Tennant Co (TNC) 2009 Q3 法說會逐字稿

Good morning. Thank you for participating in Tennant Company's third-quarter 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). We ask that you remain on line 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, Courtney. Good morning, everyone, and welcome to Tennant Company's third-quarter 2009 earnings conference call. I am Tom Paulson, Vice President and Chief Financial Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO; Pat O'Neill, our Treasurer; and Karen Durant, our Corporate Controller.

Our agenda today is to review Tennant's performance during the quarter and our updated outlook for the rest of 2009. First, Chris will brief you on our operations and then I will 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 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, on this conference call, we will discuss non-GAAP measures that include or exclude unusual or nonrecurring items. For each non-GAAP measure, we'll also provide the most directly comparable GAAP measure. Our earnings release issued today includes a reconciliation of these non-GAAP measures to our GAAP results.

Our earnings release was issued this morning via business wire and is also posted on the investor section of our website at TennantCo.com.

At this point, I will turn the call over to Chris.

Thank you, Tom, and thanks to all of you for joining us this morning. Let me begin by stating that although global selling conditions remained very challenging for Tennant in the 2009 third quarter, there were a number of bright spots. Net sales increased sequentially for the second quarter in a row, rising 4% over the 2009 second quarter.

Tennant's gross margins reached 42% in the quarter, higher than our stated objective of 41% for the year. We continue to expect to achieve full-year gross margins of about 41%. Our strong cost controls continued to yield benefits, and we're on track to save at least $15 million in 2009 from our workforce reductions with annual savings of approximately $20 million in 2010.

We have significantly reduced our total debt, lowering it to just over $43 million from more than $102 million at the end of last year's third quarter. And we are raising our 2009 full-year earnings per-share guidance for the second time this year.

Throughout the year we have focused on executing against three guiding principles, which are -- first, adjusting to the low-growth economy without sacrificing the Company's on 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 key investments or investments in key research and development projects, such as our ec-H2O technology, to drive sales growth.

And third, optimizing cash in an uncertain environment through conservative planning, increased discipline in capital expenditures and a heightened focus on working capital management.

Our reduced cost structure and effective working capital management helped Tennant generate $58.4 million in cash from operations in the first nine months of 2009, up from $13.3 million in the first nine months of last year.

I am pleased with our financial performance and with our continued investments in new products and strategic partnerships which we believe will fuel future revenue growth.

We have emphasized on our conference calls the importance of research and development in order to generate new products for competitive advantage. We continue to benefit from maintaining an R&D investment within our historical targeted range of between 3% and 4% of net sales.

New products introduced in the past three years were responsible for approximately 39% of equipment sales during the 2009 third quarter and 43% in the first nine months of this year.

Let me start with an update on ec-H2O. It was just two years ago that we first announced this platform technology, which converts plain tap water into a powerful cleaning agent without any added chemicals. This product is so differentiated from the competition that we are able to attract a growing number of new customers, as well as convert existing customers.

We're pleased to add retailers such as Kroger, Supervalu and IKEA to our list of new ec-H2O customers who allow us to use their names. Our success with many large customers is why Tennant's sales of machines with ec-H2O technology continued to exceed our expectations.

It has been at the top of our priority list to continue the global rollout of this breakthrough environmentally-friendly technology. We have now completed the introduction of ec-H2O on our core scrubbers, including five walk-behinds and six riders. These products round out a portfolio of scrubber offerings to our commercial and light industrial customer base, with specific applications in retail, education, food and beverage, healthcare, hospitality, logistics and aviation environments.

To give you an idea of the potential opportunity, around 50% of Tennant's equipment sales are scrubbers. And ec-H2O technology is particularly effective for general-purpose cleaning, which comprises about 70% of our scrubber cleaning applications.

Further, according to an independent study conducted by EcoForm, which is a leading technical environmental performance analysis company, ec-H20 has been shown to sizably reduce environmental footprints, compared to traditional cleaning with chemicals. The study analyzed footprints for energy, global warming, ozone depletion, smog, acid rain and water and air pollution in retail, healthcare and education facilities.

Typical footprint reductions on environmentally sustainable cleaning technologies are between 10% and 20% versus traditional cleaning methods. Even taking a conservative testing approach, this study found that our ec-H20 technology is achieving environmental footprint reductions ranging from 57% to 98%. We're very proud that ec-H20 delivers proven cleaning results without the negative environmental and health concerns associated with producing, packaging, transporting, using and disposing of traditional cleaning chemicals.

During the third quarter, Tennant also announced two important new partnerships. First, we have teamed up with Kaivac Inc. to jointly develop a spray hand vac or no-touch cleaning system for restrooms that will utilize ec-H20 technology. When developed, we expect the system will enable customers to cost effectively sanitize even heavily-soiled restrooms without using chemicals. Incorporating our ec-H20 technology into Kaivac's market-leading systems builds on Tennant's mission to clean more of our customers environments in more environmentally-friendly ways.

And second, Tennant and Ecolab Inc. announced the North American launch of the Scrub-N-Go Floor Scrubber Vac System. This is a cordless cleaning machine that the two companies jointly developed, initially for the quick-serve restaurant market segment. The product cleans floors up to 63% faster and more thoroughly than using a traditional mop and bucket. This represents a huge labor savings for restaurant operators.

The ergonomic and easy-to-operate product maneuvers around the small crevices and spaces typically found in fast-food outlets, as well as in full-service restaurants.

Moreover, floors cleaned with Scrub-N-Go dry faster, which should greatly reduce the risk of slip-and-fall accidents.

According to the National Restaurant Association, nearly 3 million employees and 1 million customers are injured in these accidents each year.

Tennant is manufacturing the Scrub-N-Go, and it is currently being sold through Ecolab's sales and distribution channel. Tennant is providing service through our factory-direct field technicians.

Both the Kaivac and the Ecolab partnerships illustrate Tennant's commitment to pursuing long-term revenue growth opportunities through partnerships that help us expand beyond our traditional market segments.

Speaking of partnerships, Tennant has been selected as the 2009 manufacturer of the year by ABM Industries Inc. ABM is a premier provider of building maintenance and facility services in the US and in Canada. ABM, in giving us this award, cited Tennant as the cleaning industry's best example of thinking outside the box and providing ABM with creative solutions for solving their customers' cleaning challenges. We appreciate the recognition and look forward to continued strong collaboration with ABM in the future.

Looking ahead, we remain focused on our strategic priorities to employ continuous business process improvement; improve operational excellence through lean manufacturing initiatives and a global low-cost sourcing platform; and grow sales through innovative new products and service solutions, as well as through international market expansion.

Lastly, I would like to welcome another highly credentialed individual to our Board of Directors. David S. Wickman joined Tennant's board in August. He brings expertise in financial management and operations, including more than 10 years in executive leadership at UnitedHealth Group, a diversified Fortune 25 health and well-being enterprise. David also has prior experience with a competitive cleaning equipment manufacturer. I, along with Tennant's seven other board members, am eager to work with David in the coming months and years.

Now, I will ask Tom to review Tennant'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. Also, please note as I go through the financials that I will generally not comment on the year-to-date financials, as those were detailed in the earnings release.

For the third quarter ended September 30, 2009, Tennant reported net earnings of $8.5 [sic - see press release] million or $0.31 per diluted share and third-quarter net sales of $154.4 million. In the year-ago quarter, the Company reported net earnings of $14 million or $0.76 per diluted share on net sales of $185.9 million.

Oh, I'm sorry, I want to go back there. I said $8.5 million. It should actually be $5.8 million or $0.31 per diluted share. Excuse me.

Our year-over-year sales decline of about 17% in the 2009 third quarter was more moderate than the approximately 23% year-over-year decreases in the first and second quarters of 2009. Also, as Chris noted, we're pleased to report our cost containment strategies are working. We have reported gross margins in excess of 40% in each quarter this year despite the significant year-over-year sales decline due to the global recession.

As a result of stringent cost controls and reductions in working capital during the first nine months of 2009, we generated $45.1 million more cash from operations than we did in the first nine months of 2008. Additionally, total debt of $43.4 million at quarter and was lower by nearly $60 million compared to the same time last year.

Turning now to a more detailed review of the 2009 third quarter. Consolidated net sales continue to be negatively affected by both the weak economy around the world and unfavorable foreign currency fluctuations. These factors led to lower net sales across all geographies. Excluding an unfavorable foreign currency exchange impact of approximately 2%, organic sales declined about 15% in the third quarter of 2009. Organic sales decreased about 21% in the first quarter of 2009 and about 17% in the second of 2009.

We were encouraged to see that the 2009 third-quarter consolidated net sales of $154.4 million rose 4% sequentially compared to the 2009 second-quarter consolidated net sales of $148.6 million. This marks our second consecutive quarter of sequential sales gains. As you may recall, the 2009 second-quarter net sales were up 16% sequentially compared to the 2009's first quarter net sales of $128.6 million.

In North America, we continue to see delayed purchases stemming from the economic downturn and tight credit markets. Third-quarter net sales totaled $90.5 million, down 15.6% versus the prior-year quarter due to lower unit volume across all product lines. The most significantly impacted have been the sales of the Company's large industrial equipment.

Tennant continues to be the market leader in North America, and we're well-positioned once activity in the industrial and outdoor segments regains strength.

In our EMEA markets, which encompass Europe, the Middle East and Africa, third-quarter net sales were $45.2 million, down 18.3% compared with the year-ago quarter. Approximately 12% of the decrease stems from a decline in organic sales and another 6% was due to unfavorable foreign currency exchange effects.

In Tennant's other international markets, which includes China and other Asian markets, Japan, Australia, and Latin America, 2009's third-quarter sales totaled $18.7 million, down 20.1% versus the prior-year quarter.

Organic sales in this region declined approximately 18%, driven by unit volume decreases. The effects of unfavorable foreign currency exchange also lowered sales in our other international markets by approximately 2%.

Despite a significant year-over-year decline in sales volume, Tennant's gross margin was 42% for the 2009 third quarter compared to 42.3% in the prior-year quarter. Our gross profit margin benefited from lower commodity prices, flexible production management and workforce reductions. These gains were offset by the impact of lower sales volumes and an increased sales mix of lower-margin smaller commercial equipment. As Chris said, we still expect to be able to maintain our gross margins at around 41% for the year based on the cost reductions we implemented and anticipated lower commodity prices in 2009.

Research and development expense in the third quarter totaled $5.5 million versus $6 million in the prior-year quarter. R&D expense as a percent of sales was 3.6% in the third quarter of 2009 due to the low level of sales in the quarter compared to 3.2% in the third quarter last year.

R&D expense in the 2009 third quarter still remained within our target range of 3% to 4% of net sales. Although on an absolute dollar basis, we anticipate our R&D investment to rise in the fourth quarter of 2009, it will still fall within our targeted percent of sales range.

Selling and administrative expense in the third quarter of 2009 decreased $4.4 million or 7.8% to $51.8 million from $56.2 million in the prior-year quarter. We achieved a lower overall S&A expense in the 2009 third quarter compared to the same period last year as our workforce reductions and strong cost controls more than offset higher incentives on better than anticipated performance.

On a year-to-date basis, selling and administrative expense was reduced $25.6 million or nearly 15% to $146.3 million versus $171.9 million in the first nine months of last year. The Company achieved lower S&A expense through workforce reductions, cost cutting and delays in discretionary spend.

Selling and administrative expense as a percent of sales was 33.9% for the first nine months of 2009 compared to 31.4% in the same period last year. We're working on business process improvement projects that we believe will help us lower S&A expense as a percent of sales in the coming years.

Tennant's 2009 third-quarter operating profit was $7.6 million, up sequentially from $5.4 million in the 2009 second quarter, which rolled sequentially from $0.3 million in the 2009 first quarter excluding the first-quarter $43.4 million pretax non-cash goodwill impairment charge and the favorable $1.3 million revision to the restructuring charge reserve. By comparison, the Company reported an operating profit of $16.4 million in the 2008 third quarter.

Our overall effective tax rate in 2009 third quarter was 24.1% compared to 22.6% in the third quarter of 2008. Both quarters benefited from discrete net favorable tax items, primarily due to adjustments of tax reserves related to federal tax filings, as well as the expiration of the statute of limitations from various jurisdictions.

The underlying base tax rate for 2009, which excludes discrete tax items, was reduced from 39.5% to 36.9% in the third quarter of 2009. The tax rate primarily depends on the mix and taxable earnings by country.

Looking out at the balance sheet, we are, again, very pleased with the Company's progress. Net receivables at the end of the 2009 third quarter totaled $114.6 million, a decrease of $27.4 million from $142 million a year earlier. Accounts receivable days outstanding was 66 at quarter end, down from 70 at the end of the 2008 third quarter. The improvement primarily stems from the reduction of outstanding receivables.

Due to proactive management, our accounts receivable days outstanding have held steady at 66 days for the past two quarters, down from a peak of 77 days in the fourth quarter of 2008.

Tennant's inventories at the end of the 2009 third quarter totaled $60.8 million, down $12.2 million from $73 million in the third quarter last year. FIFO days inventory on hand was 94 days at the end of the quarter, which was up compared to 89 days in the year-ago quarter but significantly lower from the high of 121 days at the end of the 2009 first quarter. The improvement from the first quarter is chiefly due to stronger sales in the third quarter and the continued traction we are seeing with our inventory reduction initiatives.

Accounts Payable is $37.7 million at the end of the third quarter, up $6.1 million from $31.6 million in the year-ago 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 $8.8 million in the first nine months of 2009 versus $16.9 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 now expect capital expenditures of $13 million or lower this year. Our original forecast was for a spending level of about $15 million.

We are extremely pleased that during the first nine months of 2009, Tennant generated $58.4 million in cash from operations compared with $13.3 million during the first nine months of 2008. At the end of the 2009 third quarter the Company's total cash was $13.9 million, down $8.9 million from $22.8 million a year ago.

Total debt was $43.4 million at the end of the 2009 third quarter, a significant decrease from $102.1 million at the same time last year. The reduction in debt was a result of our focus on cash optimization and was mainly due to lower working capital and the $9 million income tax refund received back in April.

Our debt-to-capital ratio was 19.5% at the end of the third quarter, which is down from 28.9% at the end of the 2008 third quarter and significantly lower than the 35.7% at the end of the 2009 first quarter. Tennant is in compliance with the debt covenants.

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.

Moving now to our outlook, we continue to expect a difficult selling environment in the fourth quarter of 2009 and we remain committed to conservatively managing the business. Our December 2008 restructuring program is on track to deliver anticipated savings of at least $15 million this year and $20 million in 2010. Including the 2009 first-quarter non-cash goodwill impairment charge of a $2.29 loss per diluted share and the benefit from the restructuring charge reserve revision of $0.07 per diluted share and the 2009 third-quarter discrete net favorable tax item of $0.04 per diluted share, we now estimate a full-year net loss in the range of $1.63 to $1.55 loss per diluted share.

Excluding these items, our expected net earnings range for 2009 is now $0.55 to $0.63 per diluted share. We have lowered the low end of the range -- we have raised the low end of the range from $0.20 to $0.55 per diluted share and increased the high end of the range from $0.50 to $0.63 per diluted share. We are also narrowing our 2009 full-year net sales to a range of $585 million to $595 million. Our previous guidance anticipated a 2009 full-year net sales 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 of approximately 4%. A gross margin of approximately 41% and capital expenditures of $13 million or less. We also continue to anticipate a base tax rate in 2009 in the range of 36% to 38%, depending primarily upon the mix of full-year taxable earnings by country.

Based on our current estimated full-year net sales range of $585 million to $595 million, fourth-quarter net sales are expected to be in the range of $153 million to $163 million. We anticipate gross margins to be around 41%, and expect fourth-quarter earnings per diluted share in the range of $0.14 to $0.23.

We look forward to updating you further on Tennant's progress during our fourth-quarter earnings conference call in February of 2010. We are currently planning to provide guidance for the 2010 full year at that time. Now, we would like to open up the call to any questions. Courtney?

(Operator Instructions). James Bank, Sidoti & Company.

I'm just having trouble reconciling the discrete tax item in the quarter. If I add back the $800,000, I'm coming up with $0.23 at a 34.2% tax rate.

This is Karen. It is also the base tax rate adjustment that we made from 39.5% down to 36.9%. We did not call that a discrete tax item; that is just a change in our regular base tax rate.

Right. But I think what I'm doing is I'm making your tax provision $2.6 million, which comes to $0.23. I'm just trying to figure where that extra $0.04 was coming from.

Well the discrete tax item was about $800,000, which is $0.04 of EPS.

Okay. All right. Well I'll just try to figure that one out later.

Feel free to call if you have any other questions on this, James. We'll talk you through the details.

The commodity costs. Would you guys be able to break that out on the margin terms?

We have not provided that traditionally. We're not ready to do that right now, James, just given the big buckets of where things are happening. And commodities was an important part of being able to hold our margins at around that 42% level. We're feeling more pressure now but we don't believe we're going to see any meaningful level in commodity costs in the quarter that we're in right now in our fourth quarter.

And, in the operating review of the press release, the sustained strong cost controls, is that the $15 million in savings you anticipate this year and the $20 million next year on annualized terms?

Yes. But the way to think about that also, it really goes beyond just the headcount reductions that we took in December that are driving the $15 million of savings this year and the $20 million next year. We are still running the business very conservatively, and we are waiting to spend until we see the revenue come in. So we are saving money versus traditional run rate spends, just due to the state of the economy right now.

Is there any way you could give us the balance of the discretionary spend versus the costs that are sustainable?

We're not prepared to provide that at the current time.

Okay, fair enough.

And the fourth quarter typically or historically I guess your strongest quarter. I guess taking your guidance even going to the high end of guidance at $0.63 in earnings sort of implies it will be down sequentially. I just wanted to get a better idea of what's driving that. What do you guys see right now today that is ultimately driving that?

Actually, if you looked at the back end of the revenue based on the guidance we gave for the full year, we're saying that the low end of our guidance we could actually see a modest sequential decline. At the high end of our guidance we would see fairly substantial sequential growth relative to Q3 and would also see reasonable growth relative to prior year.

We just believe it is prudent to be conservative at the current time, given we just don't have good visibility. There is a bit of lumpiness as you see our order patterns come in. That's why we're giving such a broad revenue range. We sure hope we're being conservative. We hope we come in at the high end of that and see sequential improvement and year-over-year improvement. But we are being conservative.

Okay. All right, great. Thank you. I'll jump back in queue.

Joe Maxa, Dougherty & Company.

Back on the guidance question, Tom and Chris, the margins, you're talking 41%. Are you expecting to see a change in your product mix, maybe some of the larger product that has a lower margin come into the Q4?

No, not at the current time. We are actually expecting to see -- we're not expecting any improvement in our large improvement. And typically of we saw an improvement in our large improvement, that would help some expansion in our margins as we kind of have a bit higher margins in some of our large equipment.

Oh, okay; I misunderstood the earlier comment.

Sorry about that.

That's fine. The partnerships with Ecolab and Kaivac -- Ecolab looks like that is ready to go now. And what would be your next expectations or let me ask you this -- what are your initial feedbacks? And then one more thing on that.

What would be a price point? Are these affordable for QSRs? I'm assuming they are. But in this environment, are they willing to spend, whether it is a few thousand dollars or just give us an idea of what that might cost?

We're obviously very excited about this partnership. It opens up a whole new market for us. We have never served the quick-serve restaurant segment in any meaningful way. And so we are not prepared to talk about what the sales potential is but we're willing to talk about what the market opportunity looks like. Because if you just take the top 10 quick-serve restaurant chains in North America alone, where Ecolab has a relationship, we're talking about 100,000 restaurants or so. So, this is new to us.

We don't know what the adoption rate is going to be. But you can do the math at various adoption rates and figure out how big an opportunity this is for us.

We have not yet sold anything into any of the chains, although we have tested the Scrub-N-Go in some key chains around the country. And the feedback has been extremely positive, which is why we decided to go forward at this time.

The last question on pricing, we have not given pricing information, but what I would say to you directionally is that the Scrub-N-Go machine is priced kind of at the same point as the low end of our current walk-behind scrubber range. So I think you get a directional read on what that means.

Okay. And on the Kaivac, when do you expect that to be available and start sales of that?

On Kaivac, we're already selling Kaivac's existing restroom cleaning systems through our national accounts organization today. So that is ongoing and it's been ongoing now for several months. What we've announced is that we have a development agreement, so this has just started.

We think that ec-H20 technology is relevant in restroom cleaning systems, wide-area cleaning equipment, etc. And Kaivac as a market leader in this segment was a very, very interesting partnership.

So right now it is all about technical development. We'll see as time goes on what we're able to accomplish. And when we're ready to make an announcement regarding commercializing a product, you'll be the first to know.

All right, thank you.

Yvonne Varano, Jefferies.

On the sales side, can you just drill a little bit more down on where that came from? Were you seeing any pickup in the service part of the business. I know you had said prior that it seemed like people were really delaying replacing certain parts on the equipment, and I'm wondering if that picked up. And just curious as to what is going on in the EMEA region. Still weak but looked a lot better there?

I'll take that one. What we are seeing, if you look at it in total by our key reporting geographies, we are seeing lower organic declines versus prior year. So we did see improvements in North America, EMEA and also our other international markets, at a total revenue level. Again, that is better -- it's lower declines than we've seen in the prior two periods.

On top of that, we are seeing a little bit of pickup in both our service parts and consumables. But still too early to call whether it is beginning to lead the recovery at this point. But we are also seeing improvement in that area, as well as in our small equipment portfolio.

Okay. And then, I know you said that you are expecting a 4% negative currency impact. Was that for 4Q or for the year?

For the full year, actually. So we're not good enough to call the currency impact that well but we are seeing the hurt of the currency continuing to diminish in the fourth quarter as we saw in Q3.

Okay. And then, sorry, lastly, back on the sales, it seems the percentage of sales coming from the new products declined a little bit in the quarter versus what we have seen for the year-to-date period. Could you maybe address what is happening there?

Really, it is still at a very high level. We have got to remember that. Our goal is to have 30% of our equipment sales come from new products launched in the last three years.

So I think two things happened. One is that you have some products that fall off because they are more than three years old. And I also think what you are seeing maybe is a little bit of an improvement in our base commercial business, also, which of existing machines that are not new in the quarter, which brings the number down to 39% versus 43%. But net-net, it is still a very strong performance for our new products.

Great. Thanks very much.

Zahid Siddique, Gabelli.

Good morning. I have a question on Q4 sales. I guess if we back into your guidance, the sales guidance for the year, that implies that the sales for Q4 will be in the $155 million to $165 million range, roughly?

Roughly. (multiple speakers) numbers are $153 million to $163 million, but that is close.

Right. That implies that Q4, actually, in Q4, your sales will grow in Q4 of '08. You are somewhere between zero and 7%?

Correct.

Isn't that too let's call it liberal when we are seeing sales falling 16%, 17% in Q3 and most of this year, and then you are saying that in Q4 you actually have sales go up?

Yes, that's factual. And the thing you need to remember there is we saw a big decline last year in our Q4, so we're finally getting to the place where we actually get a benefit in our year-over-year comparisons because our Q4 last year was honestly a very low base relative to historical Q4s. So we believe we're going to see not only sequential improvement but year-on-year improvement in the quarter. But we still are giving a very broad range in our guidance for the quarter.

So I guess the weak Q4 was a factor -- will be a factor -- weak Q4 of '08.

You have to remember that through the third quarter of last year, we still had organic growth of 4%. So, really, we did not see any sales declines until the fourth quarter, started in October and just accelerated through the quarter.

Okay, that's very helpful. And just one other question, could you comment on the credit environment, what you're seeing out there?

We're still being impacted by it, in that we know that as we talk to our customers, they are getting -- still have not the level of access that they've typically had to the credit market. And we're not seeing as much money flowing into leasing. And honestly the approval rates on our customers are going to get leases are not as high as they have historically been. So it is still negatively affecting our business.

Okay, thanks a lot.

Mark Zinski, 21st Equity.

Have you been able to determine if there has been any meaningful impact on your consumables business from the swine flu epidemic?

On our consumables business? I'm not sure I understand the question.

Just on your chemical sales.

Actually our chemicals are less than a percent of our revenue, Mark. So it is a pretty inconsequential part of our overall revenue stream. So if there is any effect, it is not material enough that it matters.

Oh, okay. Great. And then is the acquisition strategy still on hold?

It is for the current time. We're going to wait for the economy to ensure that it fully recovers. Although we are maintaining conversations with potential partners. And we are not nearly as active as we have been, but we're staying prepared for when the economy recovers. And we think there's going to be some nice opportunities out there.

Okay, that's it for me. Thank you.

You bet.

(Operator Instructions). Earl Fisher, SFE Investment.

Thank you. I've never been on your line before and I am curious -- I'm interested in the fact that you won this 2009 manufacturer's award. And was that based upon the way your machines that you make are more environmentally benign, or that the people who buy your machines, as you said in the case of EcoLab that they might have less injury from the employees, which is a serious thing.

I'm trying to figure out, have you tried to factor in how much savings you will be able to get from being environmentally friendly as well as saving on the insurance of other companies that buy your products?

To answer the first question as to why ABM selected us as manufacturer of the year, I do think that our ec-H20 technology played a very important part. But I also think we're viewed as a valued partner in terms of the way we provide customer service and interact with them on a daily, weekly, monthly basis. So it's the combination of the two.

And regarding, since it's the first time you've been on the call, regarding ec-H20 technology, what we say is it provides tremendous benefits to our customers. Yes, there is a cost-saving element associated with the fact that they don't have to use chemicals anymore. They don't have to buy, transport, store or dispose of chemicals. That's a big deal from a cost standpoint. We've said that the payback on that cost savings is anywhere from a few months to 18 months, depending on the application.

But, ec-H20 also simplifies the cleaning and the training process because now their employees -- and remember cleaning employees are very transient. The turnover is very high. They have to be trained and retrained quite often. With ec-H20, when you are only using tap water, you tell the operator you put water in the tank, you turn the key on and you go, and you dump it wherever you want. So it simplifies the cleaning process.

And it uses 70% less water. And we also leave floors drier more quickly, which is the whole slip-and-fall benefit, which is substantial not only in quick-service restaurants but in retail averments, hospitals, schools and across the board. So, I think our customers as well as -- our end-user customers as well as ABM are seeing all those benefits being important from the ec-H20 technology.

You didn't mention insurance.

Because we don't -- we're not able to quantify what the insurance benefit could be. We would hope that if we're able to tangibly show that slip-and-fall accidents are being decreased in a substantial way that for example the quick-serve restaurants will be able to go to their insurance carriers and negotiate lower rates. But there is no indication yet that we can report that that is the case. But it is a potential, absolutely.

Well I would say that Helmerich & Payne makes a rig by the name of FlexRig. And over the years they have shown that people -- they have less medical insurance problems because of the fact that it is a better rig; it's a safer rig; fewer people have to work on it. So I suggest you look into that.

Yes, and I promise you we already are. What I'm just saying is we cannot report anything tangible as of yet.

You have no further questions at this time.

Okay. Well, let me close by saying we are pleased that Tennant's net sales and earnings per share rose sequentially in the 2009 third quarter from the second quarter, and that our gross margin increased sequentially as well, despite the pressure on net sales caused by the global economic downturn.

Throughout 2009, we have remained focused on controlling what we can control. We also 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.

Thank you for your time today and for your questions.

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