Tennant Co (TNC) 2007 Q4 法說會逐字稿

Good morning. My name is Matthew and I will be your conference operator today. At this time I would like to welcome everyone to the Tennant Company's fourth-quarter earnings call. All lines will be placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I will now turn the call over to Tom Paulson, Vice President and Chief Financial Officer. Sir, you may begin.

Thanks, Matthew. Good morning everyone and welcome to Tennant Company's fourth-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 Durand, our Corporate Controller.

Our agenda this morning is to review Tennant's solid performance during the quarter and full year and discuss our outlook for 2008. First Chris will update you on our operations and then I will review the financials and our outlook. 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.

Additionally, this conference call includes discussion of non-GAAP measures that include or exclude unusual or nonrecurring items. For each non-GAAP measure we 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 our 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 a comparative operating performance of the Company.

Our earnings release was issued this morning via Business Wire and is also posted on the investor section of our website at TennantCO.com. At this time I'll turn the call over to Chris.

Thanks, Tom. Today I will discuss the highlights of Tennant's fourth quarter and full year performance as well as the two acquisitions that we announced recently. Let me start by saying that we are very pleased with the Company's continued strong sales and efficiency gains. We produced record fourth-quarter and full-year net sales on top of record sales in the same period last year.

Earnings for both the quarter and the full year also rose substantially versus the prior year periods. The Company's revenues and profitability continue to grow due to new product introductions, market expansion and greater operational efficiency. Overall 2007 was a year of significant growth and investment in the business.

We successfully executed our strategic priorities throughout the year. These priorities included leveraging Tennant's cost structure through continuous process improvement and operational excellence. On the growth side we focused on introducing innovative new products and solutions and expanding our markets and business opportunities.

We accomplished several major initiatives in 2007 and made further progress on all of our priorities in the fourth quarter. In terms of leveraging our cost structure, our 2007 goals were to consolidate our North American manufacturing footprint, expand our presence in China and establish global sourcing capabilities.

We invested a total of approximately $4.2 million during the year or $0.17 per diluted share to support these programs. These costs were modestly above our stated pretax range of $3.5 million to $4 million but within our EPS range of $0.15 to $0.17 per diluted share. We expect to significantly reduce product cost and enhance our operating efficiency over the next three to five years as a result of these initiatives.

As we exited 2007 our North American manufacturing footprint consolidation initiative was complete. We moved all operations from our facility in Maple Grove, Minnesota and integrated them into our other North American facilities. We then sold the Maple Grove plant and recognized a sizable gain on the transaction in fourth quarter of 2007.

Our China facility is now manufacturing two products and a select number of subassemblies for local and worldwide distribution. We also have another product platform in China ready for production early this year. It was just one year ago that we began production there.

Sales in China continued to ramp in 2007 with an annual growth rate of 39%. We held our international 2008 operating plan reviews in China which is an indication of how important it is to our future.

We have also begun benefiting from our global sourcing initiative which contributed just over $4 million in gross savings during 2007. We doubled the percentage of materials and components sourced from low-cost regions including China from approximately 7% in 2006 to 14% in 2007. In 2008, we expect to exceed the savings from low-cost sourcing that were realized in 2007.

As part of our operational excellence initiative, we announced last September restructuring of our worldwide workforce. Tennant Company's evolution from a floor cleaning company into an environmental cleaning solutions company requires new positions and skill sets. This action allows us to better match the Company's talents and needs and the needs of our business as it evolves and expands into new areas. We have now filled most of the key positions ahead of plan, successfully attracting and hiring top-level talent.

One such individual who recently joined Tennant is Mike Schaefer, our new Vice President and Chief Technical Officer. Mike is now responsible for driving Tennant's global research, development and innovation. Most recently, Mike served as vice president for Ecolab's dispensing systems business where he was in charge of their R&D efforts. We're glad to welcome him on board.

Looking at the growth side of the equation, we are focused on building Tennant's sales through market expansion including acquisitions and through new products. International expansion is a key piece of our strategy. To capitalize on the opportunities we see outside North America, about a year ago we hired Carl Heiser as Vice President of international. He has been instrumental in establishing a plan for international growth and we're now seeing traction against this new strategy.

As we have stated before we will consider acquisitions that add complementary products or expand our global sales and service coverage. We have been busy on this front. In the past ten days we announced two exciting acquisitions that are in line with our acquisition strategy and will help us build our business globally.

We announced on February 15 that Tennant entered into a purchase agreement to acquire Applied Sweepers which is a privately held company based in Falkirk, Scotland with revenues of approximately $40 million. We expect to complete this acquisition by early March.

This acquisition is complementary both from a product offering and a market coverage standpoint. To give you some background, Allied Sweepers is the leading manufacturer of subcompact, outdoor sweeping machines in the United Kingdom. It also operates subsidiaries in the United States, France and Germany. The Company is the leading supplier of small sweepers used for city cleaning to municipalities across the UK and sells through a broad distribution network around the world.

Applied Sweepers' products are sold under the brand name Green Machines. These subcompact sweepers come in three size ranges that are used in city cleaning applications such as sweeping pavements, pedestrian areas, streets and alleyways. Applied Sweepers has a highly regarded service organization and a stellar reputation for innovation and high-quality products. Its city cleaning products complement Tennant Company's current outdoor offerings and will enhance our ability to offer a broader set of solutions to customers worldwide.

The worldwide outdoor cleaning market is estimated to be about $500 million. This acquisition combined with our 2006 acquisition of Hofmans Machinefabriek in the Netherlands will provide Tennant Company greater access to the European City cleaning market and will offer additional opportunities to further leverage both companies' existing sales and service capabilities throughout the world.

Turning to Latin America, we're pleased with the initial success of our entry into Brazil, which is an attractive emerging market for our products. Volume growth in Brazil was a significant contributor to sales increases within our Latin America region. Latin America sales rose 35% in the fourth quarter and 29% for the full year 2007 compared to 2006.

As you saw last week on February 22, we announced our agreement to acquire Sociedade Alfa to further strengthen our presence in Brazil. Again this acquisition fits with our strategy to expand Tennant Company's sales and service capabilities with complementary product lines. Alfa is based in Sao Paulo, Brazil with a branch office in Curitiba and a manufacturing facility in Limeira.

They are recognized as the Brazilian market leader in the cleaning industry reporting just over $9 million in sales revenue for 2007. Alfa's strong name recognition in the commercial cleaning equipment market combined with our industrial equipment products and coatings creates a tremendous foothold and a foundation for growth in Brazil and throughout Latin America.

New products are another important growth area for Tennant. On this front we continued our commitment to invest 3% to 4% of annual sales in product development. Notably, approximately 35% of Tennant's equipment sales during the 2007 fourth quarter and full year were generated by new products launched in the last three years. This is above our stated goal of 30%.

In 2007 we launched five new products targeting all of our markets. In the fourth quarter, we unveiled a breakthrough new cleaning technology called ech2o; that's e-c-h-2-o. We had originally planned to introduce ech2o in 2008 but decided to accelerate the announcement into 2007 in order to capitalize on what we saw as a significant market opportunity. As a result introduced ech2o in October which was nine months ahead of our original schedule.

In the simplest terms, ech2o cleans by electrically activating plain tapwater to perform like a powerful detergent. Only tapwater goes into the machine. There is no added detergent. In addition to being environmentally friendly, ech2o offers significant customer advantages including lower cost, ease-of-use, and improved operator safety.

The ech2o technology is a significant advancement for our industry and for Tennant Company. It reinforces our technology leadership in the cleaning industry and continues our evolution and growth as a provider of environmental cleaning solutions. We will begin global shipments of machines equipped with the ech2o technology during the second quarter of 2008.

Initially the ech2o system will be available on six walk-behind scrubbers including the Tennant T5, T3, 5680 and 5700 as well as the Noble speed scrubber -- walk-behind scrubbers. We plan to extend ech2o to other Tennant and Noble scrubbers as well.

This technology is a particularly good fit for general-purpose cleaning which encompasses about 70% of our scrubber cleaning applications. We believe ech2o will give us a competitive advantage especially in targeted vertical markets such as hospitality, schools and hospitals.

Our new product pipeline remains robust and we anticipate offering an expanding number of environmentally friendly products and solutions in the future. We plan to launch six to seven new products in 2008 that will further enhance our product portfolio and provide continued growth opportunity.

On January 29 we announced our first new 2008 product which is the Tennant branded S30 Mid-Sized Rider Sweeper. The S30 offers quiet large area sweeping and a patent-pending, three-stage dust control system for indoor and outdoor spaces while improving operator comfort and safety as well. We expect that new products launched in 2008 like the S30 will help us continue to achieve our goal of generating 30% of equipment sales from new products launched within the past three years.

Overall, the business is performing well and on plan and we expect to reach our operating margin goal of 9.5% in the fourth quarter of 2008. While we have our finger on the pulse of the economy, so far our business has remained strong and we anticipate that our positive momentum will continue in 2008.

At this point, I will turn the call over to Tom for a review of our 2007 financial results and outlook for 2008. Tom?

Thanks, Chris. In my comments today, all references to earnings per share are on a fully diluted basis. For the fourth quarter ended December 31, 2007 as Chris noted we reported record sales and increased earnings on top of record fourth quarter results last year. As in previous quarters, we sustained revenue growth across all of our geographies and product lines.

We posted fourth quarter net earnings of $0.66 per diluted share, a 53% increase versus $0.43 per diluted share in the 2006 fourth quarter. Earnings for the 2007 fourth quarter included two previously announced items. First, the gain on the sale of our facility in Maple Grove, Minnesota totaled $6 million pretax or $0.19 per diluted share. Second, earnings in the 2007 fourth quarter were reduced by $800,000 pretax or [$0.03] per diluted share completing the workforce restructuring program announced in the third quarter last year that was tied to our operational excellence initiative.

Consolidated net sales for the quarter totaled a record $182.6 million up 9.4% from $166.9 million in the year ago quarter. Contributing to the Company's sales were increased volume and higher selling prices. Favorable foreign currency exchange effects added approximately 5% to consolidated net sales for the quarter.

Year-to-date, consolidated net sales grew 10.9% to a record $664.2 million with favorable foreign currency exchange effects adding approximately 3% to full-year net sales. Full-year net sales were fueled by new product launches and expansion into new markets such as China and Brazil.

Full-year net earnings increased 34% to $39.9 million or $2.08 per diluted share compared to the same period in 2006. This was within our previously provided earnings guidance range of $2.07 to $2.15 per diluted share.

We are pleased that the Company posted solid earnings gains of in 2007 but we were at the low end of expectations in the fourth quarter due to conscious investments to accelerate the ech2o product launch, better than anticipated success filling new positions following our restructuring and a higher fourth quarter tax rate. Net earnings in 2007 benefited from strong growth in net sales and operating profit improvements in addition to the net benefit of onetime items.

These onetime items and their impact are listed in the supplemental table on Page 5 of today's press release. Here is a quick summary.

The net tax benefit of $3.6 million or $0.19 recognized in the third quarter. The workforce restructuring charge of $2.5 million pretax or $0.09 with $0.06 incurred in the third quarter and $0.03 in the fourth. And the fourth quarter gain on the sale of our Maple Grove facility of $6 million pretax or $0.19. Together the net effect of these onetime items was a positive $0.16 per diluted share in the 2007 fourth quarter and a positive $0.29 per diluted share for the full year.

In North America, 2007 fourth quarter net sales totaled $108.7 million up 3.2% versus the prior year quarter chiefly due to increased selling prices. We shipped fewer large orders of $1 million or more than in prior quarters, however North America sales did meet our expectations in the quarter.

Full-year net sales in North America increased 6.8% to $417.8 million primarily due to volume growth in all our product categories and selling price increases. Foreign currency exchange effects on North America sales were approximately 1% in the fourth quarter and less than 1% for the full year.

In Europe, fourth quarter net sales grew to $52.2 million up 17.3% compared to the 2006 period. Foreign currency exchange effects contributed approximately 12% to net sales and acquisitions added approximately 2% with selling price increases and volume accounting for the remaining growth. Fourth quarter growth in Europe was below our targeted organic growth rate of 5 to 9% due to lower UK sales volumes, however, we're beginning to see progress and anticipate a return to more normal growth in the second quarter of 2008.

Full-year net sales in Europe increased 16.9% to $172.7 million. Favorable foreign currency exchange effects and acquisitions added approximately 10% and 5% for the full year respectively to sales in Europe. The Hofman outdoor product line continued to perform well throughout the year contributing to organic growth as of July 2007, the one year anniversary of that acquisition.

Tennant's other international markets had a terrific quarter posting its best year-over-year fourth quarter growth in several years with net sales of $21.7 million. The 26.9% growth over the comparable 2006 quarter was led by expanded market coverage and strong volume particularly in our Asia-Pacific and Latin American regions. Favorable foreign currency exchange effect benefited net sales in the quarter by roughly 6%.

For the full year, other international sales grew 22.8% to $73.7 million compared with 2006. Favorable currency exchange effects added approximately 4% to 2007 net sales. Expanded market coverage and strong volume drove full year sales in Tennant's other international markets.

During the quarter we succeeded in further leveraging our efficiency. Tennant's gross profit margin rose to 42.4% for the 2007 fourth quarter compared with 41% in the prior year quarter. Contributing to the gross margin improvements in the quarter were the favorable mix of products sold, benefits from global sourcing and [lean] initiatives and favorable foreign currency exchange.

Full-year gross margin in 2007 was flat at 42% versus 2006. We remain encouraged that savings from our global sourcing and operational excellence initiatives allowed us to maintain gross margin in 2007 despite increased material costs and investments in the business. As Chris said our global sourcing efforts contributed approximately $4 million in gross savings during 2007 and we expect even greater savings from this initiative in 2008 as we will discuss in our outlook.

R&D spending in the fourth quarter totaled $6.1 million compared with $5.8 million in the 2006 fourth quarter. R&D expenses as a percent of net sales were 3.3% for the fourth quarter 2007 compared to 3.5% in the comparable quarter last year. For the fourth quarter and full year we remain within our target of annually investing 3 to 4% of net sales in R&D.

Selling and administrative expenses for the fourth quarter totaled $56.8 million or 31.1% of net sales versus $51.8 million or 31% of net sales in the 2006 fourth quarter. We incurred an additional $800,000 in workforce restructuring costs during the quarter. As Chris mentioned earlier this action was taken to better match skillsets and talent in evolving areas that are critical to successful execution of our strategic priorities.

On last quarter's conference call, we estimated the remaining cost of the restructuring would be $600,000 or $0.02 per diluted share in the fourth quarter 2007 and $200,000 or $0.01 per diluted share expected in the first quarter of 2008. We were able to accelerate this plan and its related costs into the fourth quarter and have essentially completed filling the most significant positions. Excluding the workforce restructuring costs, selling and administrative expenses were $56 million or 30.7% of net sales in the fourth quarter.

Also impacting fourth quarter selling and administrative costs was the earlier than planned announcement and related marketing activities of our new ech2o technology. Sales of ech2o will begin this spring.

For the full year, selling and administrative expenses totaled $206.3 million or 31.1% of net sales compared with $189.7 million or 31.7% of net sales in 2006. Excluding the workforce restructuring cost, full year selling and administrative expenses were $203.8 million or 30.7% of net sales. We remain committed to leveraging operating expenses as sales grow to allow for operating margin expansion.

Our fourth quarter operating profit was $20.6 million or $14.6 million excluding the gain on the facility sale which represented an increase of 35.2% compared to $10.8 million in the 2006 fourth quarter. The operating profit includes the $0.03 per diluted share for the restructuring charge as well as $0.02 for the China expansion and completion of the North American manufacturing footprint consolidation.

Our fourth quarter operating margin was 11.3% or 8% excluding the gain on the facility sale versus 6.5% in the prior year quarter. For the full year, operating profit was $54.8 million or $48.8 million excluding the gain on the facility sale which represented an increase of 22% compared to the $40 million in 2006.

Full-year operating margin in 2007 was 8.3% or 7.3% excluding the gain on the facility sale up from 6.7% in 2006. We remain confident that we can achieve our stated goal of reaching an operating margin of 9.5% in the fourth quarter of this fiscal year.

Tennant's effective tax rate in the fourth quarter of 2007 was 39.8%, higher than expected due to the mix of taxable earnings by country. Our 2007 full year effective tax rate was 30.9%. The 2007 full-year base tax rate was 37.2% excluding the onetime net favorable tax benefit of $3.6 million recognized in the third quarter related to the reversal of the German tax valuation allowance.

We expect our 2008 base tax rate to be in the range of 36.5% to 38.5% depending primarily upon the mix of taxable earnings by country. We are continuing to work on tax planning strategies to lower our overall tax rate.

Now turning to the balance sheet, net receivables at quarter end totaled $127.5 million compared to the $116.3 million at the end of the 2006 fourth quarter due to growth in net sales over the 2006 fourth quarter. Accounts receivable days outstanding remain flat at 61 at the end of the quarter versus the comparable period last year.

Our inventories at year-end totaled $64 million up from $61 million at the end of 2006. The increase stemmed primarily from higher inventory levels in foreign locations due to longer lead times and pipeline frill for new products. (inaudible) days inventory on hand was 83 days in 2007 versus 82 days in 2006.

Capital expenditures totaled $28.7 million in 2007 slightly above our targeted range of 26 to $28 million. Capital expenditures in 2007 included investments in our footprint consolidation, global expansion initiatives, the acquisition of properties adjacent to our corporate headquarters and main plant and tooling costs to support new product development and costs of sales [reduction] initiatives.

We expect full year capital spending in 2008 to be at a similar level of approximately 25 to $29 million. We are accelerating our upgrade of SAP and related infrastructure enhancements by one year which will improve the ability of our systems infrastructure to expand globally. In addition, we plan to invest in our corporate facilities in Minnesota creating a global R&D center of excellence.

During the fourth quarter the Company repurchased approximately 185,000 shares of common stock under the Board authorized 1.4 million share buyback program. Total cost of the shares repurchased was $8.5 million. At quarter end approximately 739,000 shares remained under Tennant's share repurchase program.

We ended 2007 with a debt-to-capital ratio of 1.8% and $33 million in cash and cash equivalents. Our solid balance sheet position positions us well to fully fund the recently announced acquisitions through a combination of available cash and our existing $125 million credit facility.

Now I will review our outlook for 2008. As a reminder we provide annual but not quarterly guidance.

Our 2008 outlook assumes that we will continue to build on our success with further top and bottom line gains while we're carefully monitoring for any signs of a recession impact in our business. As Chris said, our view at this point is that our business is strong.

We anticipate that we can maintain our growth momentum and further leverage operating efficiencies for the full year. We expect that our 2008 earnings by quarter will be seasonally similar to our quarterly performance in the past few years.

For the 2008 full year the Company expects organic net sales growth to be at the high end of our 5% to 9% goal fueled by a strong new product pipeline and investing in continued market expansion. We anticipate achieving further operating excellence benefits and efficiency improvements as a result of our recent investments in operations. Our global low-cost sourcing and lean manufacturing initiatives are expected to save between $9 million and $12 million in 2008.

For the full year Tennant anticipates earnings per diluted share to be in the range of $2.25 to $2.40. This compares to 2007 earnings per diluted share of $2.08 or $1.79 excluding the onetime tax benefit of $0.19, the gain from the Maple Grove sale of $0.19 and the restructuring charge of $0.09.

The [2000] guidance range does not incorporate the recently announced acquisitions. Our current expectation is that these acquisitions may be modestly dilutive in 2008 yet solidly accretive in 2009. With that, we'd like to open up the call to any questions, Matthew.

(OPERATOR INSTRUCTIONS) Ted Kundtz, Needham & Co.

A couple of questions for you. One, could you give us a little more information on the acquisitions? They're going to close fairly quickly. It looks like you've mentioned that one had $40 million of revenue, one had $9 million of revenue last year. How fast are those growing and what are the -- do they have similar margins to you folks?

I will comment on the margin and the growth side. I mean we haven't publicly at this point expressed any specifics around the growth patterns of either of these businesses. But what I can say is they are solidly growing businesses. And I think that as we move forward we will be able to provide some more insight there but they are healthy businesses that are growing nicely.

From a margin standpoint, for various reasons we're not prepared to give a lot of specifics there. But what we can say is both of these businesses are nicely above Tennant's current EBITDA margins. So they will be margin enhancing businesses to us.

It looks like you could easily see maybe $55 million plus in revenues on an annualized basis from these companies.

We would certainly expect that

And they're slated to close as you stated before (multiple speakers)

We sure hope that we can even close our deal before we exit February in the case of Applied but we're certainly comfortable it will happen in early March. In the case both the Brazilian acquisition of Alfa we're saying it is going to be 30 to 60 days due to different approvals etcetera. We sure hope it is going to be at the 30-day mark and we are honestly pretty comfortable with that at this point.

It sounds like your outlook for gross margins would be going up as well. You expect -- I would assume, expect to exceed what you achieved for '07?

I would be reluctant to give you a specific number but our expectation in 2008 is we will see both expanding gross margins and operating margins. And we've talked about our fourth quarter achievement of 9.5%. I'm not ready to give you specific gross margins but we do expect expanding gross margins in the year.

Now this $9 million to $12 million of savings you expect, how will that be realized over the course of the year?

It should be relatively -- it will be somewhat back-end loaded but relatively even across the quarters. We certainly expect the biggest component of that to be holding onto all of the sourcing savings we got last year plus seeing an increase in that. So the global sourcing savings should be in the vicinity of $5 million to $6 million and the balance of that is going to be split between the benefits of closing down Maple Grove and also beginning to see some benefits from our lean initiative. So somewhat more skewed towards the back half but pretty even throughout the year.

The last question I had was the SG&A number. It looked a little high for the quarter and you mentioned some of that was attributable to introduction of the new products coming out, ech2o product. Could you kind of break that out for us a little bit? Is there any way to get a better handle on what SG&A is going to look like going forward, any impact (multiple speakers)

You know what, let me see if I can give you a little bit insight in there. When we -- and I'm not prepared to give you all the numbers to get into all the math at this point. But when you really pull out acquisitions, the impact of currency, the pre-investment against our ech2o launch and also bringing on people little bit quicker, we really felt just fine about our operating expenses in the quarter. On the surface they look high.

As you look at them after restating for that we feel that we were right about where we wanted to be in line with our internal expectations. What I would say going forward is that we will expect to continue to see leverage in our operating expenses similar next year to what we saw this year meaning the same kind of percentage improvements that we saw '07 to '06 we should see again in '08 to '07.

Well you got a little bit of a lower SG&A as a percent, about 0.06 of a percent and you would expect to see that going forward (multiple speakers)

Yes, I would say we would expect to see that level of leverage at least going forward. A lot of that's going to depend upon the expected growth profile of the business. We're not going to be hesitant to invest to try to grow the business and accelerate our topline growth if we see opportunities. So that's why I don't want pin myself down too closely.

Okay, I was just trying to get the sense was there any onetime investment in the SG&A in this quarter where we could expect to see the absolute number maybe drop a little bit? Or are you saying you're at a new level here, that this level of $56 million per quarter is kind of the runrate?

There was certainly some onetime spending in the quarter but not a huge number. The other thing you need to recognize is our operating expenses do get in big revenue quarters it is higher than the runrate due to our sales incentive and payments to our distributors also.

It's a little (multiple speakers)

The fourth quarter tends to be a little bit higher than other quarters as some incentives and rebates kick in.

Okay, and Chris maybe just one question for you would be just in terms of the acquisition activity going forward are there other opportunities out there that you guys are still evaluating?

As we've said in the last year for the first time in Tennant's history really developed an acqusition roadmap. We have built a core business development team. We have gone out and proactively looked at opportunities that are consistent with the strategic filters that we have talked about which are complementary products, expanding sales and service coverage and companies or technologies that help us further our environmental cleaning solutions strategy.

So I would say that we are quite frankly surprised at the number of opportunities that are out there so we have a fairly robust pipeline. But I would also say to you we have just done two acquisitions and the first order of business here is we have got to integrate these with excellence.

So, I don't anticipate seeing anything come down the pipe here in the short-term. But we continue to be very active in terms of looking at acquisition opportunities that further our overall strategic objectives.

Seaver Wang, Utendahl Capital Partners.

I was just wondering if you could give kind of a layout of the marketing strategy for the ech2o product. Is it going to be kind of a traditional launch? And maybe cost associated with it and the timing of the costs?

Let me just -- I'll talk a little bit about the strategy. I don't know if we've developed divulged waht the costs are going to be. But I mean one of the things we did with ech2o that we have not done before is you know we announced it at our industry's annual trade show in Florida in October where we won the most innovative new product award.

We did that knowing we were going to actually start shipping in March of 2008 because we felt that this technology was so exciting that if we could build some buzz for it early and with that also start to produce some preproduction machines that we could get into the hands of some of our key customers who are opinion leaders and who we felt if they were excited about the benefits offered by ech2o that they would start talking about that to their peers and colleagues throughout the industry. So I think that has worked pretty well for us and that is relatively new.

We are seeing really for the first time in our history too substantial pre-orders for ech2o because people being worried that once we launch it that we may run out of capacity and they want to be first in line. That's not something we experienced before. So I think that's the major difference in the way we have handled this launch versus historical launches.

And the pre-orders are you seeing the type of customers that you had expected? You had mentioned hospitality and maybe education.

It's hospitality, education; it's retail, it's health-care. It's anyplace where general-purpose cleaning is done which as we've said is about 70% of our cleaning applications. (inaudible) those vertical markets are probably the biggest. They're the ones that are most interested in the benefits of ech2o which includes a significant environmental benefit but also cost saving and productivity benefits as well.

So by focusing there I think we can get the biggest bang for our buck and (inaudible) also parts of the market that are kind of trendsetters and opinion leaders. And that should help us to spread the word and actually gain more distribution coverage earlier rather than later.

A quick question on the raw materials and shipping to commodities in general are just still at elevated levels. What are your views on just shipping costs and obviously copper in some of the batteries that go into your machines, etcetera?

Let me comment on that, Steve. I would love to be able to say that we're seeing some slowdown in commodity costs. There's still a fair amount of pressure that we're seeing. We were able to mitigate that in Q4. We feel really good about that and we did see lead year-on-year was even a bigger hurt to us in the fourth quarter. But through our pricing and through some increases in surcharges we were able to offset all that.

But we're still seeing pressure as we go into the year and it's in oil derivatives and plastics so it's affecting us in tires and anything that is a direct oil product. And there are -- it's not lightening up in any of the areas. But overall I can make one comment from a planning standpoint -- lead is still high but it's within our range of how we planned for the year.

So we don't really see any one of the things where they are at today causing us do not be able to stay within our guidance range. But I would sure I like to see the pressure back off.

Any strategy of maybe pre-buying just to hedge a little bit?

Probably not. We historically have not put ourselves in any kind of a position in that regard. I doubt we will adopt a hedging strategy.

[Bob Nicholson, Pine Cobble].

A quick question for you on your guidance for 2008. How much of the success from the new ech2o product have you factored into the guidance which you are giving?

I'll comment on that. We're not prepared to give you a specific number. What we can say is the real ramp doesn't start until Q2 so the reality of that is our industry is not -- there's not this gigantic pipeline that you get. So we won't see any real benefit until the back half of the year. So it's not a gigantic part of our year. And we hope we're being conservative so we hope it presents an upside to us.

But it will certainly be until '09 before we see anywhere near a full-year benefit from the product. So it's in our guidance but we hope there is some upside there.

And just order of magnitude what sort of gross margin improvement would you expect from this new product versus your traditional platforms?

You know, I couldn't measure it in our absolute -- in the absolute gross margin of overall Tennant. What I can say is on the products that it's going on it's margin enhancing. And we're giving the customer a real benefit and we will see some improvement in our margin structure from it.

But our goal is on all new products especially innovative new products is that they have to have better margins than the products they replaced. So that is a philosophy that we embedded in the culture and we clearly achieved that with ech2o.

David Taylor, David Taylor & Co.

Some questions about costs. Has the cost of the China initiative, is that behind us now?

Yes, it is. We have invested and we haven't split this out but we invested $3.4 million in China in our footprint consolidation in '06 and $4.2 million. These are both pre-tax numbers in '07. Those investments are behind us and that will overall shift to that investment going away and we would hope move towards a profit versus a drain on the pre-tax profits.

You expect the new product, ech2o, to be a net cost in the first quarter, correct?

Yes, that would be a fair way to think about it in that we're not really going to see meaningful revenue until Q2. And the reality of it is we will as we did in Q4 continue to invest somewhat ahead of the curve in order to really ensure we have the highest level of momentum we can out of the shoot.

When you say invest ahead of the curve, I mean what sorts of expenses are you talking about?

One of the things we do for all of our new product launches is that we travel the country and we bring together key customers and distributors. And we basically introduce the product, we train them on the product making it -- for our customers making it easy for them to understand why this is an interesting proposition for them and for our distributors to help them be more effective at selling the technology to their customers. So all that activity pretty much takes place around the country, indeed around the world in the first quarter. So a lot of the expenses (multiple speakers)

It's going to the education and training?

Yes, so that we have the entire system up and ready when we start shipping.

In my experience, new products especially kind of revolutionary new technology like this is while they have great long-term prospects generally lose money in their early periods. Do you expect that with ech2o or -- you're talking like you expect it to be profitable pretty much from the get-go once you start shipping.

We expect it to be profitable from the get-go.

Robert Moffat, 21st Century.

I am curious what is your timeframe for patent approval with the ech2o technology and have you put any thought into your risks associated with protecting the technology in overseas markets?

It's really tough to predict when (inaudible) will get approved but it certainly could be as long as 18 to 24 months before we get final approval on that. But we are to a certain extent speculating.

What I would say on this too is in terms of our international protection and we have -- we spend more time and effort on these patents than we have ever on any other technology we've introduced because we realize how important is. So we basically are protected in all the key countries that we anticipate competing in in the future and also worth mentioning is we have nine patents pending on this technology.

Will the revenue from parts and service on ech2o be higher margin than your current equipment? Is there strategies for continually having some kind of a recurring income from ech2o?

No different than our existing scrubber products so it's much more about the opportunity we're providing for our customers. It's not about -- we hope to have better margins but it's not being driven by some sort of replacement strategy.

The only thing that goes away is we sell our fast detergents on some scrubbers. But chemical sales for us (technical difficulty) less than 1% sales. It's minimal. So that's really the only thing that gets impacted by ech2o. Everything else should be exactly the same as it is on existing equipment.

At this time there no further questions.

Alright, let me conclude by saying we are very pleased with our performance in the fourth quarter and indeed for the full year of 2007. We have got some momentum going and our expectation is that that momentum should continue through 2008 and we thank you for your interest in Tennant and we look forward to updating you on our progress periodically here as the year progresses. Thanks a lot.

This concludes today's Tennant Company conference call. You may now disconnect.