Tennant Co (TNC) 2009 Q2 法說會逐字稿

Good morning and thank you for participating in Tennant Company's second quarter earnings conference call. This call is being recorded. If you do not wish to participate, you may disconnect at this time. (Operator Instructions)

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

Thanks Christa. Good morning everyone and welcome to Tennant Company's second-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 quarter and our updated outlook for 2009. First, Chris will brief you on our operations and then I'll cover the financials. After that we'll 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 filed 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 non-recurring items. For each non-GAAP measure, we also provide the most directly comparable GAAP measure. Our earnings release issued today include the reconciliation of those non-GAAP measures to our GAAP results. Our earnings release was issued this morning via Business Wire and was also posted on the Investor Section of our website at tennantco.com.

Now I'll turn over the call to Chris.

Thanks Tom, and thanks to all of you for joining us this morning. As are aware, the global economic recession continued in the second quarter. And as we anticipated, Tennant faced a difficult selling environment which affected net sales in all of our geographies.

Despite these challenges, however, we are very encouraged by our second quarter earnings, which were driven by our successful effort to lower Tennant's cost structure. As I said last quarter, we remain focused on controlling what is within our control in 2009. 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 initiative 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 a 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 again yielded solid benefits in the second quarter. Among the quarter's highlight, Tennant posted a sequential increase in revenues from 2009 first quarter to the second quarter. We succeeded in sequentially improving the Company's operating profit margin in the second quarter, and we continued to anticipate delivering profitable results from operations in the second half of the year.

Contributing to these results were strong execution of cost containment strategies and the restructuring program that was announced in the 2008 fourth quarter. We expect the restructuring to deliver at least $15 million in savings in 2009, and at least $20 million in savings starting in 2010.

Our reduced cost structure and focus on working capital management helped Tennant generate $31.4 million in cash from operations during the second quarter, compared to only $1.2 million in the same quarter last year. The Company also substantially reduced total debt during the quarter by 44% versus a year ago.

Turning now to an update on our long term growth strategies. As I said before innovative new products are an important competitive advantage and source of value creation for Tennant. As a result, we remain committed to investing in research and development within our historical targeted range of between three and 4% of net sales. New products introduced in the last three years again demonstrated their importance by generating 47% of Tennant's equipment sales in the 2009 second quarter, and 46% of sales in the 2009 first half, easily surpassing our 30% target.

Fueling these results was the continuing global rollout of our chemical-free cleaning technology called ec-H2O or ec-Water. During the quarter ec-H2O won further international recognition as a breakthrough, environmentally friendly product. We are pleased that ec-H2O was named as one of the top 10 green building products of 2009 by Sustainable Industries magazine.

Further ec-H2O also captured the 2009 innovation award at the CleanNZ show in New Zealand, and received the Smart Water approval certification in Australia. These honors are in addition to ec-H2O winning the prestigious 2009 European Business Award for Business Innovation of the Year and being named by R&D Magazine as a top 100 innovation. To date ec-H2O continues to exceed our expectations for sales and customer satisfaction. We are converting a growing number of existing and large new customers to ec-H2O.

This cost effective technology is opening new doors to new accounts, such as Carrefour in Europe which is the world's second largest retailer and Tesco which is the largest British retailer. The advantage of ec-H2O is that it is so differentiated from the competition and offers such significant benefits in cost savings, such as greater productivity and worker safety as well as reductions in water, energy and hazardous chemical use. We believe that ec-H2O will lead to additional new business wins, increased market share and accelerated growth going forward.

In the second quarter we announced an exclusive licensing agreement with Activeion Cleaning Solutions to expand the availability of ec-H2O in a handheld spray devices. Our agreement with Activeion will further broaden the market availability of our ec-H2O technology, adding complementary products to our growing suite of ec-H2O products.

Activeion's first product under license is the Activeion Pro, a portable easy-to-use sprayer that effectively cleans a range of surfaces, from glass and stainless to wood and carpet. The partnership between Tennant and Activeion will expand ec-H2O beyond floor cleaning applications; in education, retail, hospitality and healthcare industries.

This is another example of our strategy to develop eco-friendly products and technologies that deliver powerful cleaning results. We will continue to pursue growth through appropriate partnership opportunities like Activeion, that fall outside of our traditional market segments. Tennant's 2009 new product launches are focused on continuing the successful rollout of ec-H2O. We plan to introduce this technology on a total of five rider-scrubbers this year.

Tennant introduced three new rider-scrubbers with ec-H2O in the first six months of 2009. We plan to introduce the other two rider-scrubbers with ec-H2O technology in the second half of this year. These products round out a 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 environment.

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 innovate new product and service solutions as well as through international market expansion.

Our growth in operational excellence initiatives should position the Company to remain competitive, and enhance the long-term value creation of our business. Now I'll 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 toady all references to earnings per share are on a fully diluted basis. Also please note that as I go through the financials that I'll not comment on year-to-date financial, because those are detailed in the earnings release.

For the second quarter ended June 30, 2009 Tennant reporting net earnings of $3 million or $0.16 per diluted share and second quarter net sales of $148.6 million. In the year ago quarter the Company reported net earnings of $8.3 million or $0.44 per diluted share on net sales of $193.6 million.

Importantly as Chris mentioned, we achieved our goal to be profitable on the second quarter even though we experienced a significant sales decline caused by the global recession. Our cost containment strategies are working.

Also during the 2009 second quarter we generated $30.2 million more cash on operations than we did in the 2008 second quarter and totaled that drop to $56.3 million at quarter end, down substantially from $100.8 million at the end of the same quarter last year.

Turning now to a review of the 2009 second quarter. Consolidated net sales were negatively affected by both the global recession and unfavorable foreign currency fluctuations. As a result, consolidated net sales in the second quarter declined 23.2% with lower net sales across all geographies. Excluding an unfavorable foreign currency exchange impact of approximately 6%, organic sales declined about 17% in the second quarter of 2009. Organic sales declined about 21% in the first quarter of 2009.

We were encouraged to see that the 2009 second quarter consolidated net sales of $148.6 million were up 16% sequentially compared to the 2009 first quarter consolidated net sales of $128.6 million. For the year-to-date, consolidated net sales were 23.5% lower than in the prior year first half, again due to the global economic downturn. Year-to-date organic sales declined about 19% with unfavorable foreign currency exchange effects reducing consolidated net sale by approximately 6%.

The acquisition of Applied Sweepers and Alfa benefited consolidated net sales by approximately 1%. In North America, we continued to see delayed purchases stemming from the economic downturn and the tight credit markets.

Second quarter net sales totaled $87.7 million down 19.2% versus the prior year quarter, due to the lower unit volumes across all product lines. Most significantly impacted have been our sales of large equipment.

Sales benefited approximately 1% from price increases taken across most product lines offset by a negative 1% impact from foreign currency exchange. Tennant continues to be the market leader in North America and we are well positioned once activity in the industrial and outdoor segments regains strength.

In our EMEA markets which encompass Europe, the Middle East and Africa, second quarter net sales were $45.6 million down 28.4% compared to the year ago quarter. Approximately 14% of the decrease stems from a decline in organic sales and another 14% was due to unfavorable foreign currency exchange effects.

In Tennant's other international markets which is composed of China and other Asian markets; Japan, Australia and Latin America; 2009's second-quarter net sales totaled $15.3 million down 28.2% versus the prior year quarter. Organic sales in this region declined approximately 20%, driven by unit volume decreases. The effects of unfavorable foreign currency exchange also lowered sales in our other international markets by approximately 8%.

Despite a significant decline in sales volume, Tennant's gross margin was 40.4% for the 2009 second quarter compared to 42.5% in the prior year quarter. Our gross profit margin benefited from lower commodity prices, flexible product management and workforce reduction.

These gains were offset by the impact of lower sales volume and an increased sales mix of lower margin smaller commercial equipment. We still expect to be able to maintain our gross margins at around 41% for the year, based on the cost reductions we have implemented, and anticipated lower commodity prices in 2009.

Research and development expense in the second quarter was flat at $5.7 million versus the prior year quarter. R&D expense as a percent of sales was 3.8% in the second quarter of 2009, due to the low level of sales in the quarter compared to 2.9% in the second quarter last year. R&D expense in the second quarter still remain within our targeted range of 3 to 4% of net sales. We're pleased that selling and administrative expense in the 2009 second quarter decreased $11.7 million or 19.3% to $49 million versus $60.7 million in the second quarter last year.

The company achieved lower F&A expense with workforce reduction and strong cost containment. Tennant's 2009 second quarter operating profit was $5.4 million, up sequentially from $0.3 million in the 2009 first quarter, excluding the first quarter, $43.4 million pre-tax non-cash goodwill impairment charge and the favorable $1.3 million revision for the restructuring charge reserve. By comparison, the Company reported an operating profit of $16 million in the 2008 second quarter.

Our overall effective tax rate in the 2009 second quarter was 38.9% compared to an abnormally high 43.7% in the second quarter of 2008. The 2009 second quarter effective tax rate is primarily related to the mix in taxable earnings by country.

Looking out at the balance sheet, we have some good news to report. Net receivables at the end of the 2009 second quarter totaled $108.9 million, down $41 million from $149 million a year earlier. Accounts receivable, days outstanding was 66 at quarter end, down sequentially from 75 at the end of 2009 first quarter.

The improvement primarily results from higher sales in the second quarter and the collection of outstanding receivables. Due to proactive management, our accounts receivable days outstanding is back down to 66 days, the same level where it was that at the end of the 2008 second quarter.

Our inventories at the 2009 second quarter end total $59.2 million, down sequentially from $66.8 million at the end of the 2009 first quarter, and down from $78.1 million in the second quarter last year. FIFO days inventory on hand was 98 days at the end of the quarter, which was up compared to 90 days in the year ago quarter, but significantly lower sequentially from a 121 days at the end of the 2009 first quarter.

The sequential improvement from the 2009 first quarter is primarily due to higher sales in the second quarter and the traction we are seeing with our inventory reduction initiative. Accounts payable was $33.7 million at the end of the second quarter, up from $25.5 million at the end of the 2009 first quarter. With our increased focus on conservative cash management, we have worked closely with our suppliers to extend payment terms while retaining the flexibility to revert back to taking cash discounts when economic conditions improve.

Capital expenditures totaled $6.7 million in the first half of 2009 versus $10.9 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 extremely pleased that during the 2009 second quarter, Tennant generated $31.4 million in cash from operations compared to $1.2 million in the year earlier quarter. Cash from operations in the first half of 2009 totaled $42.6 million compared with a negative $4.7 million in the first half of 2008.

At the end of the 2009 second quarter, the Company's total cash was $16.1 million, down slightly from $18.5 million a year ago. Total debt was $56.3 million at the end of 2009 second quarter down significantly from $100.8 million at the same time last year.

The reduction in debt was a result of our focus on cash optimization and was primarily due to lower working capital and the $9 million income tax refund we received in April, which we mentioned in our earnings conference call last quarter. Our debt to capital ratio was 24.5% at the end of the second quarter, which is down sequentially from 35.7% at the end of the first quarter.

Tennant is in compliance with its debt covenants. As you may recall in the first quarter, we proactively obtained an amendment to our credit agreement to exclude non-cash charges and previously announced restructuring charges from the debt covenant calculations. We believe that our current cash and available debt capacity are more than adequate to cover normal operating cash needs and fund capital spending while remaining in compliance with our debt covenants for the next 12 months.

In regard to Tennant's overall long-term capital structure strategy, we have recently taken a couple of steps provide more flexibility and capacity. We have put a shelf loan agreement in place with Prudential to obtain up to $80 million of fixed-rate, long-term debt. This agreement was filed with the SEC in a Form 8-K today.

It enables us to have a mixable fixed and variable rate debt when economic conditions warrant. Also today we filed a Form F-3 shelf statement with the SEC to facilitate any future issuances of securities up to $175 million.

This will give us the option to offer either separately or together debt securities, preferred stock, depository shares and/or common stocks in one or more offerings. This is a standard universal shelf registration to provide maximum flexibility in our capital structure going forward.

No securities may be offered under the shelf registration statement until it is declared effective by the SEC. While we do not have any current plans to use these facilities, having them in place will give us greater long-term flexibility to raise capital as opportunities arise.

Turning now to our outlook. 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.

Excluding the 2009 first-quarter non-cash 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 $2.05 to $1.75 loss per diluted share.

Excluding the goodwill impairment charge and the benefit form the restructuring charge reserve revision, our expected net earnings range for 2009 is now $0.20 to $0.50 per diluted share. We have raised the low end of the range from $0.05 to $0.20 and increased the high end of the range from $0.45 to $0.50. We are maintaining our previously estimated 2009 full-year net sales guidance in the range of $560 million to $600 million.

Our full-year outlook includes the following assumptions as of today. Continuation of the weak global economic environment and lack of visibility into the months ahead, unfavorable foreign currency impact on sales in the range of 4% to 6%, an 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. Finally, it is important to note that we expect Tennant revenue to be stronger in the 2009 second half than they were in the first half. We anticipate gross margins to be about 41% and that the Company will be solidly profitable. With that, we would like to open up the call to any questions.

(Operating Instructions) Ted Kundtz, Needham & Company.

Couple questions for you. What percentage of your business of your parts are you getting out from low-cost countries? I know that's a continuing program for you guys. I just wondered how the progress on that is progressing?

We don't have an update on that at the current time. I should've done that, to be honest with you. I know we continue to make progress.

We feel good about where we are at for the first half of the year. We do believe for the full year that we are going to hold on to the $10 million of savings we had through last year.

And we'll get somewhere in the vicinity of $4 million or maybe a bit more in the current year, even on a lower revenue base. So, we are on track and we do believe we'll hit our goal to be at 25% at the end of the year, but I'm honestly not quite sure exactly [where we're at] through the first six months.

Okay and the savings you anticipate next year, will that require any additional steps or are those steps already been taken?

What do you mean exactly by that Ted

Well you mentioned I think you expected another additional savings of -- I thought you said $20 million next year. Do I have that right?

No, when we are fully deployed -- I'm sorry, we believe that the fully-deployed savings by the of 2011 will be $20 million.

That was the number, yes.

Yeah, exactly.

And that's all -- those steps have already been taken?

Yeah. The thing we have to do is we have cross functional teams in place to attack these cost savings projects and they will continue to identify opportunities in the future. They're not all identified but we're going to have keep working against those. But no major capital investment or no major changes in strategy to go after that the $20 million.

Okay.

But every year we establish what the priorities are. There's a list of projects, we go after those. So far we have been successful in executing against them and delivering the promised results. And so what we need to do over next couple of years is get the next stage of the list and go after those. So when you say that the activity is in motion, no. There's new activity that starts but it's very clear what we're focusing on and how to go after it.

Okay, great thank you. Another question for you, Chris, is could you give us any sense on the ec-H2O sales? I know you don't give the actual dollar amount but could you say what percent of the potential customers that could be buying those products are buying them? I'm trying to get sort of the idea of what is the acceptance rate of that product among your potential customer base, those making purchases, and how many are shifting to ec-H2O.

I know we are frustrating you and others with the fact that we are not divulging a lot of information. But you have to understand at this stage, we are early in the process and for competitive reasons, we have chosen to be very general in our comments and the comments are that we continue to exceed our own internal expectations both in terms of sales and customer satisfaction.

What we have said though that ec-H2O is relevant. If you look at it from a scrubber standpoint, it's relevant to about 70% of our scrubber business.

Great.

Right so -- and that we have said publicly. So the vast majority of our scrubber business, ec-H2O is relevant. Again we have a relatively small share, especially on the commercial side of the business.

So we view that ec-H2O as being a very significant market share play. As you are seeing with some of the business we starting to win, we are increasingly being able to talk about some large new business like the Carrefours and the Tescos of the world and the other big business in North America that we're also winning that we're not at liberty yet to disclose the names of.

But we -- again, this is a significant market share play for us, that is our belief. And so far, early indications are that we're on track.

Are you still getting the price premium for the product?

Yeah, generally we are getting the price premiums on the product. I mean it's actually getting easier to get some of the price premiums as people begin to understand the benefits of the technology. Initially, there was some skepticism when you're coming in with a technology at a higher price. But now we are getting less pushback, less resistance.

Okay. And one final question, Chris, for you. Maybe just sort of if you could add some additional color on some of the trends you are seeing most recently here. I don't know if July makes much of a difference.

But just your thoughts on the various parts of the world that you are servicing. Are you seeing conditions starting to improve a little bit, or -- ? It sounds like that's the tone you're sending out which is if I'm correct -- maybe you could add a little more color

We have said that sequential sales or sales in the second quarter were down 17% organically. They were down 21% organically in the first quarter.

Most of that benefit came in North America. The rest of the world came in pretty much flat in terms of performance in the second quarter versus the first quarter. So I would -- we would characterize the current situation as stabilization. We are not yet seeing recovery. But I think we are seeing stabilization

Okay.

I would add one comment to that, Ted. We did -- we are pleased with the sequential improvement we saw in Q2. The strongest month in the quarter was June. I mean April is better than the back half of March and May was a bit better. June was the strongest.

July and August are typically tougher months due to -- it's summer and Europe tends to close down so our sequential improvement number we believe it will happen in Q3. But it is toughest of the quarters and we remain very comfortable for the whole back half in Q4. Q3 is the toughest one, because you don't really know for sure until you get to September. But we are seeing a bit of improvement overall

Terrific. I think you guys are doing a very nice job. Thank you very much

James Bank, Sidoti & Company.

In regard to the cost leverage -- and I understand operational excellence is going to be just ongoing. Is most of the heavy lifting done this year in terms of the benefit that we just saw in the second quarter or is there further benefit to the $15 million you had mentioned earlier?

We'll see a little bit of sequential improvement in the benefit versus Q2. I mean Q2 is a bit better than Q1 as we've had a little bit of additional savings. But Q3 will be completely fully deployed but it won't be that much different in Q2, a bit of improvement.

Okay, and in regard to the commodity cost reduction, how much did that benefit the gross profit in the quarter.

We haven't given specific information but commodities did -- they continued to help us. Q2 is a little bit better than Q1. We don't see a lot of improvement in Q3 and Q4 versus Q2. We see stabilization, but it will give us benefits versus prior year and that's really critical.

Okay, and now switching to your new products, it just seems like the (multiple speakers) I'm sorry? It sounds like the ec-H2O is just such a technology of great magnitude, may I ask is there something on the horizon that could be of equal magnitude that you guys might be working on right now?

Well, on that point, we are in the early stages of rolling ec-H2O out. So I think our focus should be on making sure we maximize the potential of this technology before we start to launch and leverage other technologies.

But what we do promise you is that we continue to have a very active exploration focus within our advanced product development team and we are hoping that we will come up with some terrific new ideas in future. But right now ec-H2O we believe, as I said, is a technology platform. We have it on our scrubbers, we've now licensed it to a private firm that has brought to market a spray bottle. So this is the early going and the best is yet to come.

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

Jo Maxa, Dougherty & Company.

Thank you. I was wondering if you could talk a little bit more about your long term capital structure. You gave some brief thoughts. Should we be thinking of possible acquisitions as a use of your -- maybe going with a mixed shelf if you need it? Is that maybe the primary use of it?

(multiple speakers) comment on that in the public documents. It's a potential source of funds but I mean we are -- right now we are honestly just very focused on the managing these tougher times. We're focused on continuing to integrate the acquisitions we've made.

And we wouldn't venture out into the -- we would not expect to do any acquisition until the economy fully recovers. We're still talking to people. I mean we have a business development area.

We continues to keep our pipeline going but we did -- nothing is imminent and we [knelt] the things we did today from a universal shelf registration to really create optimum flexibility into the future. But nothing is imminent right now.

Okay, I just wanted a quick briefer on that. The increase sequentially, are you seeing it equally between your equipment and your parts and service or did one of these areas have a quicker comeback (multiple speakers)

We're not -- as we normally don't give precise splits in the quarters, we do for the full year. But that improvement that we saw in the equipment sequentially and parts and consumables and services, pretty much the same. We saw some sequential improvement in both of those areas. So not one of them was dominant over the other.

So the mix shift is roughly the same as (multiple speakers)

It is. We might have been -- expected a bit more on the P&C and service. But the improvement was about even.

So, was this Carrefour and Tesco, are they existing customers or is that a competitive win?

A lot of that business is incremental, especially on the Tesco front. We've had a little bit of Carrefour's business but we've won now the majority of it in Europe through this deal.

Got it. What is your -- what kind of initiatives or how aggressive I should say, are you going afte competitors customers with your new ec-H2O? And I'm just wondering if that's a major initiative that you are hitting now or are you more focused still on your own customers and then just with a few here and there?

Well, we said that the big opportunity here is to take market share. So believe me, what we've been focusing on from the beginning of the year given the slow economy is to figure who are the big national accounts in the United States, Europe and elsewhere that we want to focus our attention on. And our North America team and our European team, they have a list of the top 10 priorities and they have strategies against all of them and we are aggressively pursuing winning some of that business.

And we are quite frankly being quite successful. And I think the Tesco and the Carrefour are two examples of that. There are others that unfortunately we cannot divulge at this time and hopefully at some point here in the future, we will be able to do so. But we are I think exceeding our own internal expectations in terms of our ability to win new business, significant new business with ec-H2O technology.

Great. Thanks, Chris and Tom

David Taylor, David P. Taylor and Company.

Thank you. I hesitate to congratulate you for a down quarter year to year, but I have tell you as a long-term shareholder, I am quite pleased with how you did in the quarter and what you are talking about in terms of your prospects.

(inaudible) David

Sure, a couple of questions. I know that most of your competitors are really small companies and this is very fragmented industry in which you compete. I would think that in this current very tough environment, that a lot of these companies have had serious financial difficulties.

I mean I know -- you've leveled through, but you haven't violated your covenants or anything. I noticed some pretty big companies that have. And I would think that small companies would have really difficulty competing against you. Am I right in terms of assuming this?

No, I think you are right. And we divide up the industry into the small mom-and-pop type operations which until relatively recently, actually controlled the majority of our industry. They no longer do so.

So they've already lost significant share even before the economic recession, as more and more business become national account and focused within broad geographies. They just couldn't serve it.

So I think with the economy the way it is, they are going to fall by the wayside in greater numbers and even faster. But most of these companies are small private companies. We really don't know what their financial condition is, we just learn one day that they seem no longer to be in business.

(multiple speakers) has that happened?

And that's happening but that's been happening for the last two or three years and my sense is accelerating. They estimate that they still control in the 35 to 40% of the market today. But they controlled probably 60% plus two, three years ago. Then you have our major competitors, the Europeans, Nilfisk out of Denmark and [Hako] and [Carture] out of Germany.

Do these companies compete in the United States as well as in Europe?

And they compete in the United States and I think it's been tough for all of us. My sense is we are probably weathering the storm better than any of them.

Our other sense is -- and only Nilfisk advance publishes financial results because they are part of a public company, the other two are private. But our sense is they are doing okay, and they are going to weather the storm.

We think that at least one of the German companies may be in some trouble and that their future is in question, especially in North America at this time. So we are monitoring that very carefully.

Matter of fact when we were asked the question of where we are going for market share, we are going after their customers as a priority because we think that that's the (multiple speakers)

Surprise you would say that. Okay, another question on ec-H2O and this sort of reflects on the first question. You said that it's been better than your expectations.

What came to my mind immediately was expectations as of when. After all, the time we sort of fell off the cliff nine to 12 months ago. Which expectations formed when are we talking about?

We don't -- obviously we've had to temper our expectations because of the economy. But I think that if you look at the one (inaudible) bright spot in our business, it is the sale of ec-H2O.

But our expectation -- you've got to look at this medium to long-term. We have enough of these machines in the market with very reputable companies and we know that these companies love the technology and it's doing what we said it would do, both in terms of cleaning performance, productivity, cost savings and being environmentally friendly.

So, when the economy recovers, we believe strongly it's going to start to take off. The other thing we've talked about is that we are getting access to customers in business we've never had access before. Because we said, if you are a national account and you have thousands of cleaning machines, switching costs are high. Why change to somebody else when you've used a certain machines for a long time, you know how to use it, your operators know how?

It cleans.

Right? And for the first time, we have something that's so differentiated that they are actually coming to us and saying -- listen, we want to test this new technology. And we have been pleasantly surprised by the amount of new business we are winning and these are people that have never really talked to us before and I think that also bodes extremely well for the future as the economy recovers and we are able to build these programs out. I think that's why we say it exceeds expectations.

Well, let me just tighten the questions a smidge. If we were to go back 12 months ago to the time in which your '08 second-quarter conference call was going on and whatever expectations you had in your mind, I'm not trying to pin you down on numbers. Is business better in ec-H2O than you thought 12 months ago?

I think what we're seeing is that ec-H2O is performing consistently with the expectations that we initially established for it even before the economy turned down. Now what I would also tell you though is that we went into it relatively cautiously.

Okay, but so with your initial cautious expectations, you are doing better?

Yes. We are meeting and exceeding those, yes.

Even though these expectation were formed more than a year ago.

Chris Killingstad Yes.

Okay. That's what I wanted to hear. Okay, great. Keep up the good work, guys.

Operator Zahid Siddique, Gabelli & Company.

Couple of questions. First one on our share buyback, any plans to reinstate that?

Not at the current time. We just -- we are -- we just feel that it's -- continues to be important to be very conservative, to horde our cash. We are lack of visibility. So we don't have any intentions at the current time.

Okay, and then I wanted to go back onto the shelf registration question. Why now -- I guess what was your thought process? Why did you not do it a year ago or two years ago? You mentioned you are not interested in acquisition at least in the near terms. So what's really the rationale of that?

A couple things, Zahid. The honest answer is that I wish we should have done it previously. It's just something that is very common practice for companies like ourselves. It's important to note that we couldn't execute anything against that until the SEC approves it and that can be a longer process at times.

So it's just I think good practice to give yourself complete flexibility, file with the SEC, go through the approval process and have that there. Its in place for three years and therefore it creates the optimum flexibility to make your decisions when you want to. But we're just going through the approval process now.

Okay. On the Prudential shelf, what is the interest rate? You said it was a fixed interest rate. What is that number?

Thomas Paulson It would be market based at the time. It's really just a shelf agreement that's in place)

Okay.

If we wanted to go and take termed out debt, we could access [them what we would]. The interest rate at that time will be market based.

We wanted again that in place if the economic conditions warranted that it made sense to convert some of our short-term debt to long-term debt. We'd like to have the flexibility to execute against that shelf. So again, it's just really creating flexibility for the future.

Sure and just the last question, could you comment on the quotation activity a little bit more and also cancellations and the credit environment if people are canceling because of that or for other reasons?

Our credit environment remains very tough and it is impacting our customers' ability to purchase equipment and it's affecting their thought process. So the credit environment continues to affect what our customers are doing.

Our order activity is -- actually remains fairly -- the activity with customers has remained fairly active through all of the economic downturn. We just aren't converting the typical number of leads and activity into actual shipments. So activities remain pretty solid throughout.

Okay, that's all I had. Thank you so much.

(Operator Instructions) [Sharad Patel], Jefferies & Company.

Just that I'd like to try to touch on a little bit on the geographies as you guys are seeing them going forward. Are we still looking at significant double digit kind of -- well definitely year-over-year -- declines across North America, Europe and the other international segment or should we thinking of a little bit of a relief as we approach through the end of year here?

We anticipate that if you look at it, we haven't commented within the geographies. But if you look at it, broad overall consolidated level. We believe we will see growth in the back half of the year relative to the front half and we think that Q4 will be the first quarter that we'll actually see year-on-year growth.

We are not prepared to comment exactly the breakout that we're seeing within that year-on-year growth. But if you look at the three broad geographies that we reported, I mean we are seeing significant declines year-on-year.

If you get embedded within those areas, there's clearly countries like a China for instance that is growing year-on-year. But it's -- the economical impacts are very broad. It's very global.

Is there one area particularly that you're focused on as far as -- or seeing a little bit better of a recovery than anywhere else sequentially, or --?

In the quarter we actually saw a bit better sequential improvement in North America than we did in Europe for example and as far as focus areas, those are our two biggest markets and in a downturn like this, we clearly have to be exceedingly focused on our big geographies which is where we obviously have to focus on.

Right. And in North America, I take it it's still a lot more smaller equipment driven which was where you found the increase a little bit or did you see some large equipment as a benefit in that particular geography?

We've seen improvement in our large equipment business. The benefits sequentially in North America came out of small equipment part of our business is what we're seeing.

Right. And you have got to remember that ec-H2O is on our commercial and light industrial equipment. So it's very much skewed towards commercial and it's the one real bright spot in our business, so that's not surprising.

And has that taken hold a little bit better in North America than it has in Europe so far, or is there like a particular area that you are looking for a little more focus I guess for the ec-H2O? Is it more focused toward North America currently and then approaching the Europe and other international markets or --?

The focus -- go ahead, Chris.

As an equal focus -- the two markets that are the biggest opportunity are in North America and Europe. But I would say we're getting the same sort of traction in both markets, maybe a little bit better in Europe which is also not surprising given they tend to be a little bit ahead of North America in terms of environmental consciousness.

So this really is in their sweet spot. But you look at markets like Japan, this could be a big idea there as well.

But even in markets like China and Brazil, we are selling this technology on a more niche basis obviously. But you've got to establish the technology and then you grow with those economies. But really when you talk about focus, right now where the people and the effort and the money is being put, it's mostly Europe and North America

Okay, thanks for time guys

There are no further question at this time.

Okay, well let me give some closing remarks. Thank you all for your time today and your questions.

Despite the current global downturn, we remain focused on controlling what we can control in 2009. We are pleased with the further progress we've made to achieve a sustainable reduced cost structure during the second quarter.

We remain confident in our business model and are firmly committed to the long-term strategic direction that we have established. We believe that our strong cost controls, improved operating efficiency and new products will further enhance Tennant's long-term value creation potential. Thanks again.

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