Tennant Co (TNC) 2008 Q4 法說會逐字稿

Good morning and thank you for participating in Tennant Company's fourth-quarter 2008 earnings conference call.

This call is being recorded. If you do not wish to participate, you may disconnect at this time.

After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

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

Thanks, Rachel. Good morning, everyone, and welcome to Tennant Company's fourth-quarter 2008 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; Pal O'Neill, our Treasurer; and Karen Durant, our Corporate Controller.

Our agenda this morning is to review Tennant's performance during the quarter and full year and our outlook for 2009. First, Chris will update you on our operations, then I will review the financials. 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 a 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. Our earnings release issued today includes a schedule to reconcile these non-GAAP measures to our GAAP results.

Our earnings release was issued this morning via BusinessWire and is also posted on the Investors section of our Web site at Tennanco.com.

Now, I will turn over the call to Chris, who will review Tennant's fourth-quarter and full-year performance and discuss how we are driving to deliver results in 2009. Chris?

Thanks, Tom, and thanks to all of you for joining us this morning.

As you know, the global economy declined sharply in the fourth quarter, and Tennant certainly felt the impact. While we are disappointed that recent economic events have such a negative effect on our fourth-quarter results, we are proud of our many key accomplishments during the year. These include the three strategic acquisitions in 2008 that expanded our presence in international markets, the successful launch of Ec-H2O technology and the continuing growth opportunities that it affords, as well as the $10 million of gross savings from our global low-cost sourcing and lean manufacturing initiatives.

Let's step back and take a broad look at Tennant's performance in 2008. As you'll recall, Tennant entered 2008 in a growth mode after posting record sales in 2007 with an organic sales increase of approximately 6.5%. We were anticipating further gains in 2008, but had contingency plans in place to reduce costs if the economy faltered.

Around mid-March, we began implementing Phase 1 of our contingency plans, taking action to lower spending levels as sales softened in North America. At that time, we either cut or delayed discretionary spending and postponed non-revenue-generating new hires. Consistent with our lean principles, we also reduced work hours in our plants to match demand. These early 2008 steps lowered our variable costs, prevented unnecessary inventory buildup, and helped generate solid operating performance through the third quarter of 2008. In fact, our operating margins improved sequentially each quarter through the first nine months of 2008, reaching 8.8% in the 2008 third quarter. We also posted organic sales growth of approximately 4% in the 2008 second and third quarters.

Against this backdrop, economic forecasts continued to deteriorate heading into the fourth quarter. What started out as an uncertain economic environment rapidly turned into an unprecedented decline.

In the 2008 fourth quarter, Tennant's sales fell 16% year-over-year, largely due to delayed customer purchases, stalled credit markets, and unfavorable foreign currency exchange rates. As the magnitude of these issues became clear, we accelerated actions to rescale our business and align it with market conditions.

Reacting quickly to deteriorating markets in the fourth quarter, we implemented a restructuring plan that was announced on December 17. When completed, this action is estimated to reduce our global workforce by approximately 8%, or 240 positions, which we expect will deliver at least $15 million in annualized savings in 2009, and at least $20 million in savings starting in 2010.

We continue to implement previous cost containment strategies and we froze salaries. Further, to preserve cash for operations and growth initiatives, we have temporarily suspended repurchases of Tennant stock and reduced 2008 capital expenditures to approximately $21 million versus the planned $25 million and $27 million range.

Amid the uncertainty that plagued us through most of 2008, we remained focused on our strategic priorities, and our direction has not changed. We are committed to pursuing growth and operation excellence initiatives that should position the Company to remain competitive and should allow us to return to historical levels of profitable growth when the economy recovers. Because of the expense reductions taken in 2008, we anticipate being profitable for the 2009 full year, as Tom will discuss in more detail shortly.

The Company's strategic priorities include employing continuous process improvement, improving operational excellence through lean manufacturing initiatives and a global low-cost sourcing platform and growing sales through innovative new products and service solutions, as well as through international market expansion. Our efforts to improve Tennant's operation efficiency have been successful. As I mentioned, we met our 2008 goal by achieving approximately $10 million in gross savings from global low-cost sourcing and lean manufacturing. One of the ways we accomplished this was by increasing the level of sourcing from low-cost regions from 14% in 2007 to 20% at the end of 2008. We will continue on this path in 2009 and aim to achieve a 25% level of sourcing from low-cost regions.

Although the global recession clearly hurt our sales volume and profitability in 2008, we are pleased that our strategic acquisitions contributed to sales and expanded our markets. In total, the Applied and Alfa acquisitions added approximately 3% to consolidated net sales for the fourth quarter and are approximately 5% for the full year. Although the economic conditions have adversely their sales levels, the integration of our acquisitions remain on plan.

We also continued to see results from our long-term strategy to build our international business. In 2008, revenue outside of North America accounted for 43% of Tennant's sales, versus 33% just four years ago and only 28% of our total sales in 2000. We have the people, the structure, and the products to aggressively grow our international business when the worldwide economy improves.

New product introductions that differentiate us from our competition are also an important source of revenue and will remain at the top of our priority list. We are committed to continuing our critical strategic activities in research and development and plan to invest at our historical level of between and 3% and 4% of net sales.

In 2008, sales of new products introduced in the last three years generated 44% of equipment sales, exceeding our 30% target. Tennant introduced six new products during 2008 in addition to the global introduction of our award-winning electrically converted water technology called ec-H2O.

Despite the recession, ec-H2O exceeded our 2008 expectations both for sales and customer satisfaction. This cost effective and environmentally friendly technology has either been adopted or is currently being tested actively by key accounts around the world, which we believe will lead to new business wins and accelerated growth going forward.

In 2008, we initially offered ec-H2O on six walk-behind scrubbers. In 2009, it will be introduced on five rider scrubbers. This will round out Tennant's portfolio of offerings to our commercial and light industrial customer base with specific applications in aviation, education, food and beverage, healthcare, hospitality, logistics, and retail environments.

We view ec-H2O as a game-changing technology platform that can spawn new applications and, over time, take Tennant into new markets. We are aggressively exploring both options.

We also continue to seek opportunities to bring Tennant's technology into new markets. An example of this is our licensing agreement with BISSELL that we announced this past November. Under the agreement, BISSELL has licensed Tennant's ReadySpace carpet cleaning technology to be marketed as BISSELL's PROdry home carpet cleaner. For the first time, this has placed a Tennant-developed solution in the consumer market. We are excited about this opportunity and are seeking other licensing avenues.

Our product pipeline going forward will remain robust. As the innovation leader in our industry, we believe it is important to continue to invest in R&D for the benefit of our employees, shareholders and customers. We are confident that the actions that we have taken are the right ones to protect and grow our business over the long term. Whether an economic recovery occurs in 2009 or 2010, it is our job to manage the business through this difficult business cycle.

We know what we can control, and that's our focus in 2009. With that in mind, the three guiding principles that we will follow this year center around, first, adjusting to the low-growth economy without sacrificing the Company's long-term potential; second, prudently allocating scarce resources to initiatives that position the Company to deliver against controllable objectives such as increased savings from global low-cost sourcing and lean manufacturing initiatives, reduced selling and administrative costs, and investments in research and development projects, such as Ec-H2O, to drive sales growth; and third, optimizing cash in an uncertain environment, through conservative planning, increased discipline and capital expenditures, and a heightened focus on working capital management.

By moving forward with our key growth and operational excellence strategies, we are committed to having the right products in the right geographies with an improved cost structure for when the economic recovery takes hold.

Now I will turn the call over to Tom for a review of the Company's financial results and our outlook. Tom?

Thank you, Chris. In my comments today, all references to earnings per share are on a fully-diluted basis. Also, please note, as I go through the financials, that I will generally not be commenting specifically on the full-year financials, as those are detailed at length in the earnings release.

For the fourth quarter ended December 31, 2008, Tennant reported a net loss of $16.9 million, or a $0.92 loss per diluted share, on net sales of $153.3 million. Fourth-quarter net earnings were reduced by $19.8 million pretax or $0.88 per diluted share for the previously disclosed restructuring, of which $14.6 million was related to a workforce reduction. The workforce reduction is estimated to achieve annualized savings of at least $15 million in 2009 and $20 million in 2010, as Chris noted.

In the fourth quarter, the Company also recorded a $5.2 million charge for other unusual items, including $3.4 million for increased accounts receivable reserves due to the global credit crisis and a $1.8 million write-off related to technology investments that are being replaced by new solutions.

In North America, we continue to see a longer sales cycle with customers delaying their purchases due to the economy. Our 2008 fourth-quarter net sales in North America totaled $88.2 million, down nearly 19% versus the prior-year quarter on lower unit equipment volume. The Company's Applied acquisition contributed approximately 1% to North America's fourth-quarter net sales, which was offset by an unfavorable foreign currency exchange affect of approximately 1%.

We believe Tennant will be well-positioned as the market leader in North America when activity in the industrial and outdoor segment regain strength and as commercial customers migrate to smaller cleaning machines because of the maneuverability and attractive price points we anticipate capturing this business with the compact products that we've launched in the past two to three years.

In our EMEA markets, which encompass Europe, the Middle East and Africa, fourth-quarter net sales declined approximately 16% to $45.9 million, compared with the year-ago quarter, on lower unit volume and an unfavorable foreign currency exchange rate that reduced net sales by approximately 9% for the quarter. Our acquisition of Applied added approximately 6% to EMEA net sales in the fourth quarter.

In Tennant's other international markets, which is comprised of China and other Asian markets -- Japan, Australia and Latin America -- 2008 fourth-quarter net sales rose 0.5% to $19.2 million versus a strong prior-year quarter. Here, we benefited from expanded market coverage in our Asia-Pacific and Latin American regions and our acquisitions, primarily Alfa in Brazil. Acquisitions contributed approximately 8% to other international's 2008 fourth-quarter net sales. This performance reflects the investments we made in these emerging markets. Unfavorable foreign currency exchange effect impacted net sales by approximately 6% in the quarter.

Tennant's gross margin was 36.5% for the 2008 fourth quarter, compared with 42.4% in the prior-year quarter, again due to significantly lower unit volume. Although we took cost-cutting actions as quickly as possible in the fourth quarter, the economic tsunami hit faster than we could react. As a result, Tennant's fourth-quarter gross margins contracted by 590 basis points.

Research and development expense in the fourth quarter was $6.5 million, up from $6.1 million in the prior-year quarter. R&D expense as a percent of sales rose to 4.2% in the fourth quarter of 2008 due to a decline in sales in the quarter, compared to 3.3% in the comparable quarter last year. For the year, R&D expense was 3.5% of net sales, within our targeted range of 3% to 4%.

For the fourth quarter, selling and administrative expenses totaled $71. 8 million versus $56.8 million in the 2007 fourth quarter. The increase in S&A expenses were chiefly due to the fourth-quarter restructuring activities. Excluding restructuring costs and other unusual items, S&A expenses were $52 million in the 2008 fourth quarter, compared to $56 million in the 2007 fourth quarter. Although Tennant's S&A expenses, excluding the restructuring charge of $19.8 million, were lower than in the 2007 fourth quarter on a dollar basis, the rapid decline in sales still resulted in higher S&A expenses as a percent of net sales during the 2008 fourth quarter.

We remain committed to controlling costs and lowering our operating expenses as a percent of sales over the next few years. To that end, we have engaged an external consulting firm that specializes in standardization and process improvement. They will help us develop a two to three-year plan for attaining meaningful reductions in S&A expenses as a percent of sales.

Our fourth-quarter operating loss was $22.4 million, compared to an operating profit and $20.6 million in the 2007 fourth quarter. Fourth-quarter 2008 operating margin was a negative 14.6% versus a positive 11.3% in the prior-year quarter. The lower operating margin in the 2008 fourth quarter is primarily attributable to restructuring costs and significantly lower sales volumes, as previously discussed. In addition, the 2007 fourth-quarter operating margin benefited from the $6 million gain on the Maple Grove, Minnesota, facility sale.

Our overall tax rate in the 2008 fourth quarter and full year was 28.2% and 39.6%, respectively. The full-year rate was higher than our anticipated 36.5% to 38.5% range, chiefly due to the final mix of pretax earnings and losses by country.

Now, turning to the balance sheet, net receivables at quarter end totaled $123.8 million, compared with $127.5 million a year earlier. Accounts receivable days outstanding was 77 at quarter end, up 7 days versus 70 at the end of the 2008 third quarter and compared to 61 at the end of the prior-year period. The increase stems from a sharp drop in sales volumes in late 2008, a higher mix of international sales which carry a longer payment terms than in North America, and a recent slowing in payments due to the credit crisis.

Our inventories at quarter end totaled $66.8 million, up slightly from $64 million at the end of the 2007 fourth quarter. The inventory increase primarily results from our 2008 acquisitions and from higher inventory levels due to stocking parts from low-cost countries and new product introductions.

FIFO days of inventory on hand was 101 days at the end of the quarter, versus 83 days in the comparable period last year.

Capital expenditures were $20.8 million in 2008, which, as Chris noted, was much lower than our planned range of $25 million to $27 million at the start of 2008 and down nearly $8 million from capital expenditures of $28.7 million in 2007. As global market conditions deteriorated, we deliberately lowered our capital expenditures as part of our cash preservation efforts. Yet, during 2008, we were able to complete a number of high-priority capital projects, including our very successful SAP upgrade in the fourth quarter.

As of September 2008, we have temporarily suspended repurchases of Tennant's stock, as previously announced, in order to conserve cash. We expect to reevaluate this decision when economic conditions improve. We currently have no plans, however, to reduce Tennant's quarterly dividend.

Tennant's cash and cash equivalents totaled $29.3 million at the end of the 2008 fourth quarter, compared to $33.1 million in the prior-year quarter. Total debt was $95.4 million, compared to $4.6 million in the 2007 fourth quarter.

We had a debt to capital ratio of 31.2% at the end of the 2008 fourth quarter, versus 1.8% at the end of the same period last year. The increased debt in 2008 primarily stemmed from funding the company's 2008 international acquisitions, which reflects Tennant's strategy of expanding operations outside of North America.

Now, turning to our outlook, we are expecting a very difficult selling environment in 2009, as are most companies. This requires us to conservatively manage the business. To that end, the restructuring that we announced in December 2008 is on track to deliver anticipated savings, and we have additional contingency plans in place that we will implement, if needed.

Our 2008 full-year outlook includes the following assumptions as of today -- the continuation of the weak global economic environment with sales declines anticipated in most geographies; unfavorable foreign currency impact on sales in the range of 4% to 6%; and an operating profit margin in the low single digits.

Additionally, while we do not provide quarterly guidance, I want to remind you that Tennant's first quarter is historically our weakest. Coupled with the current tough economic situation, we believe first-quarter revenues will come in lower than the $153.3 million we reported for the 2008 fourth quarter, and we do not expect our first quarter to be profitable. At this point though, we do anticipate seeing sequentially quarterly improvement in the Company's performance during 2009, and we expect to be profitable in the remaining quarters of 2009 and for the full year.

We also anticipate a base tax rate in 2009 of approximately 37%, depending primarily upon the mix of taxable earnings by country. We expect significantly lower capital expenditures of $15 million or less.

Given these assumptions, Tennant currently estimates full-year 2009 sales in the range of $590 million to $625 million and earnings of between $0.05 and $0.45 per diluted share. We recognize that this is a wider range than we typically provide but feel it is prudent to give this range at this early point in the year.

I know you are hearing this from many other companies but I can't emphasize enough that the level of economic uncertainty, continuing problems in the credit markets, and a general lack of visibility into when the economy and Tennant's business will improve make providing an outlook very difficult. We will reevaluate our assumptions as the year progresses and events unfold.

We believe the current cash and available debt capacity are more than adequate to cover the Company's normal operating cash needs and fund capital spending during 2009. Tennant is currently in compliance with debt covenants, but we are in the process of negotiating an amendment to the Company's credit agreement to exclude restructuring charges in order to ensure compliance with covenants throughout 2009. We anticipate executing the amendment prior to filing our 2008 10-K.

As we've discussed, our 2008 fourth-quarter results provide a glimpse into the challenges that lie ahead. So we are taking appropriate actions to scale our operations and to conservatively manage the business during this volatile period.

In addition, as Chris noted, although we are disappointed that the end of 2008 had such a negative impact on our earnings, we are proud of our many key accomplishments in 2008, including our three strategic acquisitions, our successful introduction and continuing rollout of Ec-H2O, as well as our expanded presence in international markets. We expect that these positive achievements and our lower cost structure will continue to benefit Tennant going forward.

With that, we would like to open up the call to any questions. Rachel?

Thank you, sir. (Operator Instructions). Seaver Wang.

A quick question on ongoing cost savings -- you reached your $10 million mark. Can you give us a range for cost savings for '09?

Yes, I will give you a sense of that, Seaver. We don't anticipate -- we anticipate holding onto the savings that we've garnered to date, and we don't anticipate being able to expect to repeat that $10 million level in '09. We believe our sourcing benefit should be an additional $5 million of additional sourcing savings, obviously somewhat affected by the lower revenue base that we are anticipating. We do believe we will get some lean benefits over and above that. I am just not ready to give you a number on that at the current time, given the wide range of our revenue. But we do anticipate a continued savings. We believe we will continue to be successful but don't anticipate to be able to repeat the $10 million level in '09.

Okay. Then assuming that the consulting firm you hired can reduce SG&A, at least a little bit in '09, then there's, say, maybe a little bit of upside possibly?

We would anticipate we will get some quick wins in '09 from the work we are doing. The front end of the work we are doing is really an in-depth assessment of our processes globally. Then we're going to pick the projects out of that that we will begin to implement, so we do believe we will get some incremental benefit this year, but the big wins are going to be as we go out over the next few years.

I mean, this isn't going to be a quick project. This is going to be a long-term change in the way we do business to become best in class in many areas and really ensure that, as revenue starts growing, we are not adding people back and that we can really leverage our people costs as we go forward which, as you know, has not been a real strength of Tennant in the past.

In R&D, do you expect it to remain in that 3% to 4% of sales but probably closer to the 3% and --?

We will remain within range. I would call it at the lower end to the middle at the current time. But we firmly intend to remain within the 3% to 4% range with our R&D spend.

But more importantly there, we intend to maintain a robust new product pipeline through this period and to ensure that the key initiatives and strategies that will provide the biggest benefit are preserved so we can leverage them when the economy recovers. That's the important message.

Okay. The product portfolio is pretty robust at this point, given the last two years of product rollout. I mean, are you fairly satisfied at this point with the product portfolio with no real big I guess deficiencies?

We anticipate achieving or exceeding our goal of 30% of equipment sales coming from new products launched in the last three years in 2009.

Then last question -- just what can we expect for the tax rate for --?

I would use a 37% rate, Seaver, at the current time. We like to think that is conservative, but I just believe that's the best rate to use right now.

Okay, thank you.

Theodor Kundtz.

Could you guys or Chris maybe just talk a little bit more about the different geographies that you're serving and kind of the business conditions you are seeing in each and how they might be different in the US versus Europe versus the rest of the world? Maybe just a little more color on that would be helpful.

Well, my experience is usually recessions are rolling, and they don't hit all geographies equally at the same time. What we are sensing right now is that all geographies are being hit very hard by the recession.

If you look at our sales in the fourth quarter, I think that is a pretty accurate reflection of what we're going to continue to see through 2009 with North America and Europe being hardest hit, followed by Asia Pacific. There's some bright spots in Asia Pacific, but Japan, as we saw with their fourth-quarter GDP decline, is going to face a very tough year. We anticipate a little bit more robust market in China just because of the stage of development. Then Latin America, where our sales were pretty much flat in the fourth quarter, I think, given the acquisition of Alfa in Brazil and given that we are starting off of such a low base, that's probably the one bright spot in 2009. Unfortunately, it's also the smallest part of our business. So we're not going to make or break the business based on our performance in Latin America.

Do you see conditions getting worse currently than they were in the fourth quarter, or just sort of a continuation of what you saw in the fourth quarter when things really kind of slowed down dramatically for you?

You know, just to kind of go back on that a little bit, Ted, I mean the fourth quarter had three pretty different months. These are broad numbers, but October was down about 5% organically; December was over 20% down; and November/December was around 20%, which brought the overall quarter down about 16%. What I would say is we are looking at our trends right now into the first quarter. Things are moderating; it's not getting worse. But I would say, to use a broad number, best case it will be a similar year-on-year decline to what we saw in the fourth quarter. So conditions have moderated, they are not getting worse, but we are not seeing any significant improvement.

You are just concerned about the commercial space in that what's happening in the commercial market -- is that impacting you guys much differently or --?

We are being negatively affected across also segments of our business, to be straightforward about it. Actually, the industrial side is where, in our larger equipment sales, is where the biggest year-on-year declines are. But we are being adversely affected across all parts of our portfolio.

Okay. The BISSELL agreement, the licensing agreement with them, is there any sense of quantifying that at all, or do you have any sense of what that outlook would be for the year?

We are not really at liberty to give you a number on that, Ted. I mean, it's not going to be a real big number, but it is relevant to our financials, but we are not prepared to give you a number on that.

I think the more interesting thing, Ted, is that now we are not actively investigating licensing opportunities in markets that we don't serve, with BISSELL being the first one. We think that, over time, we will generate more and more business through licensing. That is one of our strategies.

Yes, that would be great because that's all profit.

We would love that.

Great. Then just maybe a little more color on the rollout of Ec-H2O. How is that being accepted out there? Any kind of pushback to it at all, or just kind of your view of the rapidity of the acceptance of that?

Right. We haven't said much about what our sales levels are or exactly which customers we've managed to penetrate. We do that more for competitive reasons at this point. But I did say that sales exceeded our internal plant projections despite the recession in 2008, and I think that customer excitement, quite frankly, has exceeded our expectations as well. I mean, we went in thinking that the chemical cost savings would be the big deal, but customers coming back and saying "yes, that's important but boy, you know, if it improves our productivity, streamlines the cleaning process and lowers our training expenses and we think it's going to reduce our medical liability costs as well because our people no longer have to breathe or handle these chemicals, then it leaves behind no environmental footprint." So it's a win on every important front for a customer. So it's a much more broad-based win for customers than we had anticipated going in, which is a real positive, which is why we think customer satisfaction has been better than we anticipated.

You know, like with any new technology, there is an adoption curve. You know, you have the innovators and the early adopters, and they tend to be the opinion leaders in the industry, and eventually you get to the mass market. You know, we are still very much at the beginning of that curve.

But we are, as I said, testing Ec-H2O across most of the big key and global accounts around the world currently. We have some great early wins. We haven't disclosed who they are, but based on that, we believe that we will be able to accelerate growth through winning more than our fair share of that business going forward.

When is scheduled rollout on the rider scrubbers? You mentioned five being in '09. Is that early on in the year, or throughout the year or --?

Yes, it has just started. I think the first rider has been introduced to the market, so it's going to be rolled out between now and I think the last one goes out early in the early third quarter. But it is more front-end or first-half loaded.

Okay, terrific.

Joe Maxa.

Can you give us a sense? I know you said all parts of your business were down, but were the parts and service line came in and what you're seeing in that line here in Q1?

Yes, clearly that business is holding up better than our equipment sales. We are not ready to give any specific numbers on what we are seeing in those exact trends as we are into January and February, but that part of our business is holding up better. But we have seen -- that hasn't affected more than we would have anticipated, but we do believe that will return to normalcy. People need to maintain their equipment and we believe that part of our business will hold up and continue to be somewhat of an annuity stream for us. But it has been more negatively affected in the back end of the year than we would have -- back end of last year than we would have anticipated.

And then, Tom, how do you get to your guidance? Can you kind of walk us through how you peg that revenue?

You know, we actually -- we've really built it up by geography, Joe. I mean it is really anticipating that we see -- and we've built it up by geography but it really does assume that we see very -- a similar first quarter to what we saw in the fourth quarter and very modest sequential improvement in our business. So, as you just look at it, as we go into the second quarter, we anticipate to see modest improvement but we expect to continue to see revenues below prior year. We do believe that, by the time you get to the fourth quarter, we are lapping obviously an extremely low quarter, that we do expect to see some upside versus the prior year. But for now, we're just looking towards modest sequential improvement quarter-to-quarter and no real big improvement in the overall economy.

So service and parts being a little better than your equipment, have you also -- I mean, as part of this -- or what kind of discussions have you had with your customers or your larger customers and what they are saying about what they are looking at for '09?

We have obviously factored in feedback from our sales folks in their conversations with their customers, but you know, they tend to be more optimistic than the reality of what's going on in the marketplace, so we are really not relying heavily on what the field is saying.

Okay, that's very helpful. I mean, I got cut off a couple of times when you were talking about the OpEx and the consulting firm that you are hiring. Did you give a goal of what you are trying to get to?

We did not. We just said it's really about a two to three-year project that we are just at the front end of it. We are going to do about a 12-week assessment of our processes really around the whole globe, and then we will pick the key projects and begin implementation to drive process improvement over the next period of time. We expect obviously to get a few quick wins, but we are taking a long-term point of view to really change our operating expense structure.

Okay. Then I also missed when you were talking about your debt covenants. You thought you would be able to restructure.

Yes. We are in compliance at the end of December, and we are having conversations with our banks and we anticipate to have the situation rectified so we won't have any potential issues as we go into this fiscal year. So we anticipate having that all signed before we file our 10-K. So we will not be facing potential issues as we go into the year we are in right now.

The main driver was just to exclude the restructuring out of those numbers?

Yes.

Okay. All right, thank you.

James Bank.

Quickly, Tom, what were the existing covenants on that senior debt?

The two main covenants are a debt-to-EBITDA ratio of less than 3.5 or lower, and also an EBITDA-to-interest ratio of 3.5 or higher. So those are the two primary covenants.

I want to emphasize we did not have any issues with that at the end of December. It's really about excluding the restructuring charges as we go forward to not potentially have an issue on a go-forward basis. So we do believe we are out in front of this and anticipate having things signed before we file our 10-K.

Okay. What is the remaining borrowed capacity, the actual dollar amount?

Do you have that handy, Pat?

About $35 million.

About $35 million available on the current lines. We also ended the year with $29 million of cash. So we think we have more than adequate cash to satisfy any kind of operating needs we have on a go-forward basis.

Okay. Now, the lower end of your guidance, or actually excuse me -- your guidance in general, the bottom-line guidance heading into '09, does any of that include any charges you are assuming?

It assumes no additional charges.

Okay. So Tom, just a quick eyeball, is that $0.05, that nickel on the lower end with an assumed EBITDA of maybe $18 million to $19 million, is that more or less in breach I guess of let's just consider it a prior covenant -- before you to restructure it?

It potentially could be.

Okay.

Which is the reason why we are trying to get out in front of the issue. If you look at your forecast, you look at the state of the economy, our point of view is it makes sense to be very straightforward with your lenders and look out to where things are going and get those situations behind you, particularly with the uncertainties out in front of us. We've had good conversations to date, and we believe we will get an agreement signed with our bank group prior to filing.

Okay. What date do you anticipate filing the Q?

Our anticipated date is March 5, roughly, somewhere around that date.

Okay, great. I will look forward to that, then.

Then quickly jumping to Ec-H2O now, you keep switching it on me! [laughter] What is the premium again on that, on percentage terms? Like if you took a standard walk-behind scrubber machine and then you took one with the ec technology or excuse me, the Ec-H2O technology, what would the premium be again?

You know, it is such a wide range, James, just given the diversity of the pricing on that piece of equipment, that the device is very similar on each of the pieces of equipment, so the percentage [up] charges are quite dramatic. So we would prefer not to get into that.

Okay, okay, fair enough. That's all I have. Thank you.

[Matthew Levison].

Most of my questions have been answered, but I do have a couple remaining. I understand, of course, that you have applied for patents on Ec-H2O and I wondered if you have some idea as to the time frame in which they might be conferred.

Yes, we've applied for in excess of 20 patents on Ec-H2O. I don't know. We don't have clarity yet on when they are going to be conferred. It is a much slower process than we would like.

Understood.

But we are highly confident that they will be allowed at this point.

Okay, well that's certainly reassuring.

One thing I noticed is that your warranty expenses tend to be fairly high. They seem to run in the area of 2% of sales and sometimes I think even more than that. It would seem that, if management were able to address this in some way without -- naturally without angering your customers, that it could do some very nice things for margins. Have you looked at this? Is there something that could be done in terms of, say, either strengthening some parts or some engineering that might significantly impact this expense?

Well, I think what we're focusing on more is to improve the reliability of our products. I mean, one of the things that we've been faced with here over the last two or three years is that we have launched so many new products off of new platforms, right, versus historically Tennant had a very stable product portfolio where we had anywhere between 10 and 12 years to get it right and to work out all of the bugs, and so warranty was at a lower rate. I think it has increased a little bit now that we've launched so many new products. But we do have, believe me, in place, in 2009 and going forward, very specific actions for ensuring that we design for reliability and that our manufacturing processes also ensure that we are building the machines to the very high-quality standards that we have. I anticipate us making progress on this front starting in 2009.

That's certainly very good. One last question if I might? There were references to the Company being impacted by higher material costs. Now with the recession, are you benefiting from lower material costs or --?

We do. At the current time, we think that, as you look at where costs are today from kind of the commodity-oriented things that we buy that are a part of our cost of goods sold, we do view it as an opportunity as we look forward into the year. We are seeing the trends go in the right direction for us. We view it as -- the year is certainly shaping up to be more positive in that regard than the prior year was.

Zahid Siddique.

Good morning. Just a couple of questions -- one, on the BISSELL deal, just in general philosophically, doesn't that licensing -- doesn't that dilute the Tennant brand?

They do not use the Tennant brand on their products.

Correct, but if you start licensing your products in that way, would that not dilute your product brand in any way?

We don't believe so, Zahid. What we're looking at is we want to license, if we do it into areas that we are not intending to compete in. We are selling our products into the industrial and commercial markets. We don't have any intention of competing in the consumer arena. So, if we can take our technologies and they can be adapted into that area and we can earn a licensing fee, we view it as being a positive for us financially and in many instances should be positive for the band also.

My belief is that the broader your technology base -- as long as you maintain the integrity of that technology and the way you deliver it to the end user, whether it be a consumer or a commercial customer, it builds credibility, acceptance of that technology. I think it benefits us in the core markets that we will continue to go direct in. I also just think it puts us in the forefront of being a technology leader, so that when we launch the next generation of technologies, people will say "Well, Tennant, they've done -- they did the ReadySpace technology and the Ec-H2O technology, and look, they do it both in hospitality and healthcare and retail, and they have been successful in consumer applications as well." I just think that helps us get off to a much faster start and get broader reach for our technologies as we go forward.

Okay. My next question is on CapEx for '09. What should we expect?

$15 million or lower.

$15 million or lower.

That's obviously dependent upon the state of the economy, but we are prepared to ensure that, you know, our current plans are to spend at the $15 million level, which is substantially below where we've been the last four or five years and also is actually below our D&A but we are prepared, if the economy gets tougher, to go below that level.

Okay, great. Then just one last question -- what was the rationale behind changing the name of eco to Ec-H2O?

Well, it was really the ability to trademark it and then making sure we had something that was protectable as we went forward. Actually, now it's become Ec-H2O. I mean it is a much easier name to remember and it is a much easier concept to explain. So, I think it has been a net positive for us.

Okay, but in terms of customer recognition, that doesn't change. You know, you are kind of early on in the process?

No. We were so early on in the process that this was kind of like inside baseball. We knew about the brand and what it meant, but our customers were just beginning to learn about it. If you look at the logo, it's still very similar to what it was before. We just talk about it differently.

Okay, thank you so much.

[Shiraq Patel].

As we talked about raw material prices coming in, how do you anticipate pricing to hold up going into 2009?

We have taken price increases, and we do anticipate to be able to get some modest pricing benefits, but it will be not anywhere near what we've achieved over the last few years. We are not prepared to give you an exact number but it will be positive but not nearly the magnitude that we've had over the last two to three years.

Okay. Then moving over to just the revenues in general, I was kind of looking for a breakout between the equipment and the parts. I know I think that's something you guys included in the 10-K, but do you have a general feel for how that percentage was for the full year here?

About 60/40.

It was about 60/40 -- 60% equipment, 40% service, parts and consumables.

Okay, and you kind of expect that to hold up for 2009?

Well, you know, it has held up for the last four or five years. Could it shift a little bit in favor of service, parts and consumables? Absolutely, but we do not anticipate a big change.

Okay. Then on the $15 million in CapEx for 2009, what is maintenance CapEx?

You know, it's something below the $15 million level, so it's -- we've never given a precise number on that, and so it's obviously somewhere below $15 million because we are continuing to fund our cost-reduction efforts and our new product introductions. That's included in the $15 million, so our bare minimum maintenance is clearly somewhere below that level.

Kevin Casey.

A couple of questions -- I might have missed some of these. Did you break down how much Ec-H2O sales were in the quarter?

We have not, Kevin. We haven't given any breakouts of that, and for the time being, for competitive reasons, we don't anticipate doing that in the near future.

All we said was that it exceeded our internal plan.

Okay. Then have you guys received -- when you have these royalty arrangements for both that product and some of your other technology, do you guys receive any upfront payments, or is it all based on future sales?

It tends to be based on future sales.

Then the renegotiating of the debt, is there going to be a cost associated with that?

There will be some fees associated with that.

Is that in the guidance, or is that going to be a one-time?

It's included in our numbers on a go-forward basis. So there will be some fees associated, and it will dictate that we have more market-based interest rates on a go-forward basis. At the current time, our loan is far below market, and so we will anticipate there will be some higher interest costs associated with that. That is built into our guidance.

Okay. Then is there a rate with which would walk and take the chance on the covenants?

We would not anticipate doing that, no.

All right, thanks.

Theodor Kundtz.

Just a quick follow-up -- Tom, just talking about looking at the CAT reserve -- accounts receivable reserve you took, what's your view going forward on that? Is there a concern that, with the environment out here, you're going to see some more -- have to take some or write-downs there?

Yes, we think we've obviously adequately reserved ourselves as of the end of December. That's why we took the actions. There's an awful lot of literature out there that you need to think about it differently, given the credit crisis that's going on.

We've also built in a higher level of adds to our reserves -- I mean into our guidance as we go forward. So not only do we believe we adequately reserved ourselves, we are also expecting that we're going to need to continue to add reserves at a higher level than we historically have done.

Okay, and that is in the guidance you (multiple speakers)?

That is in our guidance, yes. We feel we have adequately covered ourselves.

Okay, great. Thanks.

Thank you. There are no further questions at this time. Do you have any closing remarks?

Yes I do. So, thank you all for your time today and for your questions.

Despite the current macroeconomic conditions, we are focused on controlling what we can control in 2009. We remain confident in our business model and are firmly committed to the long-term strategic direction that we've established. Although the year ahead looks very challenging and, frankly, it may be a bumpy ride, we believe that our strategies of international market expansion, new products and operating efficiency gains, coupled with strong cost controls, position us well for long-term success. Further, we believe these strategies will allow us to have the right products in the right geographies with an improved cost structure that should allow us to resume our historical track record of profitable growth when the macro economic conditions improve. We look forward to keeping you all posted on our progress. Thank you.

Thank you for your participation. This concludes today's conference call. You may now disconnect.