Tennant Co (TNC) 2007 Q3 法說會逐字稿

Thank you for participating in Tennant Company's the third-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.

If you have joined by phone today we would like to inform you that we will be showing a two-minute video during our call. This video may be viewed by logging onto our webcast at www.tennantco.com under About Investor Relations. Please select the option listen via phone view on Web. If you do not have computer access please remain on the line until it is completed at which time we will resume our conference call.

Today's conference is being recorded and 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. And Mr. Paulson, you may begin.

Thank you. Good morning everyone and welcome to Tennant Company's third-quarter 2007 earnings conference call. I am 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; Pat O'Neil, our Treasurer; and Karen Durant, our new Corporate Controller.

We're coordinating our call a bit differently today. And we are here in Orlando at ISSA, the cleaning industry's leading trade show to preview our brand new ech(2)o chemical-free cleaning technology. For a brief portion of Chris's presentation we will have slides and a two-minute video to demonstrate this new technology as just mentioned.

We encourage you to log onto our website at www.tennantco.com to view the slides and a Company video. If you are unable to do so our entire presentation will be available for replay about an hour after the live call.

We also will review Tennant's solid financial performance for the third quarter. After that we will open up the call for your questions. Before we begin please be advised 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.

Additionally, this conference call includes presentations of non-GAAP measures that include or exclude unusual or nonrecurring items. For each non-GAAP measure we will also provide the most directly comparable GAAP measure.

Management believes that the non-GAAP measures provide useful information to investors regarding the Company's results of operations and financial condition because they permit a more meaningful comparison and understanding of the Company's operating performance for the current, past or future periods. Management uses these non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of the comparative operating performance of the Company.

Our earnings release was issued this morning via business wire along with the news release announcing our new ech(2)o technology. Those releases are posted in the investor section of our website. You'll also find an online ech(2)o media kit posted to our homepage. We invite you to take a look at these materials.

So since we have a lot to cover today I will jump right into the financials after which I will turn the call over to Chris for a review of ech(2)o and an operational update. In my comments today all references to earnings per share are on a fully diluted basis.

For the third quarter ended September 30 2007, we are pleased to report record sales, earnings and EPS contributing to Tennant's outstanding performance for double-digit sales gains in each of the Company's geographic areas. We posted net earnings of $0.57 per diluted share, an increase of 36% compared to $0.42 per diluted share in the 2006 third quarter.

Earnings for the 2007 third quarter include a previously announced charge for restructuring our worldwide workforce tied to Tennant's operational excellence initiative. The Company's action impacted approximately 2% of our employee base. The restructuring charge totaled $1.7 million pretax or $0.06 per diluted share in the third quarter.

Also previously disclosed and included in the third-quarter earnings was a one-time tax benefit related to a reduction in the valuation reserves net of the impact of tax rate changes in foreign jurisdictions on deferred taxes. The net tax benefit was greater than originally announced in a September 26 2007 news release and totaled $3.6 million or $0.19 per diluted share. Together, the net effect of the restructuring charge and tax benefit was a positive $0.13 per diluted share in the 2007 third quarter.

Consolidated net sales for the quarter totaled $161.3 million, up 10.7% from $145.7 million in the year-ago quarter. The Company's higher sales were fueled by volume gains principally North America and other International as well as price increases in all geographies. Favorable foreign currency exchange effects added approximately 3% to consolidated net sales for the quarter.

For the year-to-date, consolidated net sales grew 11.5% with favorable foreign currency exchange effects adding approximately 3% to net sales in the first nine months. Net earnings for the first nine months of 2007 increased 27% to $27.3 million or $1.42 per diluted share compared to the same period in 2006.

Net earnings in the third quarter and first nine months of 2007 benefited from strong growth in net sales and operating improvements in addition to the net benefit of one-time items. North America had a great quarter. Third-quarter net sales rose 10.3% to $104.7 million primarily due to higher sales in our national accounts and through our distribution network driven by volume growth for new products. Price increases also contributed to growth in the quarter.

For the first nine months of 2007 net sales in North America increased 8% to $309 million. Foreign currency exchange effects on the Company's North American sales were negligible in both the 2007 third quarter and nine months.

In Europe, third-quarter sales increased 10.3% to $39.5 million. Favorable foreign currency exchange effects added approximately 8% to sales in Europe for the quarter. The Hofman outdoor product line continued to perform well contributing to organic growth. Gains were partially offset by lower sales in United Kingdom. We have hired a new country manager who is currently revamping the growth strategy for this business.

We will need to take deeper actions and adjust our go-to-market strategy to ensure organic growth in the UK. Other than the UK business, Europe is generally meeting our expectations.

For the year-to-date, net sales in Europe increased 16.8% to $120.5 million. Favorable foreign currency exchange effects added approximately 9% to net sales in Europe for the nine months of 2007. Also contributing to gains were sales of the Hofman product line and the price increases.

In our other International markets, net sales for the second quarter rose 14% to $17.1 million versus the prior-year quarter. Favorable foreign currency exchange effects benefited net sales by approximately 5%. The gains were driven by expanded market coverage in Brazil, volume growth in Australia and the Middle East and price increases in certain markets.

Year-to-date, other international sales grew 21.4% to $52.1 million versus the 2006 first nine months. Favorable foreign currency exchange effects added approximately 3% to net sales in other International markets in the first nine months of 2007.

Tennant's gross profit margin for the 2007 third quarter was 41.4% versus 41.6% in the same period last year. Margins were constrained by costs associated with the manufacturing footprint consolidation, China expansion and integrating the Hofmans acquisition but benefited from positive foreign currency effects.

Additionally cost reduction initiatives and price increases were not enough to offset higher costs of raw materials and certain purchased components, especially batteries. As part of our efforts to mitigate these higher material costs we're implementing a sales price surcharge in the fourth quarter on batteries and battery related products.

Gross profit margin for the 2007 first nine months was 41.8% versus 42.4% in the 2006 nine months. As we noted in the press release, concerning the cost pressures we've faced this year and the investments we've made in the business worldwide we're encouraged by our margin levels and we continue to focus on strategies to increase our gross margins.

R&D spending in the third quarter totaled $5.9 million compared with $5.5 million in the 2006 third quarter. R&D expenses as a percent of net sales were 3.7% for the third quarter of 2007 compared to 3.8% in the comparable quarter last year. For the 2007 third quarter and nine months we remained within our target of annually investing 3 to 4% of net sales and R&D.

Selling and administrative expenses for the third quarter including the restructuring charge totaled $50.9 million or 31.6% of sales versus $45.2 million or 31% of sales in the 2006 third quarter. Excluding the restructuring costs, selling and administrative expenses totaled $49.2 million or 30.5% of sales.

The $1.7 million restructuring charge primarily consists of severance payments, outplacement benefits and recruiting costs. Tennant disclosed that last month that approximately 60 positions would be restructured to better match skill sets and talent in evolving functional areas that are critical to successful execution of the Company's strategic priorities. As we announced in September, the total cost of the restructuring is estimated to be $2.5 million with $600,000 or $0.02 per diluted share expected in the fourth quarter 2007 and the remaining $200,00 or $0.01 per diluted share expected in the first quarter 2008.

Selling and administrative expenses for the nine months of 2007 were 31.1% down from 31.9% in the comparable period last year. The decrease as a percent of net sales for the nine months was primarily due to sales growing at a faster rate than expenses despite investments to support our growth initiatives.

Our third quarter operating profit was $10 million compared to $9.9 million in the 2006 third quarter. The operating profit includes the $1.7 million restructuring charge as well as $700,000 or $0.03 per diluted share of cost for the China expansion and manufacturing footprint consolidation.

The third quarter operating margin including the restructuring charge was 6.2%. Excluding the restructuring charge it was 7.3%. Year-to-date the operating margin was 7.1% with the restructuring charge and 7.5% excluding it. That is up from 6.8% for the first nine months of 2006. We remain confident that we can achieve our stated goal of reaching an operating margin of 9.5% by the end 2008.

Now let me comment on the tax rate. It was 2.5% in the 2007 third quarter versus 28.6% in the prior year quarter. As mentioned, this included net favorable one-time items of $3.6 million related to the reversal of a German valuation reserve net of the impact of tax rate changes in foreign jurisdictions on deferred taxes.

We continue to assume a 2007 full-year base tax rate before the impact of one-time items of approximately 36%. We do not anticipate any additional near-term adjustments for remaining tax valuation reserves but we are continuing to work on tax planning strategies to lower our overall effective tax rate.

Now turning to the balance sheet. Net receivables at the end of the third quarter totaled $114.7 million which is sequentially $1.6 million lower than the second quarter but $13.5 million higher than the end of the 2006 third quarter basically reflecting higher sales volumes. Accounts Receivable days outstanding were 465 days of the end of the third quarter up one day versus the prior year period due to a higher mix of International receivables which have longer payment terms.

Inventories at the end of the 2007 third quarter totaled $63.5 million up from $61.4 million in the prior year period. The increase stemmed primarily from higher inventory levels in foreign locations due to longer leadtimes and pipeline fill from new products. Third quarter FIFO days inventory on hand were 89 days down from 91 days for the prior year period.

Capital expenditures during the 2007 first nine months totaled $23.8 million and included investments related to our footprint consolidation, global expansion initiatives and new product development. We continue to anticipate full year capital spending this year of approximately $26 million to $28 million which is at the high-end of our stated range at the beginning of the year.

Tennant's cash, cash equivalents and short-term investments totaled $31.8 million compared to $45.1 million in the prior year quarter. The Company repurchased approximately 279,000 shares of common stock during the third quarter under the Board-authorized 1.4 million share buyback program. Total cost of the shares repurchased was $11.9 million. The Company has 924,000 shares remaining under its authorized share repurchase program.

With that, I would like to turn the call over to Chris for an update on the quarter's highlights including our new ech20 technology.

Thanks, Tom. We are very excited about Tennant Company's continued growth momentum in the third quarter and nine months. As Tom pointed out, we had a record quarter in sales, net earnings and EPS. 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.

We are also very pleased to announce a brand new technology today called ech(2)o -- that is ech(2)o. We believe it can be category changing in our industry. I will give you more details on ech(2)o in just a moment. First however, I want to take a step back and look at the big picture to help you understand how ech(2)o fits into our strategic priorities.

As you know, we have been focused on executing our strategic priorities to drive top and bottom line gains. These priorities include leveraging Tennant's cost structure through continuous process improvement and operational excellence.

On the growth side we're focused on introducing innovative new products, developing future integrated solutions and expanding our markets and business opportunities. We have continued to make steady progress on all of these priorities. I will start on the growth side of the equation which is where ech(2)o fits in.

You have heard us talk about integrated solutions in the context of our long-term strategy to evolve into an environmental cleaning solutions company. Well, ech(2)o is our first big integrated solution. It is not merely a new product; it is a technology platform that will be used on many of our Tennant and Nobles branded scrubbers and over time, potentially in other applications as well.

So, what is ech(2)o? Ech(2)o is a breakthrough cleaning technology that electrically activates plain water to behave like a powerful detergent without adding any chemicals. It's cleaning effectiveness is proven to be the same or better than general-purpose cleaners without the environmental or health impacts of producing, packaging, transporting, using and disposing of traditional chemicals. You start with water and end with just water.

Importantly, ech(2)o combines a number of customer advantages including lower costs, ease-of-use, equal or better cleaning performance and improved operator safety as well as an environmentally friendly alternative to traditional cleaning methods. Ech(2)o reinforces our technology leadership in the cleaning industry and continues our evolution and growth as a provider of environmental cleaning solutions.

Here is a two-minute video that explains how our ech(2)o technology works. If you are not logged into the Tennant Internet webcast you will not hear the audio portion of the video. Please remain on the line. The conference call will resume once the video is complete.

Video -- no audiorecorded. See Web site for details.

The video has ended; you may resume.

We are unveiling this technology here at ISSA today and showing it to many of our largest customers. We are very excited to the first in our market with electrically activated water technology that delivers on our goal of offering more environmentally friendly solutions that also provides superior cleaning performance, increased customer productivity and improved health and safety.

The ech(2)o is another step in Tennant Company's evolution from providing floor cleaning and coding solutions to developing beyond the floor cleaning applications and expanding into new markets. Initially the ech(2)o system will be available on the Tennant T5, T3, 5680 and 5700 Walk-behind Scrubbers as well as the Nobles Speed Scrub Walk-behind Scrubbers.

We intend to extend ech(2)o to other Tennant and Nobles brand scrubbers as well. We are currently in the early production phase of ech(2)o and we expect sales to ramp in the spring of 2008.

If you're interested in more detailed information about ech(2)o, go to our website. The information there contains video animation, graphics, customer testimonials and more. Again, this technology is a significant advancement for our industry and for Tennant Company. We think it's game changing.

Now, I will briefly touch on some of the other highlights of the quarter. First, we continued to see strong growth from new products. New products accounted for 35% of equipment sales in the 2007 third quarter. Year-to-date, new products generated 33% of all Tennant Company's equipment sales.

In particular, we're pleased with the response to our 2006 launches including the following products -- the M20 which was the industry's first integrated dual Scrubber-Sweeper; the T20 Rider Scrubber which shares the same design platform as the M20; and the Tennant T5 and Nobles SS5 Speed Scrubbers, both of which appeal to a wide range of applications and environments such as retail, hospitality, and life industrial markets.

Our stated plans for 2007 were to introduce four to five new products in 2007 and with ech(2)o we have attained that goal. Additionally our new product pipeline remains robust and we anticipate offering an expanding number of environmentally friendly products and solutions in the future.

Turning to our progress on leveraging our cost structure. I will focus for a moment on our operational excellence. When we think of operational excellence we include our people, culture and a wide range of global cost reduction initiatives. Areas I would like to highlight include our progress on global sourcing, workforce restructuring, and an update on our footprint consolidation.

First, our global sourcing efforts are gaining solid traction. We're focused on building a low-cost global sourcing program although not all of our sourcing will come from low-cost regions. By the end of 2007, we anticipate the percentage of Tennant's sourcing from low-cost regions such as China, Eastern Europe and Mexico will double to approximately 15%.

Year-to-date, the Company has achieved to $2.4 million in gross savings and cost reductions from our global sourcing strategy. Of this amount, $1.2 million was generated in the third quarter. We expect this initiative to save the Company approximately $4 million in 2007.

As Tom mentioned, we announced in September the organizational restructuring of our worldwide workforce as part of our operational excellence initiative. The Tennant Company's evolution from a floor cleaning company into an environmental cleaning solutions company requires new positions and skill sets. We conducted thoughtful and careful analysis of our workforce needs and made some select adjustments. This action will enable our workforce to evolve as our business expands into new areas.

As for our footprint consolidation, this effort is essentially complete in North America. We have moved all operations out of our Maple Grove plant and integrated them into our other facilities. We're pleased with our progress and anticipate closing on the sale of Maple Grove in the fourth quarter of this year.

Here is one last highlight that I would like to mention. I'm very pleased that Tennant Company has been named to the Forbes list of the Best 200 Small Companies. Tennant ranked No. 145 on the list and we are very proud of this recognition.

Turning to our outlook. Our 2007 outlook assumes that we will continue building on our success with further top and bottomline gains. We expect organic sales growth in 2007 at the high end of our stated range of 5 to 9%.

We are on track for another year of record sales and earnings despite continued expenses related to our China expansion, manufacturing footprint consolidation and restructuring. We're confident 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 the 9.5% operating margin by the end of 2008.

For fiscal 2007 the Company now anticipates net earnings of $1.88 to $1.96 per diluted share compared with $1.57 per diluted share in 2006. We increased our guidance by $0.10 per diluted share since the net tax benefit was greater than previously announced in September. This guidance includes the impact of the restructuring and tax benefit as well as the approximately $3.5 million to $4 million pretax or $0.15 to $0.17 per diluted share of expense related to our ongoing China expansion and manufacturing footprint consolidation initiatives.

As we've said before, we anticipate continued pressure on our gross margins due to 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 third quarter.

Also, as we have noted in the past in connection with the manufacturing footprint consolidation, Tennant expects to sell the Maple Grove Minnesota facility in the 2007 fourth quarter. While we cannot at this time estimate the impact of the sale because of the uncertainty of the transaction price, the Company anticipates a gain on the sale.

The potential gain on this sale is not included in Tennant's earnings guidance for 2007.

At this point we would like to open it up to your questions. Operator?

(OPERATOR INSTRUCTIONS) Rob Damron, 21st Century.

Good morning, guys and nice quarter. (multiple speakers) I wanted to get a little more color surrounding the gross margin. There's obviously a lot of positives and negatives impacting margin during the quarter and maybe you could give us a little magnitude on how much each of these factors impacted the margins.

We aren't prepared to get into that level of detail, Rob. I certainly appreciate why people might be looking for that but there are just some pieces that we just aren't prepared to share. You know, the one -- the two elements that we can talk further about is one was the absolute level of savings we are seeing from our sourcing efforts which was in the vicinity of about $1.2 million in the quarter.

Unfortunately just if you look at our battery related issues alone, that came close to being that much of an issue in and of itself in the quarter and we have pressures in other material cost areas. You can see the magnitude of the number of swings and we also did continue to have pricing benefit in the quarter of year on year and that's roughly about slightly above a 2% benefit. So those are kind of pieces we're willing to talk about externally.

And then the battery surcharge going into effect in Q4 -- will that pretty much cover the --

It will not. It is -- we won't get it implemented until we really start seeing the benefit of that, until about the middle of November. So the ability to completely offset the kind of increases we've seen in the fourth quarter most likely won't happen.

We did already take some pricing actions just in Europe. It was just a price increase not a surcharge recognizing the battery issues we had. We took that in the third quarter but we don't believe for going to be able to recruit the entire herd in the fourth quarter.

And then just another cost related question. The one-time costs as we move into 2008 -- you mentioned at least in the press release about $0.01 for the restructuring.

Yes.

Would you anticipate any other one-time costs as we move into 2008?

We do not. We firmly believe that we now have everything associated with China and the footprint and the restructuring behind us other than the $0.01 carryover into the first quarter. So do not anticipate any one-time costs in the upcoming year.

Okay and then just the last question on the new ech(2)o product which looks fabulous. But I wanted to talk about consumable sales related to that product. Will this in effect reduce the amount of consumables that you could potentially sell relating to this kind of product?

There are no consumables tied into the ech(2)o technology. So as it replaces machines, Tennant machines where we sell fast chemicals, it will lead into our consumables. But the fact is that we're going to be charging a significant premium for ech(2)o and we fully anticipate higher margins than previous products.

And we think that this product is going to be so compelling in the marketplace that we will be able to take share from our competition in a significant way. And that's where the real benefit is going to come.

Okay great; well congratulations. Thanks.

(OPERATOR INSTRUCTIONS) Beth Lilly, Gabelli.

Good morning, guys (multiple speakers). I wanted to get a little more clarification on ech(2)o just to follow up on Rob's question. So, going forward then it's going to be on -- just so I can get clarification, how many SKUs do you have? How many product lines do you have or how many products do you have on the market in total?

We've never really disclosed that specific number from a pure SKU perspective. Reason being that there is just so many variations on our products. I mean the thing we have talked about is that if you looked at things on a platform basis we have about 10 or 11 broad platforms that all of our products are based off of but we haven't disclosed an absolute SKU number.

So, then maybe we can talk about it in terms of platforms. So in 2008, ech(2)o is going to be rolled out onto how many of your platforms?

Well no; we can tell you how many -- the product is going to be rolled out. So I think we did state that in the script. It's going to be on six Walk-behind products with sales ramping in the spring of 2008. What we estimate is that ech(2)o technology is not going to be appropriate for the toughest cleaning situations.

So going forward we estimate that ech(2)o is applicable to 70 to 75% of all cleaning applications in which we compete. And the goal would be over the next two to three years is to ensure ech(2)o is on every machine that is sold into those applications.

So, ech(2)o will be -- you may not want to answer this but I'm going to ask it. Ech(2)o will be [on what] percentage of your product line?

Can you repeat the question?

Ech(2)o will be on what percentage of your product line then?

Like I said, if it goes into about 70% of our cleaning applications, it probably is going to be on 70% of our Scrubber products in the medium-term.

Okay and just so I can get clarification on that too which is because this is such a unique technology, you will be able to charge more so you will earn a higher margins then on your equipment sales, correct?

Yes.

Does anybody else in the marketplace have a similar technology?

It does not exist in our industry. Electrically activated water technology exists mostly in Asia and specifically in Japan. It is used in certain medical and food processing applications but it's still very very much a niche technology that is emerging in these other industries. But it has not been seen in our industry. We're definitely the first in our market.

Did you develop this technology internally or did you acquire it from somebody?

We developed it internally.

So clearly there's patents and everything to protect you?

There are nine patents pending.

[Tom Widecap], Value Holdings Management.

Can you speak to sales growth in the Far East for the quarter, in China and Japan, specifically?

We do not disclose our sales growth down to that level of detail. We really just break it into three pockets which is North America, Europe and what we call other International markets.

Can you just provide a little color? In the press release and in the commentary you spoke to Brazil and Australia and the Middle East. Can you just give any sort of qualitative feel about the China, Japan regions?

You know, we are at the front end of our efforts in China. We would like to continue to reiterate that. I mean it is -- we are very happy with the progress we made in China but in the grand scheme of our revenue growth, China is not a big material number. Japan, we don't really have anything of significance that we could speak to this material up from a growth perspective in the quarter.

Okay and then touching on the new ech(2)o product, you said that it would be applicable in about 70 to 75% of your current applications. So can you kind of elaborate on that remaining 25 or 30%, why ech(2)o is not able to be effective?

Well, the other 25 to 30% are really tough cleaning environments. An example, [Alcoa] is one of our biggest customers. And we sell a lot of equipment into aluminum smelting plants and you have to have a very very powerful detergent to get the grease, the grime and the other dirt that accumulates in those environments.

And the ech(2)o technology just can't do that. It's not formulated that way. 70% of the environments in healthcare, hospitality, retail, education, light industry, warehousing, etcetera -- Ech(2)o is extremely applicable.

Okay; in your opening comments you alluded to expanding the ech(2)o product line into other beyond-the-floor type applications. Are you willing to disclose at this point what those applications might be or where you see this product line going in the future?

I think it's premature to do that both in terms of we are investigating -- and I think from a competitive standpoint it doesn't make sense for us to talk about that. But meaning, if you look at the technology and the way that it cleans -- and we believe strongly that there potentially are some applications out there beyond our Scrubbers where this technology could work very effectively. And we are aggressively investigating the possibilities.

Okay, great; thanks and good luck next quarter.

Ted Kundtz, Needham & Co.

Hello everyone. Just a question on gross margins. Could you go back to that and just sort of give us your -- perhaps your outlook on gross margins going forward? Do you think we are now -- have seen the bottom of the gross margin range and that you think you can edge them back up with this current inflationary pressure you are seeing? What is your outlook?

As you know, we're always pretty hesitant to give any speculation around what our gross margins are going to do. I'll make a couple of different comments. One is we are very focused on gross margins. We're even more focused on operating margins. And the thing we remain committed to even in a very tough commodity environment is that we will get to our 9.5% target next year.

So that is -- I won't call it our singular focus but it is the one piece that we view as an immovable object as an internal objective within our Company. On the gross margin side, the thing that I can say is, I mean, if we can get to what would be a more normalized commodity market and continue to ramp up our sourcing savings, assuming the same kind of mix of business we have today, we would certainly expect to see gross margin improvement as we go forward.

But it's very difficult to look at when you start speculating about what geographies we're going to move into and what our equipment mix is. Our objective though is to see gross margin increases. We are not ready to commit to actual levels of that.

Okay, can you get to your target without a gross margin increase of the 9.5% operating margin?

Yes.

You can do that at this current gross margin level?

I'm not saying that. We are saying we can get there without seeing significant increases in our gross margins. We can see it with modest changes in gross margins. We still believe we can get to our 9.5% level.

(OPERATOR INSTRUCTIONS) Seaver Wang, Utendahl Capital Partners.

Hi, good morning. Just curious about the technology. Are there any say, safety issues with charging the water that might be an issue in the future for this product line?

No, there are no safety issues. We have had this technology tested in independent labs for over a year now. We have also had it in a variety of customer applications for over a year. It cleans great, it's easy to use. Customers love it. They think it's revolutionary and all independent research on the technology indicates it's completely safe.

The durability of this technology -- I mean can it take the pounding of being used 24-7? Is it a very kind of fragile technology or is it fairly easy to fix by technicians etcetera?

It's ready for prime time.

I'm showing no further questions.

All right, well thank you all for your time today and for your questions. And again, we invite you to visit our website to view a complete media kit for ech(2)o. And with the launch of ech(2)o we think it's a new era for Tennant and it is extremely exciting. And our strong performance to date and our continued growth momentum in 2007 is equally as exciting and we look forward to keeping you posted on our progress against all our strategic priorities in the future. Thank you again.

That concludes today's conference. Please disconnect your line at this time.