects benefited net sales by approximately 3% in the quarter. Volume growth in the Asia-Pacific and Latin American regions contributed to higher other and international sales in addition to new products. Year-to-date, other international grew 25.1% to $34.9 million versus the first half of 2006. Foreign currency exchange effects added approximately 3% to net sales in other international markets in the first half of 2007.

Tennant's gross margin for the 2007 second quarter was 42.9% versus 43.6% in the same period last year. The decline was primarily due to costs associated with the Company's continued manufacturing footprint consolidation, China expansion and the integration of the Hofmans acquisition. Cost reduction initiatives and price increases were more than enough to offset higher material costs in the second quarter.

R&D spending in the second quarter totaled $5.7 million compared to $5.6 million in the 2006 quarter. R&D expense as a percent of net sales were 3.5% for the second quarter of 2007 compared to 3.7% in the comparable quarter last year. For the 2007 second quarter and six months we remain within our target of investing 3 to 4% of net sales annually on R&D.

Selling and administrative expenses for the 2007 second quarter totaled $50 million versus $47.6 million in the prior year quarter. On a percent of sales basis, selling and administrative expenses were 30.3% of sales, down from 31.5% of sales in the year-ago quarter. We are pleased with this improvement during the second quarter as we focus on lowering our selling and administrative expenses as a percent of sales.

As Chris noted, our second quarter operating profit was up 19.8% to $15.1 million compared to the 2006 second quarter. The increased operating profit stems from sales growth across all product categories and geographies. The quarter's operating profit include the China expansion and manufacturing footprint consolidation costs of $1.8 million pretax or $0.07 per diluted share.

On a percentage basis, we achieved a 9.1% operating margin, up from 8.3% in the second quarter of 2006. Year-to-date, our operating margin is 7.6%, up from 6.7% in the first half of last year. This includes China expansion and manufacturing footprint costs of $3 million pretax or $0.11 per diluted share versus the prior year period. As we previously stated, our objective is to reach an operating margin of 9.5% by the end of 2008. We remain confident we can attain this goal.

Tennant's tax rate in the second quarter was 36.3%, up from 31.8% in the prior year quarter. The increase in the effective tax rate between quarters is primarily due to the favorable impact on the 2006 tax rate from a onetime state tax refund that we received during the 2006 second quarter and the mix in expected full year taxable earnings by country. For the 2007 full year we continue to assume a tax rate of approximately 36%.

Now turning to the balance sheet. Net receivables at quarter end totaled $116.3 million, which is sequentially flat with the first quarter but up from $106.9 million at the end of -- of the 2006 second quarter, basically reflecting higher sales volumes.

Accounts receivable days outstanding remained unchanged at 61 at the end of the quarter versus the prior year period. Our inventories at quarter end totaled $61 million, up from $55.7 million in the prior year period. During the second quarter, FIFO days inventory on hand were 86 days compared to 84 days in the second quarter of 2006, primarily from increases in inventory levels at our foreign locations due to longer leadtimes and pipeline fill for new products.

Capital expenditures during the six months ending June 30, 2007 totaled $17.5 million and included investments related to our footprint consolidation, global expansion initiatives and new product development. We continue to anticipate full year capital spending in this year to be in the range we've stated previously of approximately 23 to $28 million.

Tennant's cash, cash equivalents and short-term investments totaled $32.9 million compared to $42.4 million in the prior year quarter. In June 2007, the Company entered into a $125 million senior unsecured revolving credit facility which expires in June 2012. This facility is available for general corporate purposes, working capital needs, acquisitions and share repurchases. Tennant also repurchased approximately 180,000 shares of its common stock during the second quarter under the Board-authorized 1.4 million share buyback program. Total cost of the shares repurchased was $5.8 million. For the 2007 first-half, we repurchased approximately 272,000 shares at a cost of $8.7 million.

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

Thanks, Tom. We continue to build on Tennant's growth momentum in the second quarter. As I mentioned earlier, we are very pleased to report another record quarterly performance and strong first-half results. 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.

Our new management team has been focused on executing our five strategic priorities to drive top and bottom line gains. To recap, our strategic priorities include leveraging Tennant's cost structure through continuous process improvement and operational excellence. On the growth side, we are focusing on introducing innovative new products, expanding our markets and developing future integrated solutions.

While we've made progress on all of these priorities, I want to highlight our efforts during the second quarter in a few areas. Operational excellence continues to be where our greatest opportunities lie to leverage our cost structure. When we think of operational excellence, we're including our people, culture and a wide range of global cost reduction initiatives. Focusing on our people for a moment, Don Westman, our new Vice President of Global Operations, has put in place two new managers in our North American plants, both of whom have strong lean manufacturing experience. With Don and these new plant managers, we are deepening our lean manufacturing skillset and the results on our excellence are starting to show.

In addition, due to our growth in Europe, we completed the consolidation and expansion of our European distribution center in Uden, the Netherlands during the second quarter. Today this facility is not only larger but we've introduced lean manufacturing practices that enable greater flexibility in the assembly line workflow, reduced stock levels and allow higher productivity with the same number of people. The enhanced facility will also improve the flow of materials through Tennant to our customers.

We've also moved production of Hofmans' machines into the expanded facility in Uden as part of integrating the Hofmans acquisition. You'll recall that Hofmans offers a compact street sweeper ideally suited to the European market. By consolidating the Hofmans production in Uden, we will be able to double our output of Hofmans products next year to help meet the growing demand. This move also further enables us to leverage our plant and logistics infrastructure. We expect the Hofmans integration will be completed by early 2008.

These are just some of the current activities underway to enhance our lean capabilities and operational excellence. The improvements we're making in Europe along with the footprint consolidation efforts in the US take us that much closer to becoming a much leaner organization.

Turning to the growth side of the equation, we are pleased with the response to our new products which helped drive second quarter sales across our geographic regions. In fact, 33% of equipment sales came from new products in the 2007 second quarter. Our first new products made in China for export were shipped to the United States and Europe in the second quarter. This is part of our global low cost sourcing strategy. We are now selling the Tennant T3E in Europe and the Nobles SS3 speed scrub in the United States. The T3E and the SS3 further extend our successful fast floor cleaning technology platform.

We will have one more new product to announce later in the year. As we've previously stated, we plan to introduce four to five new products in 2007 and we will attain that goal. Our new product pipeline remains robust and we anticipate offering an expanding number of environmentally friendly products and solutions in the future.

Market expansion is another area I'd like to highlight. Our efforts to capitalize on opportunities and grow more aggressively are producing results. We've repeatedly said that we face significant growth prospects outside of North America where our market share is lower than it is in the US. In order to more efficiently pursue international markets -- international expansion, we've put in place a new international management structure with greater focus on key geographies. As a result, we are now running the international business as three regional portfolios -- the Asia-Pacific region, the Europe/Middle East/Africa region, and the Latin America region. This allows management to communicate more easily within geographic time zones, for instance, and enhances accountability and collaboration. Again, the purpose of these initiatives is to continually improve our efficiency and leverage growth opportunities. And I believe our results demonstrate that we are having success.

There is one last highlight of the quarter that I'd like to mention. I am very pleased that Tennant Company has been included on the Domini 400 Social Index. The Index is comprised of 400 companies that demonstrate leadership in corporate social responsibility. We have worked hard to improve our environmental stewardship and set new environmentally friendly standards in our industry. We are very proud of this recognition.

Looking ahead, we continue to expect 5 to 9% organic sales growth in 2007. We are on track for another year of record sales and earnings despite continued expenses related to our China expansion and manufacturing footprint consolidation. We remain confident in our ability to maintain our growth 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'll turn it over to Tom to update you on our outlook for 2007. Tom?

Thanks, Chris. As a reminder, we provide annual but not quarterly guidance. Our 2007 outlook assumes that we will continue building on our success with further top and bottom line gains. Based on our strong performance in the first six months, we are raising our anticipated range of 2007 diluted earnings per share to between $1.77 and $1.85, up from our prior guidance range of $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 expense related to the Company's China expansion and manufacturing footprint consolidation initiative. This project is on schedule and we expect the footprint consolidation to be completed by the end of 2007.

As we've said before, we anticipate continued pressure on our gross margins due to the sustained material cost increases. We will remain focused on offsetting these increases through pricing actions and ongoing cost reduction initiatives as we did in the second quarter. Also as we've noted in the past in connection with the manufacturing footprint consolidation, Tennant expects to sell the Maple Grove, Minnesota facility. While the Company cannot estimate the impact of the sale on our results because of the uncertainty of the transaction price and timing, we do anticipate a substantial gain on the sale. The forecast to gain on this sale is not included in Tennant's earning guidance for 2007.

At this point, we'd like to open up the call to any questions. I'll turn it over to [Corey].

(OPERATOR INSTRUCTIONS) David Taylor, David P. Taylor and Company.

Thank you. Great quarter but I don't think you need to hear it from me. The market said it before me. My question focuses on your operating margin, your goals -- and your goals. You did 9.1% in the most recent quarter and your margins have been ramping up about 20 basis points a quarter sequentially on average over the last several quarters. Which suggests to me you're going to get to the 9.5% some time before the end of the year, perhaps in the first half of '08. Is it reasonable to expect a review of the operating margin goals in the next few quarters with perhaps a mind toward setting a higher bar?

A couple of comments on that, David. One thing I'd like to remind everybody is we feel very good about the quarter from the operating margin we hit. It was substantially above the prior year but I do want to remind people that on a first six-month basis or year-to-date basis we're at 7.6. So still below our targeted 9.5. We did comment going into the year that we would make more progress during the year for this 12 months than we did in the prior 12 months. We still expect to do that and do expect to see some continued modest improvement in the back half. And I think it is very fair that we will expect to give folks an update in either of the next two conference calls regarding our progress towards the 9.5%. So, I won't commit at this point that we will be able and prepared to do that at the next quarter, but some time before we finish this year we will give an update on our progress more specifically against the 9.5 (multiple speakers).

Great. Now when you say 9.5 by the end of '08, are you talking -- you're not talking about all four quarters?

No, we're talking about hitting that in the fourth quarter.

In the fourth quarter.

Right. The reason why we're being somewhat cautious about this is that the big move that we get from moving where we're at today to get to the 9.5 is the sourcing savings. And we're really honestly just starting to get that benefit. That's a really important part of the move to get to the 9.5 and we really want to see how we do in this back half of the year. That will give us a lot more conviction or the ability to say maybe we can pull that 9.5 forward. But we're just not prepared to do that yet.

Sure. Well, you've delivered everything you promised to me and I appreciate it.

Andrea Sharkey, Sidoti and Company.

Just kind of a follow up a little bit on what David was talking about. If I look at this particular quarter, if you kind of add back the expenses that you had for Maple Grove and China expansion, it would get me to a 10.2% operating margin in the quarter, which actually obviously exceeds this 9.5%. Is there something that you see next year in the first, second, third quarters that would preclude you from doing that again or that's keeping you guys from thinking that you can hit that 9.5% a year from now?

Well, I mean I think the key thing to remember is that quarter two is really a seasonally excellent quarter for us from an operating margin standpoint. If you look at last year, we were at 8.3 for the quarter and the year was at [6.7]. And so it is an unusually high quarter for us. And I would say I'd expect it to be -- if I was to look across the quarters next year -- I'd expect it to be one of the higher quarters again. It's just a key point to remember that it is a seasonally -- one of our seasonally high revenue points.

Sure. I guess that's kind of why I'm thinking the 9.5% by the end of the year that maybe you might hit that in the second quarter of next year and then maybe you'll drop down in the third quarter.

The key thing to remember there is when we hit that 9.5 we really want that to be a sustainable go forward operating margin number. We don't want it to be an aberration due to an unusually seasonally high given quarter or a great quarter just from a revenue standpoint. We want it to be an operating margin that we're going to adhere to quarter in and quarter out.

Okay, that makes sense, fair enough. Another question, just talking about material increases still being a bit of a headwind and something you guys are cautious on. Could you maybe just quantify or talk about in a little bit more detail which materials are giving you some trouble and how much you've seen those increase in this quarter and what the expectation might be going forward?

I'm not in that position to give you a lot of detail. Pat might be able to add a few pieces to this. But I mean the thing that is really -- we have seen some stabilization in areas like copper and aluminum. The commodity environment that's really given us fits is lead. And it's a significant hurt in our batteries and it is the one area that we don't see any slowdown. It just continues to go up. We're all frankly kind of surprised. We'd really hoped that we could see some leveling off of the commodity environment and there is stabilization. Lead is hurting us but there's still a lot of pressure on the cost side. We hope it goes the right direction soon but we're not going to count on it.

And keep in mind those commodities typically work their way through the supply chain. So if you would see, for instance, the copper and aluminum raw prices settling up, those increases still take some time to work through the supplier channel to us. So we have some delayed reaction to those cost increases.

Sure, that's fair. Also could you maybe -- I don't know if you've talked about it but lead, how much of a cost of -- what percentage of your cost of goods sold is attributable to lead?

We have not historically provided that.

But it is a big cost component in our battery-powered machines which is a fair amount of our volume that we sell.

Okay, and just curious if you -- I don't know if you can break it out at all but you've talked about the Hofmans integration, that having some impact on your cost in this quarter. And that's probably going to continue until early '08 when that's completed. Can you give us any sense of what the magnitude of that was?

Yes. If we looked at it in the quarter, if you combine Hofmans and Floorep -- which were the two deals we're in the process of integrating -- it's modestly dilutive, somewhere between a $0.01 and $0.02 negative impact. We should see some level of pickup in that regard. We think for the year between the two pieces we'll either be at breakeven or modestly dilutive. So we should see some modest pickup in the back half.

Okay. Just one last question and then I'll hop back in line. You guys have 1.1 million in miscellaneous income. What was that for?

There's two big pieces of that. The primary -- the biggest component is gains on our -- as we're pulling shares of our ESOP, their share price has accelerated. We recognize gains to the P&L as we do that. And the other piece is foreign exchange as gains and losses are carried through there now as a positive for us in the quarter. So those are the two biggest pieces.

Seaver Wang, Utendahl Capital Partners.

I'm just wondering if you can give an update on how much output China is producing now in terms of margins? I imagine that they're below the companywide margins. But just a little progress report there?

Well, Sever, we haven't disclosed what the volume coming out of our China facility is yet for competitive reasons. So all we've really said is that this year is the year we've ramped up. We've begun selling the machines that we produced in China in China and for the first time we've been exporting them to North America and to Europe. We expect that to accelerate. But it still is, in the greater scheme of things, immaterial to the overall results of Tennant.

I think once we get to a point where China becomes a material portion of our volume then we may have to change our perspective on how we communicate. But for now that's basically the information we're given.

Can you give a breakout for how it impacts cost of goods and expenses? Operating expenses?

It is a higher percentage of the 3.5 to $4 million that we're going to incur and we've incurred $3 million of that through the first half of the year and we believe it will be another $0.5 million to a $1 million the rest of the year. It is skewed more towards gross margin or cost of goods sold side but there is a component in our operating expense. We haven't provided a lot more detail than that. And I would say that -- I mean I think the key reason for the level of disclosure on the cost side of this is the 3.5 to $4 million hurt to the P&L this year will reverse itself next year. And we'll start getting a benefit from the footprint side and China should be in a situation where we are at breakeven or positive.

Rob Damron, 21st Century Equities.

Let's see, I wanted to talk about first of all, if you look at the 9.4% overall growth. What percentage was volume versus price increase?

We have not historically given precise pricing numbers in given quarters or years. What I can say is we've -- over the last few years we've been in the pricing range benefit at 2 to 3% and we remain within that range in the second quarter. It wasn't that quiet. We saw some acceleration in our pricing benefit as the pricing was taken later in the first quarter in North America. And we were within that historical range of 2 to 3% of benefit in the quarter.

Okay, and then just another question on Europe. The organic growth was slightly down there. I think you mentioned that there was a large onetime sale last year. Can you quantify how much that was and did you have anything like that going into Q3 or Q4 that we should be aware of?

Yes, we're not in a position for competitive reasons, we want to quantify the exact level. It was -- what I can say it was meaningful. And right now we -- the national account business and those big, big pieces of business coming through, it's hard to predict. We certainly hope we will have some big pieces of business like that come through in the back half of the year but we can't make any commitments.

Well, did you have any of those large orders in Q3 or Q4 last year?

Not in the second quarter. We did not in the second quarter this year.

How about Q3, Q4 of last year?

We did have some, yes.

And then just last question, of your $1.8 million of incremental costs this quarter, how is that broken out between cost of goods sold and SG&A expense?

Do you have a flavor for that, Pat?

The majority of the 1.8 impacted the gross margin line. Looking at a percent we'd probably say 60% gross margin, 40% S&A.

The split is generally run, I mean we've commented on that that it's definitely more skewed towards the gross margin side. And in general I'd say the split's about 70/30 but it does move around quarter to quarter.

Okay. All right, well, that's all I have. Thank you.

Peter Kenner, Tivoli Partners.

Good morning and congratulations on a good quarter. I'd like to know -- I know at one point in the past you talked about getting international foreign sales up to 50%, that was your goal. How are we doing in terms of achieving that and how far away are we from achieving that?

Well, we said we'd like to get it to 50/50 in the medium-term. So, the medium-term is usually considered a three to five-year period and obviously we'd like to do it sooner rather than later. Now remember, what we've done in Europe is we put new leadership in place. We brought in [Carl Hausier] from G.E. He's been onboard now for about eight months.

We are currently in the middle of our strategic planning process for the next three years and [Carl] is tasked with putting together the European and rest of the international business, a strategic plan. And we fully anticipate that it will call for much more aggressive growth than we've seen in the past. And it should allow us to achieve the 50/50 split in the medium-term. So I think that [Carl's] done -- he's off to a great start. But it takes time. As we've said, we've just reorganized the international business into three regions, which makes a lot of sense in terms of managing them on a day-to-day basis. He's reviewing his talent. I think you're going to see some changes in key positions across the business. From what I've seen so far the strategy is very, very sound and the potential is great. So, we have very high hopes for international business over the next three to five years.

I just one added dimension to that, Peter. I mean through the first half of the year we're at about 36% of our revenues coming from outside of North America. That's about 3 percentage points ahead of last year. And so we're making progress and I would say we're just seeing the front end of that acceleration to kind of give some credence to what Chris is saying. It really seems like a reasonable medium-term objective.

Good. And one other question. What -- do you plan to do just bolt-on acquisitions in the near future? Or would you do something larger if it came about?

We would -- we're going to be focused on smaller acquisitions but I mean -- we want to continue to emphasize our focus is going to be on organic growth. But we do have a robust acquisition roadmap in place. We are looking at transactions in multiple parts of the world but we will focus more on the organic side. You will never preclude doing a bigger transaction if it's the right thing for our shareholders but as a matter of where our emphasis is going to be, it's going to be on smaller acquisitions.

Great. Thank you very much.

David Taylor of David P. Taylor and Company.

Thank you. I have a couple of follow-up questions on previous questions that were asked. On the China question, you didn't want to quantify the numbers, I appreciate that. Could you talk qualitatively as to whether operations in China have met your expectations to date on operational efficiency and financial metrics, whatever you happen to have?

I'll comment on that and let Chris just jump in, David. We're very pleased with our progress in China. I mean, we want to emphasize that it remains a small part, a very small part of our overall operation. But you know we have --

But it's de novo so --

We brought a management team that's in place. I mean we are producing units that are going -- some coming back here supplying the China market. And very importantly, we have a sourcing team in place there that is an integral part of being able to achieve the global sourcing benefits that we have. So on multiple different fronts we're very pleased with the progress we're making in China.

Again, remember, from the time the Board approved the China facility, it was up and running within a year. Which I think for a company our size with no experience in the Chinese marketplace is pretty amazing. We now have the staff in China of 40 plus people led by [two ex-pats]. The fact that we're able to -- in the very early going -- produce equipment that are up to the quality specs required in Europe and the United States I think is a very, very good sign. And also, the majority of the parts components going into the machines produced in China are being sourced in China as well. So, I think all of that bodes very well for the future as we ramp this operation up.

Great. On the question that the analyst from Fidelity asked about, lead. You don't want to talk about the dollar numbers, okay. Can you give us some flavor for the poundage or tonnage of lead contained in your product on an annual basis?

We couldn't comment there, David. Sorry.

Okay. I have a question of my own and that involves the dividend. I know you have a very long history of dividend growth and I noted just before this conference call that in the middle of August last year, the Board voted an increase to the dividend. Is the August Board meeting the normal time in which the dividend is reviewed historically?

We were always reviewing our dividend but if you go back and you look at the history, we've really centered around the fact that the absolute level of dividends would increase in a 12 month period versus the prior 12 month period. And so there's -- pretty consistently we have ensured that our dividends overall are going up year-to-year. But we'll constantly look at our absolute level of dividend. We're also looking at our yield. So, it's something we'll continually evaluate quarter to quarter.

Okay, well, again I'm not asking for a quantitative answer or anything of that sort. But historically, is the August Board meeting the time in which the dividend is changed?

David, it's historically been roughly every six quarters if you kind of went back and looked at history. And also on a staggered approach. But we certainly -- we aren't committing to that at this point but I mean it's something we'll continually evaluate.

Okay, well, some companies have a particular time of year but you're saying you don't.

We're saying it's been about -- I mean, if you looked at history it's been every six quarters is when we've taken it.

I appreciate it. Thank you.

Seaver Wang, Utendahl Capital Partners.

I just have a follow-up question to Andrea's. On the miscellaneous income, the ESOP, do you expect any more of that -- the contribution in the third and fourth quarter? Can you give us an idea of that?

We would expect it to be pretty consistent with what we've seen in the first half of the year. If you looked at our overall other income we'd expect it to be kind of mirror what would happen in the first half of the year.

It's obviously dependent on the stock price.

That does it.

Kevin Sonich, RK Capital.

Regarding the discussion that you were just having about the international piece of the business as a percent of the total, were you suggesting that looking out three to five years you'd hope that to be closer to half the overall mix?

Yes.

And the US business has been performing quite nicely and we're on the, I think, front end of some nice product introductions. Would you expect the US business or the North American business to continue to grow I guess at least within that 5 to 9% range as well?

You know, at the lower end of that range, I mean -- the way we've kind of characterized it, if you broke apart the three kind of broader geographies is that the US has been more, if you looked at it historically, it's been more in the 4 to 6% range or call it the lower end of the 5 to 9. Europe has been more in the kind of right centered in that 5 to 9 and our other international business is intended to grow above the 9% level. So, we don't anticipate -- we certainly see some continued acceleration in the other international markets but we don't see any reason that Europe or North America are going to look any differently going forward than they look today.

Let me hold your feet to the fire here if I can just a little bit on the call. If the US business grows toward the lower end of that range from today's starting point, just taking a pretty general stab at the rest of the year, the other business outside the US by my math would have to grow at 15 to 20% to even get there in five years. So even giving us some room on the three to five. I guess I'm curious firstly with the Europe business, if you could touch on that just a little bit in terms of why you're confident that the weakness, the little bit of weakness we saw there last quarter and the weakness we saw this quarter outside of lapping that large order from Italy is just an isolated event and why we'd expect to see better growth there. And then if you're really shooting for that 15% plus kind of growth outside the US over a multi-year period, is that even without acquisitions? Or do we need acquisitions to get us to that 50/50 mix?

We would need some level of acquisition in order to get the 50/50. I mean particularly if you look at the shorter end of that time frame. And we've acknowledged that our emphasis on the acquisition side is not that there wouldn't be transactions that might happen in North America; there's more of a focus outside of North America. But in order to get to the 50/50, we're anticipating that there would be more potential development activity that would come outside of North America.

Can you just maybe address why you're confident that we see a pickup in the business in Europe?

Well, as we said, the softness in the second quarter was due to I think a general industry softness it seemed. I mean we weren't the only ones that experienced slowing equipment sales. It seems our competitors did too. And the deal that we did in Italy was pretty significant. I mean, if you look at the European management team and the forecast they have for the rest of the year, they're very committed to getting back on the growth trend that we have communicated to you.

And we have high confidence in [Carl Hausier's] leadership and the people that he has now reporting to him. So I think we have the strategies in place. We clearly have the products in place. And as long as we execute, we don't feel there's any reason we can't get back up to the organic growth levels in kind of the 5 to 7% range for Europe here.

Okay, great. And then just since you did mention acquisitions, you've got that nice credit facility now and a great balance sheet. What are you seeing out there in terms of opportunities?

We feel really good about the progress we made putting together an acquisition roadmap. I mean historically, it wasn't that Tennant didn't -- that we didn't look at transactions but we were far more tactical in our approach. We've really -- we've assessed a list of candidates. We're just being more proactive in our approach to it and we hope that bears some fruit to be able to do transactions that add value for the Corporation. And we just feel we're taking a more disciplined strategic approach versus being tactical and opportunistic.

And there are plenty of opportunities out there to focus on?

We believe there's -- yes, there's definitely opportunities.

Okay, great.

And we believe that if you look at the roadmap we've put together, I mean the opportunities fall across multiple geographies as well as multiple different product or business ideas as well. So we're pretty excited.

(OPERATOR INSTRUCTIONS) Beth Lilly, Gabelli.

I wanted to spend a minute and just talk about your global sourcing initiative because you've talked about that going forward as being a big priority in bringing a lot of cost savings in. Can you talk about where you are in the rollout of that? I think the number is 8% of your products are bought in low cost regions -- or your raw material, so to speak -- and you're looking to grow that number to a higher number. Can you kind of talk about where you are in the rollout?

What we've said is 70% of our cost of goods come from parts and components that are purchased from outside vendors. And that only 8% were purchased in low cost sourcing countries today so we had a huge opportunity. So where we are is we've brought in a VP of Global Procurement, Steve [Olvy], who has done a terrific job in terms of putting a strategy together, identifying the low hanging fruit in the priority areas that we need to go after. One of the things we found early on was that we weren't structured right to go after this. So we now have cross functional teams on a global basis who are assigned to the various product or cost categories. And we are in the execution phase. And what we've said is, is that we now believe we are well positioned to start generating some of those returns. And in the second half of this year we should start to see them flow through.

Tom mentioned earlier that if we were to give an update on our 9.5% operating margin we'd do so probably after we have confidence that the initiatives that we are currently executing against on global procurement are beginning to pay dividends. And when we have that confidence, you know, we think there is upside.

Okay, so, Chris, just so I can understand. You're starting to roll it out in the second half of this year?

Yes. I mean the thing is it takes time to get everything set up, to find the suppliers to negotiate with suppliers, to get the specifications fixed, et cetera, et cetera, et cetera. So we've done a lot of that work. A lot of the upfront work has been done and we're now on the execution phase and actually going live with existing and new suppliers under hopefully very different terms.

Okay. That's very helpful. Thank you.

At this time we have no further questions.

Okay, if there are no further questions, let me just thank you for your time today and for your questions as always. We are very excited about the progress we have made so far in 2007. And we believe that that growth momentum will continue through the rest of the year and beyond. And we look forward to keeping you posted on our progress. So thank you all.