Tennant Co (TNC) 2009 Q4 法說會逐字稿

Good morning and thank you for participating in Tennant Company's fourth-quarter earnings conference call. This call is being recorded. (Operator Instructions).

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

We ask that you remain on the 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 Rachel. Good morning, everyone, and welcome to Tennant Company's fourth-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 full year and our outlook for 2010. First, Chris will brief you on our operations; then I'll cover 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, on this conference call, we will discuss non-GAAP measures that include or exclude special or nonrecurring items. For each non-GAAP measure, we will also provide the most directly comparable GAAP measure. Our release includes a reconciliation of those non-GAAP measures to our GAAP results.

Our earnings release was issued this morning via BusinessWire and it 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. Today I would like to share with you the highlights of the 2009 fourth quarter and year and provide an update on our vision for Tennant's future future.

Let me begin by saying that we are pleased with the Company's fourth-quarter performance, especially as we continue to face a challenging global sales environment. Tennant sales rose in nearly all geographies and we saw sequential gains for the third consecutive quarter, which resulted in a return to year-over-year sales growth for the first time since the third quarter of 2008.

The Company's financial accomplishments include quarterly earnings per share of $0.35 versus a loss in the prior year quarter. Full year gross margins reached our 2009 stated objective of 41%. The Company generated $75.2 million in cash from operations in 2009, which was more than double the amount of cash that Tennant generated in 2008.

Our stronger cash flow enabled us to significantly pay down debt throughout the year. As a result, we ended 2009 with total debt of just $34.2 million compared to $95.3 million at the end of last year. And the Company's quarterly dividend was raised in the 2009 fourth quarter by 8% to $0.14 per share. This marked the 38th consecutive that Tennant has increased its annual cash dividend payout to shareholders.

Throughout 2009, we maintained our commitment to drive innovation through new products, keeping R&D investment within our historical targeted range of between 3% and 4% of net sales. Our proprietary ec-H2O platform is certainly one of Tennant's most successful R&D efforts ever.

Ec-H2O is the environmentally friendly process we developed that converts plain tap water into a powerful cleaning agent without any added chemicals.

In 2009, this industry-leading technology gained momentum in the marketplace, with sales exceeding expectations. In fact, approximately 50% of the customers buying ec-H2O have been new customers for Tennant. That is because this technology is so differentiated from the competition.

Our success to date in attracting new customers to ec-H2O is important because, when the economy recovers and the market for cleaning equipment picks up, we believe we have a significant marketshare play on our hands. For customers with large fleets of cleaning machines, the costs to switch suppliers can be high. But in many situations already, the benefits of ec-H2O have been compelling enough to motivate a shift to Tennant.

Gaining these customers is very meaningful because 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.

We continued the global rollout of ec-H2O in the fourth quarter. Today, Tennant offers 11 scrubbers with ec-H2O technology, including six Walk Behind scrubbers that were introduced in 2008 and five Rider Scrubbers that were launched in 2009.

We plan to add three more Riders with ec-H2O in 2010 which will round out our portfolio of scrubbers for our commercial and light industrial customer base. Specific applications are in retail, education, food and beverage, healthcare, hospitality, logistics and aviation environments.

Tennant first launched scrubbers equipped with this technology in the 2008 second quarter and, despite economic headwinds, we achieved $17 million of ec-H2O sales that year. We tripled that to $50 million in sales in 2009 and we expect significant growth from ec-H2O in 2010.

The contribution of ec-H2O to our 2009 results can also be seen when you consider that Tennant's 2009 scrubber sales were down only about 13% while the Company's total equipment sales declined about 20%. The number of scrubbers sold in 2009 equipped with ec-H2O supports our belief that this technology platform increased our sales and market share, even during an adverse economy.

Ec-H2O was a major contributor to 41% of Tennant's 2009 equipment sales coming from products introduced in the past three years. Once again, that exceeded our ongoing goal of 30%.

Now I'd like to update you on some other exciting product news. You may recall that we announced last quarter a new partnership with Ecolab to launch the Scrub-N-Go Floor Scrubber Vac System in North America. This product was just selected to receive a National Restaurant Association Product Innovation Award for 2010.

The Scrub-N-Go is a lithium ion-powered, battery-powered, cordless cleaning machine that our 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. And it represents a huge labor savings for restaurant operators.

In addition, floors cleaned with Scrub-N-Go dry faster, which greatly reduces the risk of slip and fall accidents.

Tennant is manufacturing and servicing the Scrub-N-Go and it is currently being sold through Ecolab's sales and distribution channel. The Scrub-N-Go was recently approved by McDonald's for their corporate and franchisee stores, in addition to being approved by Yum Brands for its franchisee stores which include Taco Bell, KFC, Pizza Hut, and Long John Silvers.

We expect other major quick serve restaurant approvals to occur in the first half of 2010. We are now also beginning to pilot the Scrub-N-Go in international markets.

Our partnership with Ecolab illustrates tenants Tennant's commitment to pursuing long-term revenue growth opportunities through alliances that help us expand beyond our traditional markets. To put this in context, Tennant has never participated in the quick serve restaurant market and Ecolab currently does business with approximately 100,000 of these restaurants across the United States.

This leads me to how excited we are about Tennant's future. I would like to update you on the Company's strategic direction and our vision.

Tennant's growth has been an evolution. Our business evolved from providing nonresidential floor maintenance products in the 1990s to delivering what we called Clean, Lean, and Green solutions in 2002. This was the first time we used environmental benefits as a strategic and new product development filter.

We also began investing more aggressively in advanced product development efforts. Innovative cleaning technologies like FaST and ReadySpace stemmed from this strategic shift.

Then in 2006, we began talking about becoming an environmental cleaning solutions company. We defined this as cleaning more of our customers environments in more environmentally responsible ways. This afforded our people the freedom to be creative in a much broader context, which led directly to the successful introduction of ec-H2O.

Over the past 18 months, we have learned a great deal about the capabilities of water cleaning technologies and, through this research, realized we were potentially onto something big that could transform our future. Late last year, following a series of strategy sessions, we decided it was time to further enhance our vision.

Today, the next step in Tennant's continuing evolution is to become a global leader in chemical-free cleaning and other technologies to help our customers create a cleaner, healthier world. Underlying our confidence in the new vision is the fact that we see ec-H2O as a technology platform that is potentially relevant in a broad array of markets and applications.

This platform has two equally important benefits. The first is scalability. We have created an electrolyzed water [cell], large enough to be used on our scrubbers. And we have figured out how to miniaturize it so that it fits into the head of a spray bottle, essentially using an [entail] inside approach.

We now believe we can package the technology and adapt it to a wide array of cleaning devices. This will help us achieve our goals to clean more of our customers' environments in more environmentally friendly ways.

The second platform benefit is performance. We know that ec-H2O on our scrubbers delivers great cleaning results. The technology on the active ion spray bottle has been enhanced to the point that the EPA has approved it as a sanitizer.

It kills 99.9% of common household bacteria, including E. coli, this area, and salmonella, and inactivates the H1N1 virus. We are now exploring the possibility that ec-H2O technology can be further developed to act as a disinfectant.

What if we could develop and market a spectrum of cleaning devices that deliver basic cleaning up to hospital grade disinfecting and everything in between? We think that this is a very exciting and potentially transformative prospect for Tennant. And while we don't have all of the answers yet, we are committed to figuring out what is possible.

So why should our customers care about this? The fact is that they are increasingly seeking eco-friendly cleaning solutions and using sustainability as a strategic decision-making filter. In 2008, 29% of the Standard & Poor's 500 companies produced corporate social responsibility reports, up from virtually zero in 2000. That number is growing in the US and overseas as companies understand that being good environmental stewards is important to their key constituencies and to their long-term business success.

The good news is that we are able to show our customers the tangible environmental benefits they can derive from cleaning with ec-H2O compared to traditional chemicals.

EcoForm, an independent environmental performance analysis firm, has published a report showing that ec-H2O sizably reduces environmental footprints compared to traditional cleaning with chemicals. The study found that ec-H2O typically achieves environmental footprint reductions in seven categories, ranging from 77% to 98%.

We are very proud that our breakthrough technology delivers independently proven cleaning results without the negative environmental and health concerns associated with traditional cleaning chemicals.

With many ec-H2O opportunities in front of us, we must be focused. We will leverage our ec-H2O technology platform in three phases.

First, we are extending ec-H2O to all relevant existing products. The goal is to accelerate sales and market share growth in our current markets. As I noted earlier, ec-H2O has been applied to 11 Tennant scrubbers with three more scheduled in the first half of this year.

The second phase involves cleaning more of our customers' spaces in more environmentally friendly ways. We are researching how key customer segments like retail, healthcare and education currently clean all parts of their facilities, so we can determine how best to leverage ec-H2O in most if not all cleaning applications and figure out what cleaning devices we need to develop in order to deliver the required chemical-free cleaning performance. We currently have research studies and tests underway with key customers in North America and Europe.

The third phase of leveraging ec-H2O is to develop new markets and new applications. We believe there are significant opportunities in various market segments including consumer products, food processing, and healthcare, among others.

To help achieve our vision of becoming a global leader in chemical-free cleaning, we have created a new Tennant brand called Orbio Technologies. Orb implies a circle such as the earth while bio implies life and reflects our focus on creating a healthier planet. It is spelled o-r-b-i-o. Orbio.

Our goal is to establish Orbio as the recognized standard for sustainable cleaning around the world. We have also formed a dedicated Orbio team, who are charged with figuring out how best to leverage our ec-H2O technology and create a large and robust chemical-free cleaning business in both existing and new markets.

Finally, as I mentioned, our aspiration is to become a global leader in chemical-free cleaning and other technologies. So I will briefly touch on what I mean by other technologies.

Our new 500ze City Cleaning Sweeper is a good example of the other kinds of sustainable cleaning innovations that Tennant plans to develop. We introduced the 500ze at the United Nations COP15 Climate Change Conference, which was held in Copenhagen in December. The lithium ion battery-powered 500ze Sweeper provides unmatched environmental benefits including zero CO2 emissions and reduced noise levels, in addition to powerful cleaning. We will officially launch the 500ze in Europe this year.

These are exciting times for Tennant, and to take advantage of these growth opportunities requires a higher level of R&D investment this year. As a result, our planned R&D spending levels for the 2010 first quarter and full year will be at the higher end of our targeted 3 to 4% of sales range as we invest in Orbio Technologies.

Looking ahead, we are committed to playing our current game better, which means that we will continue to drive profitable growth in Tennant's traditional business and simultaneously play new games. That is developing a chemical-free cleaning business around Orbio Technologies.

We are no longer participating only in Tennant's historical markets and cleaning applications. We believe that we have the ability to leverage our technology platforms to profitably expand beyond our traditional business.

It has been Tennant's legacy to successfully evolve. We are known as a technology innovator with a growing reputation for environmentally sustainable cleaning solutions. We have proven our capabilities in chemical-free cleaning with ec-H2O and we plan to fully leverage the significant market opportunity to help secure Tennant's future.

As we expand into new areas, a strong Board of Directors is more important than ever. I am so pleased that Don Mulligan, Executive Vice President and Chief Financial Officer of General Mills, has joined Tennant's Board which now stands at 10 members. Don has previously worked at other consumer companies such as PepsiCo and Yum Brands, and he has expertise in international finance as well as mergers and acquisitions.

I look forward to keeping you apprised of our progress against our vision and strategy. Now at this point I'll ask Tom to review Tennant's financial results and our outlook. Tom.

Thank you, Chris. In my comments today, all references to earnings per share are on a fully diluted basis. Also please note as I go through the results, I will generally not comment on the year-to-date financials as those were detailed in the earnings release.

Overall, we are pleased with the Company's performance. For the fourth quarter ended December 31, 2009, Tennant reported net earnings of $6.7 million or $0.35 per diluted share on fourth-quarter net sales of $164.2 million. The results included a $0.10 per diluted share benefit from a United Kingdom business reorganization and a $0.01 loss per diluted share from discrete net unfavorable tax items.

In the year ago quarter, Tennant reported a net loss of $16.9 million or a $0.93 loss per diluted share on net sales of $153.3 million. The year earlier loss included pretax charges of $19.8 million or $0.88 loss per diluted share for restructuring activity.

Turning now to a more detailed review of the 2009 fourth quarter, Tennant's consolidated net sales of $164.2 million increased 7.1% over the prior year fourth quarter and were higher than sales for the first, second and third quarters of 2009. As Chris pointed out, we are encouraged that the company's fourth-quarter net sales increased year over year for the first time in the past five quarters.

For the 2009 fourth quarter, consolidated net sales benefited from a favorable foreign currency exchange effect of approximately 5%. Organic sales, which exclude the foreign currency impact, grew approximately 2%. (Technical Difficulties).

By geography, North America reported a fourth-quarter year-over-year sales gain of 6.8%. That includes a slight favorable foreign currency impact of approximately 0.05%. The growth in North America was driven by sales of scrubbers, primarily through the retail vertical market.

In Europe the Middle East and Africa sales rose 0.2%. Excluding a favorable foreign currency impact of approximately 9%, organic sales declined roughly 9% in the region due to continued weakness in the Middle East and Eastern Europe.

However, our two largest European markets, which are France and the United Kingdom, posted sales growth compared to a year ago. In Tennant's other international markets, which includes China and other Asian markets -- China, Japan, Australia, and Latin America -- sales rose 25.1%. Excluding a favorable foreign currency impact of approximately 14%, organic sales growth was roughly 11% driven by strong sales in China.

Tennant's gross margin for the 2009 fourth quarter was 41.6%, up from 36.4% a year earlier, primarily as a result of tight spending controls, flexible production management, and a favorable inventory adjustment. We are pleased we achieved our 41% gross margin objective for the quarter and full year.

Research and development expense in the fourth quarter totaled $6.1 million versus $6.5 million in the prior year quarter. R&D expense as a percent of sales was 3.7% in the fourth quarter of 2009, compared to 4.3% in the fourth quarter last year. For the year, R&D expense was 3.9% of net sales within our targeted range of 3 to 4%.

Selling and administrative expenses in the fourth quarter of 2009 totaled $56 million or 34.1% of net sales compared with $71.7 million a year earlier, which included $19.8 million for restructuring activities. Fourth quarter 2009 S&A rose sequentially from the $51.8 million or 33.5% of net sales in the 2009 third quarter.

The higher expense levels stemmed from several factors -- new product launches, higher incentives due to strong fourth-quarter sales and cash generation, and severance related to consolidation and reallocation of resources throughout the business as a result of ongoing efforts to optimize our cost structure.

Our fourth-quarter operating profit was $6.3 million or 3.8% of sales versus an operating loss of $22.4 million a year ago or a negative operating margin of [14] 6%. Our goal is to achieve an operating profit margin of at least 9.5% when net revenues return to pre-economic downturn levels.

In the 2009 fourth quarter, we had an overall tax benefit of $1.1 million even though we had a pretax profit. This was primarily due to a $3. million tax benefit associated with our business reorganization in the United Kingdom.

For the 2009 full year we had an overall tax expense of $1.9 million even though we had a pretax loss. This resulted primarily from the very low level of tax-deductibility on our 2009 first-quarter non-cash goodwill impairment charge. Excluding these unusual events and our discrete net favorable tax items our 2009 base tax rate was 31%. Our base tax rate on any given year is chiefly due to the mix of earnings by country.

Turning now to the balance sheet. Again, we are pleased with the Company's progress. Net receivables at the end of the 2009 fourth quarter decreased to $121.2 million versus $123.8 million a year earlier despite higher sales in the quarter compared to the prior year period.

Accounts receivable days outstanding was 67 at quarter end, down from a peak of 77 at the end of the 2008 fourth quarter. Tennant's inventory at the end of the 2009 fourth quarter declined to $56.6 million from $66.8 million in the fourth quarter last year.

FIFO days inventory (inaudible) 87 days at the end of the quarter compared to 101 days in the year ago quarter. Our lower inventory levels reduced prior year cost layers in our LIFO inventory value calculation which resulted in a net favorable inventory adjustment in the income statement of $1.4 million.

Accounts Payable was $42.7 million at the end of the fourth quarter, up $26.5 million in the year-ago quarter due to the lengthening of payable terms. 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 $11.5 million in 2009 versus $20.8 million in 2008. We deliberately lowered our 2009 year capital spending plans by nearly 50% compared to 2008 levels, in order to preserve cash during the past year.

Our strong cost controls continue to yield benefits. We saved more than $15 million in 2009 from our restructuring actions and we anticipate incremental savings of another $5 million from these actions in 2010 for a total of $20 million in savings in 2010.

Tennant generated $75.2 million in cash from operations compared to $37.4 million in 2008. Throughout the year, the Company paid down debt and ended 2009 with debt of $34.2 million compared to $95.3 million a year ago.

The debt reduction was a result of our focus on cash optimization, lower working capital requirements and a $9 million income tax refund we received back in April. Our debt to capital ratio fell to 15.7% at the end of the fourth quarter.

At the end of 2009, the Company's total cash was $18.1 million compared to $29.3 million in the prior year.

Moving on now to our outlook. While we saw improvement in the Company's performance in the 2009 fourth quarter, we had limited visibility in the future quarters and order patterns remained unpredictable. Therefore, we will continue to manage the business conservatively.

Our financial outlook include the following expectations for 2010, as of today, the improving but still sluggish economic conditions worldwide; a favorable foreign currency impact on sales in the range of 1% to 3%; a gross margin in the range of 41% to 42%; research and development expense approaching 4% but still within the targeted 3% to 4% of sales range; and capital expenditures in the range of $13 million to $15 million.

Also in 2009, we had ESOP income of about $1 million. However on December 31, 2009, our ESOP program ended so we will no longer have ESOP income in 2010. We continue to anticipate a base tax rate in 2010 in the range of 34% to 36%, depending primarily upon a mix of full year taxable earnings by country.

While we don't give quarterly guidance, I will say that Tennant typically experiences some sales seasonality in the first quarter with lower revenues than in subsequent quarters. Our planned R&D spending levels for the first quarter will be at the higher end of our 3% to 4% of sales range as we invest in Orbio Technologies.

As Chris explained we believe it is critically important to invest in Orbio now to take advantage of this growth opportunity. Given our anticipated first-quarter revenues and higher spending, we expect the Company to be modestly profitable in the first quarter.

Of course, if the economy falters we will take appropriate actions and adjust our business plans accordingly as we have done in the past.

Based on what we know at this point, we estimate earnings for the full year of 2010 in the range of $0.70 to $1 per diluted share on net sales in the range of $615 million to $645 million.

We look forward to increased sales and profitability in 2010 along with continued investment and key initiatives to help secure our long-term future. And now we would like to open up the call to any questions. Rachel?

(Operator Instructions). Seaver Wang from HFP Capital Markets.

Good morning. Tom, can you give some kind of guidance for the tax rate for the -- for 2010 and maybe even beyond that? And then -- go ahead.

No, sure, Seaver, sorry about that. We would guide you guys to about 34 to 36% tax rate as our base tax rate. And as we look beyond 2010 we believe through actions that we took, for example, in the fourth quarter that we will be able to [give] a sustainable tax rate somewhat below that level, but for now we would use 34 to 36% in the couple of years going forward.

And then you had mentioned that first quarter would be marginally profitable?

Yes.

All right. That's it for me. Thanks.

James Bank from Sidoti & Co.

Good morning. Just starting with the eco technology, the $50 million number that you gave is that incremental or the total achieved from that technology on all of those products in 2009?

It's the total level of revenue achieved. So we are including -- in any -- a scrubbing piece of equipment that we sell ec-H2O on that piece of -- ec-H2O technology on that piece of equipment we are including the entire revenue component.

Okay.

It's hard -- the cannibalization is hard to figure out here. That's why we gave the guidance that, you know, the Scrubber portfolio in total, parts of the Scrubber portfolio did not have ec-H2O in 2009 but declined 13%, while equipment sales in total declined 20%, which I think indicates the benefit that we receive from ec-H2O in an adverse economy.

But I thought it was more of a market share gain play and wouldn't show much cannibalization.

We still firmly believe we are gaining share from the sale of ec-H2O. But we are also technology that even with the new technology, it's -- we are having -- that part of our business is still declining not as fast as the other part of our equipment portfolio.

Remember from a marketshare standpoint we also said we also said that more than 50% of the sales went to customers we have never done business with before. That is clearly a marketshare gain.

When you look at our existing customer base, who have bought our traditional Scrubbers historically and they look at this technology and they say, "Okay, next time I buy I'm going to switch out the regular Tennant scrubber for an ec-H2O scrubber." Right? I mean, there is some cannibalization there obviously.

But net net there is an incremental gain in a down environment from this technology but I think the most telling fact is more than 50% of the sales came from new customers. That should bode well for the future.

And, Chris, in your prepared remarks you certainly covered a lot. Did you in there mention how many other products this would be on in maybe 2010?

Yes. What we did say was that we would launch it on three additional riders, right? Because what we are finding interestingly is that this technology actually cleans very well in light industrial settings, which we didn't think it would do initially.

Okay. Now jumping into the guidance if I could, just want to get your sense, Tom. What essentially are you looking at or what would concern you when you see that lower end of the range at $0.70? And then conversely what would you like to see to maybe get you over that $1, the higher end of the range?

Sure. At the lower end of the range, first of all, I would hope we are being conservative there which I think is appropriate, given the lack of visibility that we have going forward. And what we would say at the lower end, we would expect that the currency impact would more than likely be at the lower end of the 1 to 3% and we would see some modest level of organic growth.

At the higher end of the range we are going to assume that we might see some modest level of improvement in our large equipment business. As we've talked about before, the large equipment business is late recovery in a down economic environment. And we frankly aren't seeing any improvement in that yet.

So that is at the higher end we might see a bit of improvement there. We might see a bit more ec-H2O business and, hopefully, more stability in some of the other markets in Eastern Europe, etc., where we really haven't started to see the level of improvement that we're beginning to see in North America.

Okay so I guess then -- staying with the high end of the range, I guess I'm just trying to get a sense of what types of variable costs are coming back. Because if I look at your peak earnings in 2007, I think you did about $664 million in sales and about $1.80 in EPS adjusted. Sort of the higher end of your sales range is $645 million with only $1 in earnings.

Are we led to believe that I guess a lot of these discretionary costs are coming back in 2010 with a higher volume?

A couple of different things there. One is, we are -- if you went back to 2007, I don't have the number right in front of me, but I believe we spent in the middle of the range with our R&D spending. We are now obviously guiding that we are going to be spending at the high end or call it 4%, to be specific.

So there's a fair amount of incremental R&D spending against our ec-H2O and Orbio technology.

The other piece is we -- I think I have been straightforward about the fact, we have cutouts of good standing in our business to the tune of $20 million, but we are assuming our revenue base is going to go back to pre-recession levels. Therefore, we have left some level of capacity in our organization and we haven't cut all the way back to the pre-levels where we were at in 2007.

And if we don't see our revenue recover, we will have to even be more aggressive in our cost-cutting moves.

Okay. Very helpful. Thank you. And by any chance, would you be able to break out the severance and the incentive expense from your fourth quarter?

Yes, I'd prefer not to put specific dollars on those. Suffice it to say that that there's really three pieces that negatively affect our fourth-quarter spending, that it would appear to be a bit higher than our third-quarter run rate. One is higher incentive due to performance.

The other piece is foreign exchange was a fair amount higher with the strength of the dollar, and the other piece is the severance component and they're all pretty equal amounts as you're looking at that. And you would also, if you compared it to the prior year, the two big things that would be different would be foreign exchange, a very dramatic piece of it year on year, and in the prior year last year, we were actually reversing incentive accruals whereas this year as we're improving performance we were actually accruing incentive.

So suffice it to say, we're actually really comfortable with where we're at from a spending standpoint and believe we are firmly in control and will manage it appropriately as we go into 2010.

That's all I have. Thank you.

Joseph Maxa, Dougherty & Co.

Thanks. On the Ecolab partnership can you give us maybe a little more of an idea of what your expectations might be coming out of that? Sounds like there's obviously a pretty huge market that you're going after.

Joe, we haven't given any numbers. What we're doing is, we are telling you how many quick serve restaurants there are out there that are currently served by Ecolab. That's 100,000 in the US alone. There's lots of fast food restaurants not served by Ecolab.

There's probably a full service restaurant market that this product would be relevant and then you have international, where we've just started testing the technology.

So I think what we are asking to do is add up all the stores, assume a penetration level and then you come to a conclusion as to what is possible at this point.

You've been approved by McDonald's and [Yum].

Yes, we've been approved by McDonald's both in their company-owned and their franchisee stores, and with the Yum Brands and their franchisee stores. And we are expecting other approvals as we go through the first quarter here.

And we think there's a really big opportunity in international markets to especially in places like Australia and in Europe.

Have orders been placed yet?

The initial orders have been placed, yes. But remember this really -- it was December when we went live with this really. And so the orders have begun to trickle in. The approvals have just recently happened, you know, and it takes time for that kind of approval at McDonald's or Yum Brands to really filter through the system.

So I think we are going to see this start to pick up as the year progresses.

You touched a little bit on the large equipment. What is your thought -- or what are your thoughts on a rebound there?

We wish we could call it. I mean, the reality of it is, we know from history, that people don't go back into their capital budgets and start making large equipment purchases until the economy is firmly back on track. You know, there's still our remaining question marks so we have not seen a pickup yet and we are managing our business, not counting on it yet. So we sure hope it comes sometime in the back half of the year, but we are not going to get ahead of ourselves.

What is the gross margin on that equipment versus, let's say, your scrubbers?

This is a broad generalization but we tend to have slightly better gross margins on our large equipment than our smaller equipment. But it is a very broad spectrum of margins as we look across all of our different products. And they are pretty close to each other.

All right oh, last thing. Any competitive response in ec-H2O at this point?

No.

What are you hearing out there? What are competitors doing today? I mean that we know that they sort of didn't work a while ago and then they kind of withdrawn from saying that. What are you hearing out there now?

What we see mostly is that they are competing more and more on price. That's the only chance they have of winning business with a lot of these big national accounts against us right now. And they are not winning many of them, if any.

Does that force you to lower your prices then as well?

No. We don't have any plans of lowering our prices.

Thank you.

And we are the value-added player in the industry and we think that with ec-H2O on our machines, it saves our customers' money, it is more productive and it provides a tremendous environmental benefit too. So I think the price is well worth it.

That's all I have. Thanks a lot.

[Matthew Levinson] from [Matthew Levinson and Associates].

Good morning. Couple of questions if I might. A fair amount of corporate sales typically are parts and service and other consumables. And one would reasonably think that your customers might have run down their inventories of supplies and such in the past year. And I wondered if this is a reasonable assumption and what you would think about -- what that would apply to future sales levels, say, going forward?

I will comment briefly on that. I mean, we did see our parts and consumables on our service business be affected more than we would have thought relative to historical downturn. So we did see a big downturn in that part of our business also. And we are seeing a recovery there in fact. But it is not substantially different than our equipment sale recovery.

So we are seeing both of those pieces of business tend to recover together. And parts and consumables and service might be a bit ahead of equipment, but not substantially. So they both are coming out.

We don't see in our business substantial destocking or restocking benefits as people tend not to carry significant inventory levels. So while we weren't -- we didn't have a big destocking hurt, we don't think we will get a big restocking benefit either.

With regard to the venture with Ecolab, roughly what does the equipment cost that is your part of it?

We haven't disclosed that. What we have said is that it's a smaller scrubber. It's at the size level of our portfolio. So it would be one of the lowest priced scrubbers we have in our business.

But we are under obligation to not specifically quote the price.

One last housekeeping question if I might. On a previous conference call management said that you are going to look for permanent debt capital. And my presumption was that you were going to wait until your audit was complete, which should be probably just about now. And I wondered if you could update us on your plans?

It continues to be under evaluation. We have not made any final decisions. We continue to be serious about putting some -- a permanent longer term debt in our capital structure, given the fact that rates are at historically low levels. But I have not made any final decisions at the current time.

Thank you very much.

Ted Kundtz from Needham.

Good morning, everyone. Could you kind of give us a little color, Chris, maybe on the different -- the environment you are seeing in the different geographic markets? It looks like the US may be picking up a little faster than Europe. And maybe you could add a little color on those, on the recoveries that you're seeing in both of those areas?

We are actually -- I mean, it's a hopeful sign that North American sales increased by over 6% organically in the fourth quarter, but still even in North America our order patterns remain lumpy.

Every time we think we have a trend, we see another dip and then it picks back up again. So that is why we are being cautious in terms of our revenue expectations for the North America business.

But I think fourth quarter is a hopeful sign and hopefully we're being conservative. In Europe, I mean we all read about what is happening with Greece and that there may be other countries in trouble.

I think our view of Europe right now is a little more bearish than it was even just a couple months ago.

But the good news is that in our core markets, which are France and the UK, we are actually doing really well even in a tough environment. It is because we have restructured those businesses over the last two or three years and we are getting some benefit from that.

Or where we're struggling really are in markets like Eastern Europe and the Middle East that have just not begun to come back yet. And we don't expect them to come back in any big way in 2010.

So that's kind of Europe and then you look at Asia. And Asia has been a bright spot throughout all of this and it continues to be. We made a lot of progress in China and continue to do so. I think we actually called out that we were pleased with North America and China sales here in the fourth quarter.

It's still not material to overall results, but it is growing rapidly. We haven't disclosed what those sales are.

The -- and then Latin America which struggled quite a bit also in 2009 is just beginning to come back. And so we are much more optimistic about the prospects in our Latin America markets in 2010. But again that is the smallest geography in our portfolio.

Clearly, our business right now depends on North America and Europe. And what I would say is that we are more hopeful about the prospects in North America and taking a wait and see position on how things play out in Europe, but do expect in our two core markets of France and the UK to make good progress.

Okay. So you think you're holding market share in Europe or are you -- I don't know if you are gaining over there or not, but you feel you are at least holding market share there?

As you know, for us to get market share information is very difficult but I would say our impression is that we are at least holding our market share.

Okay. Could you comment a little bit -- two more questions. One is, are you still looking for acquisitions to fill out anything? Or are you going to really focus on this Orbio effort instead?

We will still look at acquisitions. But we have definitely -- I mean, our efforts are diminished relative to what they historically were because we are focused on our own organic growth and investing behind our technologies. And we are remaining conservative on what we use our cash on.

But we continue to evaluate options whether they be outright acquisitions or whether they be partnerships. And we expect that as we go forward they will still be some portion of our growth going forward. But we will focus more of our efforts on the internal organic side.

And, Chris, could you give a little more color on this Orbio effort? You -- is it -- are you going to look to do this with partners or are you going to look to do some of this internally with new internally generated products? Or what exactly is the revenue strategy for this?

Right. Well, first, we -- its still early days and we are still learning a lot about the underlying science and we are figuring out where the biggest opportunities are and learning about how to leverage the technology, what kind of devices we are going to need to create. All of that is work in progress.

So it's not clear right now where we are going to focus the majority of our attention. But what we're seeing from a go to market standpoint, on one end of the spectrum Tennant owns the technology. Tennant develops the device. And Tennant will take it to market itself because it is our existing customer base. And this relates to trying to develop this portfolio cleaning devices with Orbio Technology to help our current customers clean more of their environments. So I think a lot of that will come through the Tennant system.

Then you have the -- new markets and applications and we are beginning to explore what is possible. We think there are opportunities in consumer products, healthcare, food processing and others. You know, those are not places we have historically played or have a lot of credibility as a sweeper and scrubber company. There, we may have to partner and we are very open to doing that. And we have shown that now with the active ion relationship here in the early going and we've shown it also with the Ecolab relationship, even though that -- those scrubbers are not with the Orbio Technology.

But I think the other end of the spectrum is Tennant owns the technology. We license the technology to a device maker. And we form a partnership with another company that owns the customer relationship.

So I think between the first scenario I outlined for you where we do everything ourselves to that scenario where we basically are outsourcing both the device and go to market approach, you know there are multiple iterations that we need to figure out. And what I am just telling you is we are very willing to be flexible how we go a market. The goal has to be to maximize the potential of the technology.

Okay. Thank you. Just, Tom, one question for you. Just could you quickly remind me how you book the --? How will you be booking the Ecolab revenue? How is that recognized? Are you guys selling a small scrubber to them?

Yes we do. We actually sell it directly to them and they take ownership. So we recognize it just like any other piece of the revenue that we would. And the part that I would say is we have a fair amount less expense because we don't have, we are not incurring selling expenses to sell (multiple speakers) products.

So the overall margin structure looks a bit different but revenue recognition is exactly like the balance of our business.

Okay. And there is no recourse to use. You sell to them and then they own it outright?

Exactly, yes.

Terrific. Thanks a lot.

Seaver Wong, HFP Capital Markets.

Just had a follow-up on Orbio. In terms of the investment do you -- can you give us a ballpark figure of what type of -- how much the investment is for 2010 and how lumpy it will be throughout the year? Or is it going to be front end loaded, etc.?

I'll comment on that. I mean we -- it will be consistent through the year. And so we won't -- it won't be front end loaded. And we are going to be a bit cautious as -- we are going to get ahead of ourselves and we will keep it within the 3 to 4% range, although it could very well butt right up against the 4%.

So we are going to stay within range and we are not going to be front end loaded. We will be consistent through the year. And we will remain conservative.

Thank you.

(Operator Instructions). Bob Fetch from Lord Abbett.

Good morning. You talked about the Scrub-N-Go and the Ecolab relationship. And you said you didn't have to disclose the cost of the product. From an Ecolab standpoint, are they attaching any other products to the sale?

They would obviously sell some chemicals into it. And we actually also provide -- have a contract so we provide the aftermarket servicing of the pieces of equipment in the field. So there is a typical service aspect. There is a typical parts and consumables and Ecolab would be selling their line of chemicals into being used in the machine.

So it's not chemical free?

It is not at the current time. And you know there, that is really at this time an Ecolab decision. And we have -- we believe we have the capability to make it chemical-free in the future, but have not done that at this time.

And what's -- what sort of maintenance requirements are required?

They -- we -- they are not significant. Typical of a small scrubbing machine. So nothing unusual.

And what would they do -- just return the machine to you folks? I mean it's not like you would need to send bodies out I would think?

We would leverage our existing people in the field at times when necessary. So that would be -- we are not going to add people to provide the service. We are -- I would view it as a mechanism for us to leverage our existing people around the field, driving around in the vans. So it's a nice opportunity for us.

Okay. And when you are talking about geographic performance, international, other international should look like it was about 15% during this quarter. Japan, I guess, is represented in that as well -- are they? Or do you have much in the way of sales there?

It's probably today our -- it is one of our top three markets in Asia, but it has been a market that through this recession has been very stagnant. They've struggled.

And that, to the degree that North America and Europe dominate still today at 85%. What is your expectation or hope in terms of two to 3 years out that other international ought to represent?

Well, normally we -- we [said specifically] what we hope other international -- we just said that we think that in the medium term which is in the next two to three years that we should be able to achieve a 50-50 split between North America and international.

I think what we're finding now is that the Latin America and Asia portions of our international business are beginning to grow faster. And so I think they may exceed our original expectations of our international sales split quite frankly as time goes on.

And in terms of the uptake that you talked about and discussed in regards to the new customers, are you seeing that increase in new customers spread out pretty similarly or evenly across geographies?

Most of the new customers have been in North America and Europe. Right? But there they are more in established markets where this technology is most relevant.

But we've actually exceeded our expectations in the early going in terms of sales to markets like Brazil and China and Australia, as well.

And do you go to the market there? Is it direct or indirect channel?

We do about 70% of our sales around the world direct and 30% through distributors. And most of the distributor sales come in markets where we don't have direct presence. Where we have master franchise agreement. But the majority of our sales in North America and Europe and in Australia and, increasingly, in China as well are direct.

And with some of the opportunities you talked about here earlier, you talked about the higher R&D spend. Are you increasing your sales force in advance of the expected sales in any significant way?

No. No, we're not. We think we have capacity within the sales force to take this new technology, these new products to market. Because for now, most of the sales are going to our existing customer base. Right?

So sure, we are gaining market share in that we are getting new customers we have never done business with before. But as long as they are within the geography that we currently serve with our testing salesforce, our sense is that we have the capacity to go after that business without adding anybody.

So with the economic weakness that we had if the existing customers didn't want to take the time to listen to existing salespeople, they have been spending more of their time knocking on newer doors. Is that how they came in essentially?

Well, I mean, that was an opportunity during the recession was that the existing customers were not in -- were not buying and so they had more time to actually go knock on doors of new customers with this exciting new technology. And they got more traction that I think that they anticipated during a very tough time which bodes well for when the economy recovers and people start to resume their cleaning equipment purchases.

So if they were spending -- say, continue to spend more time looking for new as things improve, do they need to constantly be talking to the existing customers as well? Or do they tend to pick up the phone and it's initiated by the customer in terms of fulfilling a need?

A lot of our business, our increasing business is becoming national account-oriented. Where we have a team of people that have an ongoing dialogue and relationship with the management of those national accounts -- be it SUPERVALU, Kroger, Wal-Mart, and the like.

So I mean, that's an ongoing pretty intimate relationship at the headquarters level. And then when they make a buying decision, what happens is then we engage our local sales reps to ensure that the local store follow-up is up to their and our expectations.

So what percent of your business would you say is national account based at this point?

We haven't disclosed that information externally.

But I mean is it as much as a quarter of your business?

It is, let's put it this way, it could be the fastest growing part of our business.

There are no further questions at this time. I now turn the call back over to management for closing remarks.

All right. Thank you, Rachel.

I am pleased with our financial performance in the fourth quarter as Tennant sales and earnings and in cash from operations all posted significant gain. We made continued investments in new products and we believe we will fuel Tennant's future revenue growth.

We are also excited and committed to achieving our long-term strategic vision to become a global leader in chemical-free cleaning. We believe that our strategic direction coupled with strong cost controls, improved operating efficiency, and new products will further enhance Tennant's long-term value creation potential.

So thank you for your time today and thank you for your questions. We appreciate it. Take care.

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