Tennant Co (TNC) 2009 Q1 法說會逐字稿

Good morning and thank you for participating in Tennant Company's first-quarter earnings conference call. This call is being recorded. If you do not wish to participate, you may discontinue at this time. (Operator Instructions). We ask that you remain online for closing remarks by management after the question-and-answer session.

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

Thanks, Laurie. Good morning, everyone, and welcome to Tennant Company's first-quarter 2009 earnings conference call. I'm Tom Paulson, Vice President and Chief Financial Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO; Pat O'Neill, our Treasurer; and Karen Durant, our Corporate Controller.

Our agenda this morning is to review Tennant's performance during the first quarter and our outlook for 2009. First, Chris will update you on our operations, and 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 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 reconciliation of those non-GAAP measures to our GAAP results. Our earnings release was issued this morning via Business Wire, and it's also posted on the Investors section of our website at tennantco.com.

Now I'll turn the call over to Chris.

Thanks, Tom, and thanks to all of you for joining us this morning. We anticipated that our first quarter would be weak. Like most industrial companies, we continue to face a difficult selling environment due to the global recession, which affected net sales in all of our geographies. However, we are focused on controlling what is within our control in 2009, as I said last quarter.

To that end, our efforts this year center around three guiding principles -- 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 expenses, 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.

I am pleased that our execution against these guiding principles yielded solid benefits in the first quarter. Tennant's lower cost structure allowed us to maintain gross margins on reduced sales. Our global ec-H2O rollout continued to gain traction as we continued to convert existing and new customers to our ec-H2O technology. And we generated strong cash flows during the quarter. Furthermore, we expect to deliver profitable results from operations for the three remaining quarters of 2009.

As noted in the press release, we took a noncash pretax goodwill impairment charge of $43.4 million as a result of the deterioration in the general economic environment and the resulting decline in Tennant's stock price during the first quarter. Tom will provide more details, but it's important for you to know that the impairment charge has no impact on the Company's cash flow, credit agreements or liquidity.

In the first quarter, we continued to implement the restructuring program that was announced in the 2008 fourth quarter. We've begun to see the benefits of this action, which we expect will deliver at least $15 million in savings in 2009 and at least $20 million in savings starting in 2010. We also continued executing our previous cost containment strategies such as a salary freeze, lower discretionary spending and reduced capital expenditures.

At the same time, we can never forget that innovative new products differentiate us from our competition and provide an important source of value creation for Tennant. As a result, we have committed to continuing our investment in research and development within our historical targeted range of between 3% and 4% of net sales. In the 2009 first quarter, new products introduced in the last three years demonstrated their importance by generating 44% of Tennant's equipment sales, which once again exceeded our 30% target.

In 2009, our new product focus is on expanding the successful rollout of our chemical-free cleaning technology called ec-H2O. We have numerous patents pending on ec-H2O, and we are the first to market in our industry with this technology, which converts plain tap water into a powerful cleaning agent without any added chemicals.

Let me give you an update on our marketing and sales success with this eco-innovation. During the quarter, ec-H2O continued to win international recognition as a breakthrough product. We are pleased that it received the prestigious 2009 European Business Award for Business Innovation of the Year. This follows the R&D Magazine award naming ec-H2O as a Top 100 Innovation in 2008.

ec-H2O is exceeding our expectations for sales and customer satisfaction. This cost-effective technology has either already been adopted or is currently being tested by an increasing number of existing and potential new customers around the world, which we believe will lead to new business wins and accelerated growth going forward.

We have initially focused our selling effort on large customers and have been successful in converting a number of both existing and new customers to our ec-H2O technology. For example, two large customers have called out ec-H2O as a companywide best practice for use in their stores -- Neiman Marcus and Costco. In addition, ec-H2O technology is currently in use at several other major retailers, including Nordstrom, Dick's Sporting Goods, PetSmart stores, Target stores, Whole Foods and throughout the Bed Bath & Beyond Corporation. Ec-H2O is also receiving strong accolades and is being used by large [DSC] cleaning professionals such as ARAMARK, Sodexo, ADM and Unico.

Traditionally, it has been difficult for a large national account customer with large fleets of cleaning equipment to convert to a new equipment supplier because of the high costs associated with switching. Today, ec-H2O is opening doors to entirely new accounts for Tennant because it is so differentiated from the competition and offers such significant benefits, including cost savings, greater productivity and worker safety, as well as reductions in water, energy and hazardous chemical use. As a result, we believe we are gaining market share from our competitors.

In addition, with ec-H2O technology, Tennant is well-positioned to capitalize on increasing regulatory and environmental concerns. As you may be aware, there is a growing public health concern over the use of hazardous chemical cleaning agents. A total of 16 states have state policies designed to reduce the use of chemicals in the cleaning process used in public schools and other public buildings. 13 other states have legislation pending that would impose similar restrictions to public and private K-12 education buildings, and some would extend this to all state-owned buildings.

At this time, compliance to these measures is voluntary. However, Tennant is at the leading edge and is able to satisfy these growing demands as policies and regulations continue to grow, as we expect them to.

Initially, Tennant offered ec-H2O on six walk-behind scrubbers in 2008. During the 2009 first quarter, we expanded the availability of ec-H2O to three battery-powered rider-scrubbers, including the Tennant T7 Micro-Rider, T15 midsized scrubber and the Nobles Speed Scrub Rider. We plan to introduce this technology on a total of five rider-scrubbers this year. These products will round out Tennant's portfolio of scrubber offerings to our commercial and light industrial customer base, with specific applications in aviation, education, food and beverage, healthcare, hospitality, logistics and retail environments.

Based on the growing market acceptance of ec-H2O, we continue to look for opportunities to extend this game-changing technology to additional products in our portfolio, as well as to entirely new applications and markets. We are very excited about the potential for ec-H2O.

Also during the first quarter, we announced a strategic sales and service arrangement with Kaivac Inc. The agreement allows us to provide our national account customers with Kaivac's industry-leading no-touch cleaning restrooms solutions. Restrooms are our customers' number one cleaning problem. And to date, Tennant has underpenetrated this market segment. The Kaivac alliance leverages our strong national account salesforce and enables us to extend into a new segment of the cleaning market.

Looking ahead, our strategic priorities remain unchanged. They 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 growth and operational excellence initiatives should position the Company to remain competitive, enhance the long-term value creation of our business, and allow us to return to historical levels of profitable growth when the economy recovers. We remain keenly focused on delivering profitable results from operations for 2009.

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

Thanks, Chris. In my comments today, all references to earnings per share are on a fully diluted basis. For the first quarter ended March 31, 2009, Tennant reported a net loss of $41.7 million or a $2.29 loss per diluted share on net sales of $128.6 million. As Chris mentioned, Tennant's 2009 first-quarter results include a noncash pretax goodwill impairment charge of $43.4 million or a $2.32 loss per diluted share.

The Company's first-quarter results also include a $1.3 million pretax benefit from the revision to the reserve for workforce reduction severance and related costs associated with the restructuring program announced in the 2008 fourth quarter. The favorable revision to the restructuring reserve was primarily due to lower severance costs than anticipated in Europe, both on an employee settlement basis and also the opportunity to eliminate open positions due to Company turnover, thereby avoiding some severance payments. As Chris said, we still expect to achieve savings of at least $15 million this year and $20 million in 2010 from the restructuring.

Excluding the goodwill impairment charge and the benefit from the restructuring charge reserve revision, net earnings would have been a loss of $0.6 million or a loss of $0.04 per diluted share, and Tennant would have had an operating profit of $0.3 million in the 2009 first quarter compared to operating profit of $8.5 million in the 2008 first quarter. The lower operating profit this year is primarily attributable to lower sales. Tennant reported net earnings in the 2008 first quarter of $5.2 million or $0.28 per diluted share on net sales of $168.6 million.

Tennant's consolidated net sales for the 2009 first quarter declined 23.7% compared to a strong 2008 first quarter. Recessionary conditions, including the ongoing difficulty that our customers have had obtaining credit, led to weak net sales across all geographies. Unfavorable foreign currency exchange effects reduced consolidated net sales by approximately 6%.

In North America, we continue to see delayed purchases resulting from economic weakness. First-quarter net sales totaled $73.3 million, down 25.4% versus the prior-year quarter, due to lower unit volumes across all product lines. Foreign currency exchange effects on North America net sales had a negative effect of approximately 1%.

Tennant remains well-positioned as a market leader in North America when activity in the industrial and outdoor segments regain strength. Also, as commercial customers migrate to smaller cleaning machines because of their maneuverability and attractive price points, we anticipate capturing this business with the compact products that we have launched in the past two to three years.

In our EMEA markets, which encompasses Europe, the Middle East and Africa, first-quarter net sales were $41.1 million, down 22% compared with the year-ago quarter, due to lower unit equipment volume. Unfavorable foreign currency exchange effects reduced net sales by approximately 14%.

In Tennant's other international markets, which is comprised of China and other Asian markets, Japan, Australia and Latin America, 2009 first-quarter net sales were $14.2 million, down 19.3% versus the prior-year quarter. Unfavorable direct foreign currency translation exchange effects lowered sales in other international markets by approximately 8%. Australia had a good quarter, but unit bought decreased in Tennant's Latin American markets.

In 2008, Tennant made three strategic acquisitions -- Alfa in Brazil, Applied Sweepers in the UK, and Shen Tan in China. The integration of these acquisitions is on plan.

We are pleased that Tennant's gross margin essentially held steady at 41% for the 2009 first quarter compared with 41.3% in the prior-year quarter, despite a significant decline in sales volume during the first quarter of 2009. The Company's gross profit margins benefited from lower commodity prices, flexible production management, the workforce reduction and pricing actions. We anticipate being able to maintain our gross margins at around 41% throughout this year, based on the cost reductions we have implemented and expected lower commodity prices in 2009.

Research and development expense in the first quarter was $5.7 million, down from $6 million in the prior-year quarter. R&D as a percent of sales rose to 4.4% in the first quarter of 2009 due to the low level of sales in the quarter, compared to 3.6% in the comparable quarter last year.

Selling and administrative expense in the 2009 first quarter decreased $9.7 million or 17.6% to $45.4 million versus $55.1 million in the first quarter last year. The lower S&A expense during the 2009 first quarter was primarily due to savings from the workforce reduction, along with cost controls and cuts in discretionary spending to better align expenses with sales.

The goodwill impairment charge was related to the decline in Tennant's stock price during the 2009 first quarter, resulting in a market capitalization below book value for a number of weeks up to and including March 31, 2009, which triggered the goodwill impairment evaluation in accordance with Statement of Financial Accounting Standards number 142. Most of the charge is nontaxable. However, it is noncash and does not affect our cash flow, credit agreements or liquidity.

Our overall tax rate in the 2009 first quarter was a negative 1.6% compared to 36.9% in the first quarter of 2008. The tax expense for the first quarter includes a $1.1 million tax benefit associated with the $43.4 million impairment of goodwill, which is materially impacting the overall effective rate. Excluding the impact of the goodwill impairment, the first-quarter effective tax rate would have been 41.9%. The increase in the 2009 first-quarter effective tax rate is primarily related to the mix in taxable earnings by country.

Now, turning to the balance sheet, net receivables at quarter end totaled $102.1 million compared with $132.7 million a year earlier. Account receivable days outstanding was 75 at quarter end, down sequentially from 77 at the end of the 2008 fourth quarter and versus 67 at the end of the prior-year quarter. The decrease in days from the 2008 fourth quarter is primarily due to the lower level of sales and the collection of outstanding receivables.

Our inventory at the quarter end totaled $66.8 million, down from $77.3 million at the end of the 2008 first quarter. FIFO days inventory on hand was 121 days at the end of the quarter versus 95 days in the comparable period last year and 101 days at the end of 2008. The increase in days from the 2008 fourth quarter stems chiefly from lower sales volume since inventory levels essentially remained flat at $67 million.

Capital expenditures totaled $3.8 million in the first quarter of 2009 versus $7.4 million in the same period last year. We have deliberately lowered our 2009 full-year capital spending plans by nearly 50% compared to 2008 levels in order to preserve cash. We expect capital expenditures of $15 million or less this year.

We are pleased that during the 2009 first quarter, Tennant generated $11.2 million in cash from operations compared to the negative $5.9 million in the year-earlier quarter. At the end of the 2009 first quarter, the Company's total cash was $26.7 million, up from $25.3 million a year ago. Total debt was $91.9 million at the end of the 2009 first quarter, down from $97.3 million at the same time last year.

After the 2009 first quarter ended, Tennant received a $9 million income tax refund in April, which was not included in the first-quarter results. The refund was used primarily to pay down debt and will benefit operating cash flow in the second quarter.

Additionally, Tennant is in compliance with its debt covenants. During the 2009 first quarter, we obtained an amendment to our credit agreement to exclude noncash charges and previously announced restructuring charges from the debt covenant calculations. We anticipate that this amendment will enable the Company to remain in compliance with its covenants throughout 2009.

Further, Tennant's Board has just authorized the Company's regular cash dividend of $0.13 per share. Tennant has paid a dividend in each of the past 50 consecutive years. The Board and management believe that the dividend is an important way for us to demonstrate our long-term commitment to enhancing shareholder value.

Turning now to our outlook, as we stated last quarter, we continue to expect a very difficult selling environment in 2009. Our December 2008 restructuring program is on track to deliver anticipated savings, and we remain committed to conservatively managing the business.

Including the 2009 first-quarter noncash goodwill impairment charge of a $2.32 loss per diluted share and the benefit from the restructuring charge reserve revision of $0.07 per diluted share, we now estimate a full-year net loss in the range of $2.20 to $1.80 loss per diluted share.

Excluding the goodwill impairment and the benefit from the restructuring charge reserve revision, our expected net earnings range for 2009 remains the same as our previously issued guidance of a profit of $0.05 to $0.45 per diluted share.

We are lowering our 2009 full-year net sales guidance to a range of $560 million to $600 million versus our previously estimated net sales range of $590 million to $625 million, which we provided in February.

Our full-year outlook includes the following assumptions as of today -- 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 operating profit margin in the low single digits, excluding the 2009 first-quarter unusual items; and capital expenditures of $15 million or less. We also anticipate a tax rate in 2009 in the range of 36% to 38%, depending primarily upon the mix of full-year taxable earnings by country.

We believe that our current cash and available debt capacity are more than adequate to cover normal operating cash needs and fund capital spending during 2009. We are pleased with our ability to maintain gross margins due to the progress we have made in achieving our reduced cost structure. Excluding the noncash goodwill impairment charge, we expect Tennant to remain profitable from operations in 2009 on lower anticipated sales.

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

(Operator Instructions). Seaver Wang, Utendahl Capital.

Quick couple of questions. You said you expect lower commodity prices, so I assume you are seeing it in the market, but it hasn't really actually hit the P&L yet?

We actually did have commodity benefits coming through the P&L in the first quarter. So it was certainly beneficial versus prior year and it was fairly beneficial sequentially versus Q4. So while we saw commodity prices going down in Q4, we didn't see much of a benefit in last year. In this quarter, we're beginning to see that benefit. And it's one of the reasons why, as we look out across the remaining quarters, one of the reasons that we expect us to be able to maintain our gross margins around that 41% level.

Okay. The general trend being it's going to be lower year over year for the rest of the year?

Yes. And we have seen it across really all of the key commodities for us. We've seen it going down. We're beginning to see it flatten out. But expectation is it's going to stay around that level for the rest of the year and be a benefit for us. But it's anybody's best guess what's really going to happen, but we are anticipating some help versus the prior year.

Okay. And then just quickly, the acquisition of the business, $2.3 million, what was that regarding?

We had two acquisitions in the quarter. They were both in Australia, and they were associated, one with a long-term distributor of Tennant products and also a distributor of Green Machines, and so both very small transactions that we are excited about going forward. And we also have a payout related to our Alfa business, which was just a part of the earnout related to that acquisition.

Okay. And then, I don't think I fully understand the deal with the Kaivac. Are you offering them certain machines and then they are offering -- I guess you are offering your distribution or --

No. They are offering the equipment and we are offering the distribution.

Okay, I see.

They have the industry-leading restroom cleaning solution, right? But they're still a small, family-owned, undercapitalized company that has limited penetration. And we have a national salesforce and are especially strong on the national account side, where they don't have a lot of presence. So we can bring that equipment into national accounts.

Our research shows that restrooms are our customers' number one cleaning problem. And it's not something we focused a lot of attention on in the past, but we view it as a big opportunity. So we are very excited about this partnership.

Okay. So your salesforce would make money on selling the new --

Yes. They basically design and manufacture the products, hand it over to us, and we sell it through our distribution channels.

And is there potential for an acquisition there, too?

We shouldn't comment on that at this time.

Of course. All right. I think that's it. Thanks.

Ted Kundtz, Needham & Company.

A couple things. Could you talk a little bit, Chris, maybe just sort of address the monthly trends you are seeing in the business? Do you feel like we've bottomed here? Or it sounds like we have, from your commentary and your sort of guidance going forward. It sounds like this is the bottom and you sort of see thing starting to trend up. But maybe you could just give us a little more color on the monthly data you are seeing.

We hope it has bottomed out, Ted, but we also say we have limited visibility to the future. But we do know that the order trends started to pick up slightly, and I emphasize very slightly, in the back half of March. That seems to have continued in April. So right now, given the information we have and the last 30-days trends, it seems to have bottomed out and there has been a very slight uptick.

That's good to hear. Are you seeing cancellations of things? Or is that -- had you seen many cancellations of orders in the past? And has that diminished?

Well, I mean, have there been some cancellations? Sure. But the bigger issue is that our customers keep pushing back orders. So the orders, they know they're eventually going to have to buy the equipment, but they keep pushing it back. So that is the bigger issue. So the orders are still in the pipeline. They just get pushed back a month or couple of months on a pretty frequent basis.

Okay. Terrific. And any pricing pressure on your products? Do you have to -- are you able to maintain prices, or what's the status there?

Broadly what we were able to do in the quarter, Ted, and we anticipate be able to do that the balance of the year, is we saw pricing benefits in the 1.5% range for the quarter. And again, that's across the globe. And it varies by market, but we are encouraged by the fact that we are certainly not getting the kind of pricing that we have been able to generate over the last three or four years, but we did see a modest benefit in the quarter.

Terrific. And so, from a competitive point of view, are your competitors just sort of doing the same thing? Can you comment at all on your competition that you are seeing, and --

There's exceptions, but broadly we see continued rational behavior in the market.

Okay. Terrific. Great, thank you.

David Taylor, David P. Taylor & Associates.

I was really impressed that you were able to maintain your gross margin at about 41%, given the massive decline in sales. Well, this complement comes with a hook.

I figured that.

Obviously, when you did your forward planning last year, you weren't considering a 23% drop in sales or anything close, probably an increase in sales, I would imagine. Could you speak to the issue of unabsorbed overhead and what the gross margin might have looked like had business come in closer to your expectations?

Yes, let me comment on that, David. We actually anticipated our business being substantially down versus prior year in the first quarter. And we expected it to be down sequentially substantially. So we actually went into the quarter expecting our volumes to be a bit better than they were, and they came in worse than we anticipated, which is why we've taken our guidance down for the year.

So the actions that we took in December from a restructuring standpoint and continue to aggressively look at have really helped us mitigate a fair amount of the absorption issue. We can't mitigate all of it because we don't anticipate -- the only way to really get at that in a big way is to close a factory. We don't anticipate doing that.

But where we have been able to hold up our margins is we have taken a headcount reduction, which a portion of that, roughly 25%, was in our cost of goods sold line. We have seen commodity benefits. We have taken price. And we have done a much better job than historically of flexing our factory and without needing to take layoffs. And people are working a little bit shorter work weeks, but we have done a real good job of being a lot more flexible around the world as we have needed to be.

Looking forward to a more normal business climate than obviously we have at the moment, could one expect, what, 4%, 5%, 6% increase in gross margin?

That would be awfully aggressive. And we certainly, we've historically had gross margins at times in the 42% to 43% range. So we don't see any reason why we can't go back into that type of range and maybe at the higher end of that. And we are certainly going to aspire to do better, but that kind of an increase would be -- we'd not count on that at all.

Keep up the good work, guys.

Joe Maxa, Dougherty & Company.

Say, Chris, a little -- can you give us a little more update on the ec-H2O? I'm just thinking along the lines of the models that offer ec-H2O as an option. What kind of a hit rate or what percent of those are being sold with the ec-H2O versus without?

If you look at our entire scrubber portfolio?

Well, I'm looking at more of the ones that -- yes, you're right, yes, you're right, as you look at this portfolio.

What we've talked about historically there, Joe, is roughly, if we look at our equipment sales in broad terms, roughly half of our revenue from equipment sales is scrubbers. And we believe that there is certainly a relatively high percent of our scrubbers that will benefit from ec-H2O. To date, we've put it on several walk-behind scrubbers last year, and now we've begun to put it on ride-on scrubbers this year. But we haven't commented specifically on exactly the percentage of our portfolio, but we think it will benefit a relatively high part.

And that's why I hesitated, because I think for competitive reasons, we don't want to divulge that. But we've said two things about ec-H2O, that it will be material to our overall results going forward, and we fully anticipate that we can come up with the next generation of innovation that will become the new cleaning standard in our industry.

Okay.

And we're making good progress in that direction.

Great. Can you just talk a little bit about the competitive landscape and maybe what changes you have seen, given the economy?

It's hard to get a lot of information about some of our competitors, as you know. Two of them are private German companies. The other is a division of a Danish company that is publicly traded. But our sense is that we are weathering the economic storm as well and in most cases better than our competitors.

And we know that because we are winning more than our fair share of business against them in the marketplace, especially here in North America. And so we view this crisis as a real opportunity for us to leverage our products and innovation and our strong national salesforce and win new business. And so far, we are doing that more effectively than we have historically.

Okay. Tom, on the selling and administrative expenses, are we able to maintain the levels from Q1 or should we start looking at those to tick up?

We will see a bit of an uptick as we go out through the year. But our expectation is, as we look at the quarters, that what we will do is we will be able to manage our operating expenses as a percent of revenue to go down a bit as we go through the quarters. So we're going to be monitoring and managing it based on our revenue level.

But you should anticipate, just like we expect to see sequential, meaning quarter-to-quarter increases in revenue, we should see modest increases in our operating expenses along with that, and our percents should go down a bit. Nothing substantial, but they should go down a bit over the quarter.

So I'm just asking, because if you look at even the midpoint of your revenue and you keep your margins around 41%, the slight increase in OpEx still gives you earnings that could easily be above the high end of your guidance. And so I was wondering if there was a little more aggressive that I should be modeling on the OpEx side of things.

You know, what I would say is maybe you're being a bit aggressive on looking at the operating expense line. But the other piece is we are -- in this environment, we're being conservative, which is just prudent management, given the number of variables that we are trying to manage right now.

Okay, very good. That's it for me. Thank you.

Peter Kenner, Tivoli Partners.

Just like to know, with the cash flow, will you be paying down debt or buying stock?

We will, for the time being, be paying down debt, Peter. We think that's the prudent thing in this environment. And we honestly also have some restrictions with our banks at the current time that we do not have the ability right now to buy back shares. Even that being said, we think the right thing for us right now is to preserve cash. And we will continue to do that during the year.

Good. And I didn't hear the answer to whether you thought this was the bottom in terms -- are you seeing things -- you think things have bottomed out or what?

What we say, Peter, is we still have limited visibility to the future. But if you look at the last 30 days, what we have seen is a very, very slight uptick that has been sustained in April. So should that continue, then I think in a month or two, we would be much more comfortable saying that it's actually bottomed out and it is starting to improve. But we just don't have that kind of visibility because it has been pretty volatile over the last three to five months.

And I would remind everybody that, along those lines, that we typically don't talk about our business sequentially. We generally talk about revenue year on year. And second quarter is generally a big increase versus Q1. We, year on year, we're going to still see a very significant decline in the second quarter, but we will see the absolute level of revenue in Q2 we believe will be up versus Q1. And we expect to see that through the remainder of the year.

And do you see foreign sales increasing, staying the same or what?

What we're seeing is if you look outside of North America, in general, the level of declines are a bit lower. So we are seeing -- we're still seeing, in virtually all markets we are seeing organic declines year on year, but they tend to not be as high as we're seeing in North America.

Got you.

And the brightest spot in the portfolio is Asia-Pacific.

Okay. All right. Thanks very much, and good going.

James Bank, Sidoti & Company.

I heard a couple of questions on debt. I was just wondering if you might be able to help us in terms of how much debt would we expect you to have at the end of this year?

We are not prepared to comment specifically on that, James, other than we did comment that we do have more than adequate cash flow to fund all of our business needs and cover our capital spending. So we firmly believe we will have free cash flow.

We do anticipate during the year to continue to pay down debt. And we just haven't given a number in that regard, but we are very comfortable that we will have enough excess cash as we go forward to continue that debt paydown.

The best example already in the month of April, we received $9 million in a refund. As we overpaid our taxes during last year, we filed a quick return and we took that $9 million and paid down debt in the month of April. So we've already got a nice start on that through the rest of the year.

Okay. The restroom market -- is there a number you could put on the size of that market?

No, because it's not something that the big players have focused a lot of attention on. You have this small niche player, Kaivac, that does a terrific job, has wonderful technology, but they have very limited penetration. I'm not sure that they understand the size of the prize, but it's substantial. You figure that every facility around the world has multiple restrooms. And if you believe the research, that it is our customers' number one problem, and you can come up with a solution that makes it both easy, effective, and healthy and safe to clean the bathroom, it could be a substantial win.

Okay.

I don't think we're prepared at this point to quantify the opportunity. But obviously we have chosen to go into this market because we think it is very interesting.

Yes, the way to think about this one, James, is we actually think we can create an automated cleaning market in the bathroom. The market doesn't really exist today. People don't do a very good job of cleaning their bathrooms. And Kaivac, we believe, has the best automated product in the industry. So we think it's a real opportunity for us to work together.

So this would be more or less a prefabricated restroom that then would be put inside either a previous building's infrastructure or one that is going up, and the janitor just closes the door, flips a switch and it cleans itself? Is that how this works?

That's the Holy Grail.

Maybe in five and 10 years we'll be talking about that.

Okay.

But right now, these are mobile units.

Okay.

That are brought in can be used in multiple bathrooms.

Okay. When I heard automated, I just thought the other. Okay.

Automated versus mop and bucket.

Okay. Fair enough. Didn't mean to go on that Jetsons tangent. But it's not easy to tell really from my position where these credit markets are kind of going. They seem to be easing. I was just wondering if you might be able to give a little bit more elaboration on the financing that your customers might have at this point.

It appears to be getting a bit better, but not substantially. And we're still seeing, as our customers are buying equipment or wanting to buy equipment and looking at taking out leases, more people are being turned down than historically have been. So while it's getting a bit better, it's not anywhere near where it needs to get to for our business to return to normal.

Okay. And lastly, I believe in the last conference call you brought up that a third party had come in in an effort to help find more cost-cutting measures. Are they still there?

They are. We are very enthused. We have taken our first -- they finished their first stage of the work. We have identified numerous quick hits that we can go after and save money this year and numerous things that will be a bit longer term. We think leveraging our SAP system and getting global consistent processes is going to have both short- and long-term effects on being able to dramatically improve our operating expenses as a percent of revenue. So we are enthused, and we are still early days, but we're feeling good about where we are heading.

Okay. And this is above and beyond the operational excellence initiative.

Yes. This is really much more -- far more concerted effort against standardization of process and really leveraging our existing systems than Tennant has ever taken on in the past. And we are going at it aggressively, but there also has to be a long-term orientation to it also.

Okay. All right, terrific. Thank you very much.

(Operator Instructions). David Taylor, David P. Taylor & Company.

Actually, I have a pair. One is Kaivac. You describe it as being, and I quote, industry-leading restroom cleaning solution. What's so great about it?

What's so great about it?

Yes. What's so great about Kaivac? I don't know. It's something more than a mop, right?

It is. It is a mobile unit that uses a pressure hose to spray water and chemicals today across the entire restroom, and then also the ability to suck it up or vacuum it up very effectively to leave the restroom dry.

So it's like a wet-dry vac?

No. It's a little more sophisticated than that.

Okay. Well, how so? Color it in.

Well, it's -- I don't know. I mean, I know how to describe it versus a wet-dry vac. Anybody have any ideas?

It's just it's specifically designed for being mobilized and for going into bathrooms. So a bathroom place is quite different than normal places that you are going to be going into a wet-vac with.

Especially a commercial bathroom.

Exactly. So it's very -- they've been at this for over 10 years now. It's very sophisticated and designed in its approach. And the big benefit in it is obviously is most bathrooms are cleaned with mops and buckets, and you effectively just move the dirt around, whereas this actually cleans and sucks it up. So it is a big step in the right direction, and we think we can work with them and improve it.

And if I'm not mistaken, a wet-dry vac basically just sucks things up. It doesn't have the ability to apply high-pressure water and chemicals with multiple attachments so you can do it across a broad wall. You can do it on sinks. You can do it in the toilets, on the floor, etc. So it's a fairly versatile machine.

Now, if you were to look at it, would you say this was high-tech state-of-the-art? No. But within the context of our industry, it's the best that is out there. And it's the solution that is trusted by most customers who take cleaning restrooms seriously.

Do they have any big-name customers that you can talk about?

We are not at liberty to comment on that, but the answer is yes.

Okay. Second question, completely different. The goodwill write-down -- I realize everyone is doing it these days. I was not aware until I heard your call that it was a function of the stock dropping below book value. But -- well, okay, there are two questions. First off, which assets were written down? Do you want to talk about that?

Why don't you give me the second question and I will do them both at one time.

The second question is, if the stock goes back up to $50 -- well, the stock is over book value now as we talk. But if it goes back up to its high, does this stuff get put back on the balance sheet?

Yes, let me comment on both of those, David. It's one of those unusual places where I will take your second question first. Once it's written down you don't ever write it back up again. And it's just -- it's the way it's done from an accounting perspective and it's --

Never liked goodwill from the get-go, so I'd just leave -- have it off the books myself.

And the reality of it is, we didn't like doing it, but it doesn't matter in our overall results. What drove, just to get a little bit more specific about it, we obviously, at the end of every year, you have to test your goodwill to ensure that it's not impaired and that it's accurately stated on your balance sheet. You never write it up higher, but you have to prove that it's at an appropriate value.

And we did that, obviously, at the end of December. And as we went into the first quarter, then, our stock price traded below book value, which that triggers the need to reevaluate your level of goodwill. Typically, you wouldn't look at it again until your end of the year. Based on where our stock price is at, as we looked at it, we had to -- we didn't change our financial --

And your stock price at the end of the quarter was what?

What was the exact number? I don't want to -- it was at $9.37 at the end of March. And what we did is we looked at our forward-looking financials, and our forecast didn't change at all. What we were forced to do, though, as we evaluated our goodwill was we had to change our discount rate that we valued the cash flows at to make it higher because of what the markets were saying. There's a lot more risk in the market.

Can you say what that discount value is?

We are not at liberty to comment on that.

Okay.

But the assets that were written down from a goodwill standpoint was in our EMEA business entirely, and we don't, obviously don't --

It was which business?

EMEA, Europe, basically.

In Europe. Okay.

Yes.

Ted Kundtz, Needham & Company.

Just a quick follow-up for you guys. On the ec-H2O product line, are those margins higher than the corporate average?

What I would say on that is that when we sell ec-H2O on a machine, it's meeting our objectives that we had equal to or higher gross margins on that product versus one without. And so I wouldn't comment on it relative to all our other products, but scrubbers tend to be higher-margin products in the first place. And it is beneficial in our overall margin structure. (multiple speakers)

Okay. So with the mix change, that could help your margins picture going forward as well, I would think.

We would like to think so.

Yes, okay. And the other question was just, and related to the ec-H2O, is there an application to use that technology on the Kaivac product line?

We can't comment on that at this time.

Okay.

What I would say to you is look at what ec-H2O does.

Right. It sounds like a perfect solution for it.

Use your judgment, and use that same judgment and imagine all the other applications that it could be used in as well. And just know that we are exploring very broadly.

Okay. Because I know you've said in the past, I think, that it's applicable to about 70% of the scrubbing jobs that you have come in contact -- you are faced with. Is that correct?

In terms of scrubbing of floors.

Scrubbing of floors, right.

Exactly. But as we say, we are actively exploring other applications beyond our existing floor-scrubbing business.

Terrific. Okay, thank you.

We invite you to please stay online for final comments from the management team. At this time, I would like to turn the conference back over to Chris Killingstad for closing comments.

Thanks, Laurie, and thank you all for your time today and your questions. Despite the current macroeconomic conditions, we remain 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 have established. Despite the challenging year we face, we believe that our strong cost controls and strategies of international market expansion, new products and operating efficiency gains position us very well for long-term success. Thank you all.

Thank you very much, ladies and gentlemen, for joining today's Tennant Company conference call. This concludes your conference. You may now disconnect.