Tennant Co (TNC) 2010 Q4 法說會逐字稿

Good morning. Thank you for participating in Tennant Company's fourth-quarter 2010 earnings conference call.

This call is being recorded. If you do not wish to participate, you may disconnect at this time. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

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

Thanks Steve. Good morning, everyone, and welcome to Tennant Company's fourth-quarter 2010 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 today is to review Tennant's performance during the fourth quarter and full year and provide our outlook for 2011. 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 special or non-recurring items. For each non-GAAP measure, we also provide the most directly comparable GAAP measure. Our release 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 Investors section of our website, at tennantco.com.

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

Thank you Tom. Thanks to all of you for joining us this morning. Today, I'd like to share with you the highlights of our 2010 quarter and year and provide an update on our strategic initiatives. But first, today's news release cites a key objective we have set to achieve a 12% operating profit margin during the 2013 fourth quarter. We believe that the Company is capable of reaching this ambitious goal by successfully executing our current strategy and assuming the global economy continues its current rate of improvement. As we work toward this target, we are keenly focused on driving organic revenue growth in the mid to high single digits, holding fixed costs essentially flat in our manufacturing areas as volumes rise, striving for zero net inflation at the gross profit line, and ensuring standardization and simplification of global processes to enable the building of a scalable business model while minimizing any increases in our operating expenses.

Now let's move on to the fourth quarter. As you saw in today's earnings announcement, the Company achieved double-digit organic sales growth in all of our geographies -- the Americas, EMEA, which encompasses Europe, the Middle East and Africa, and Asia-Pacific.

Organic sales in the 2010 fourth quarter rose approximately 11% in the Americas and 16% in both EMEA and Asia-Pacific. This growth was again driven by sales of scrubbers equipped with our proprietary ec-H2O chemical free cleaning technology, as well as sales of our industrial sweepers. It's important to note that Tennant has now posted four consecutive quarters of double-digit organic sales growth with fourth-quarter net sales rising approximately 13% organically to $182.8 million.

Fourth-quarter and full-year gross margins were within our stated goal of 42% to 43%. Our adjusted operating profit margin of 6.3% was somewhat lower than anticipated, based on our higher sales level, due to the mix of business and discretionary spending. But it was still 250 basis points higher than the 3.8% in the 2009 fourth quarter.

Quarterly adjusted earnings per share rose to $0.40, up from $0.26 in the prior-year quarter. The Company ended the year with total cash of $39.5 million versus $18.1 million a year ago, and Tennant's quarterly dividend was raised in the 2010 fourth quarter by 21% to $0.17 per share. This marked the 39th consecutive year that Tennant has increased its annual cash dividend payout to shareholders.

All in all, we are pleased with Tennant's results during the 2010 fourth quarter and the year. Tennant executed very well throughout 2010 in a relatively uncertain global economic environment.

Now I'll update you on the initiatives contributing to our success, starting with our proprietary ec-H2O technology. This technology continues to gain marketplace momentum. Those of you who are familiar with Tennant know that our environmentally friendly ec-H2O platform electrically converts plain tap water into a general-purpose cleaner without any added chemicals. It is attractive to our customers because it provides sustainable chemical-free cleaning and significant cost savings and benefits, such as greater productivity and worker safety. This technology is a win-win for our customers and for the environment.

Ec-H2O has been the primary contributor to Tennant's success in exceeding our stated goal to generate at least 30% of annual equipment sales from new products launched in the last three years. In 2010, approximately 47% of equipment sales came from new products, a testament to our strong new product pipeline.

Each year since its introduction, we have achieved significant sales growth on scrubbers equipped with ec-H2O. In its first year in 2008, ec-H2O generated $17 million in sales. In 2009, ec-H2O sales grew to $50 million. In 2010, we reached $96 million in ec-H2O sales as we completed the extension of this technology across our product portfolio to all appropriate walk-behind and rider scrubbers. Looking ahead, we anticipate another year of substantially higher sales of scrubbers equipped with ec-H2O.

To further capitalize on the revenue and market share potential of ec-H2O, we are focused on leveraging this technology platform under the Orbio brand. We remain excited about the initial strides our Orbio Technologies Group is making to further enhance and expand our electrically converted water technology platform and build a robust chemical-free cleaning business.

As I previously stated, one of our goals is to clean more of Tennant's customers' spaces in more environmentally friendly ways. This includes developing new cleaning devices that are capable of delivering chemical free cleaning beyond just floors. We are making progress. In fact, we anticipate launching our first Orbio branded new product late in the first quarter.

We are also exploring the development of new markets and applications with the assistance of a consulting firm that specializes in opportunity evaluation and commercialization of disruptive technologies. Our plans to continue innovating within our core business and funding the start-up phase of Orbio require a higher level of R&D investment. We expect that Tennant's R&D spending levels for 2011 will again come in around 4% of sales.

In addition to the momentum around ec-H2O, there are other exciting developments that I'd like to share. On January 18, we announced the introduction of the T16 battery powered rider scrubber. The T16 embodies an all-new design with performance features and benefits derived from extensive voice of customer research. For starters, the T16 is highly versatile, easier-to-use, and costs less to operate. It has an improved operator line of sight, and a soft outer shell designed to prevent structure damage in commercial cleaning applications, such as shopping malls and hospitals. It also has an optional hard shell accessory package that may be purchased for use in heavier industrial settings. The T16's cleaning controls are now located on the steering wheel for safer, more intuitive operation. Additionally, it is one of the quietest scrubbers on the market today, which enables around-the-clock cleaning. The T16 can be equipped with any of our cleaning solution technologies, including ec-H2O. As is our goal with new products, the T16 margins exceed those of the product it replaces, the T15. We are excited about the market potential for the T16 and have begun taking orders.

Another key driver of our recent success has been Tennant's ability to more deeply penetrate large strategic accounts, especially in the Americas. We are aggressively working to expand this area of our business.

I'm pleased to report a very important win. In the fourth quarter, Tennant entered into a four-year agreement with all large big-box retailer that increased us from our previous minority position to now being the majority supplier. This is a multimillion dollar piece of business, and significant equipment shipments are already taking place in the first quarter.

Based on our financial performance in 2010 and growth prospects, Tennant's Board of Directors has authorized a new repurchase program of up to 1 million shares of common stock. This is in addition to the approximately 200,000 shares that remain under an existing repurchase authorization. This new share repurchase program supports the Company's commitment to enhance shareholder value. It also reflects the Board's confidence in our business and the strength of our capital position.

Moving forward, we continue to remain focused on efficiently running the business as well as capitalizing on a select number of strategic priorities, including to leverage our IT systems and drive process improvements and operational efficiencies to build a scalable business model; strengthen the large equipment business by developing a portfolio of innovative high-performance, lower-cost and freshly-designed scrubbers and sweepers for both emerging and established markets; continue to expand our presence and aggressively grow in emerging markets such as China, India and Brazil; and grow a sizable, robust, chemical-free cleaning business under the Orbio Technologies brand.

Now I'll ask Tom to take you through Tennant's financial results and our outlook.

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 results, I will generally not comment on the year-to-date financials as those are detailed in the earnings release.

As Chris noted, we are pleased with the Company's performance in 2010, which represented a significant turnaround from a year ago. For the fourth quarter ended December 31, 2010, Tennant reported net earnings of $17 million, or $0.88 per share, on fourth-quarter net sales of $182.8 million. In the year-ago quarter, Tennant reported net earnings of $6.7 million, or $0.35 per share, on net sales of $164.2 million. Included in both quarters' results are special items primarily relating to tax initiatives that I'll discuss later. Our adjusted diluted earnings per share, excluding those special items, totaled $0.40 in the 2010 fourth quarter compared to $0.26 in the year-ago quarter, an increase of 54%.

For the 2010 full year, Tennant achieved net earnings of $34.8 million, or $1.80 per share, on net sales of $667.7 million. In 2009, Tennant had a net loss of $26.2 million or a loss of $1.42 per share on net sales of $595.9 million. Our full-year results included special items related to tax initiatives in 2010 and 2009 and also the first quarter of 2009 non-cash goodwill impairment. Our adjusted diluted earnings per share, excluding those special items, totaled $1.31 for the 2010 full year, compared to $0.67 for the prior year, an increase of 96%.

Turning now to a more detailed review of our 2010 fourth quarter, Tennant's consolidated net sales of $182.8 million increased 11.3% over the prior-year fourth quarter. For the 2010 fourth quarter, consolidated net sales were unfavorably affected by a foreign currency exchange impact of approximately 1.5%.

Organic sales, which exclude the foreign currency impact, grew approximately 12.8%. The growth was primarily driven by continued strong global sales of scrubbers equipped with ec-H2O technology and also sales of industrial sweepers.

Once again, we had year-over-year increases in large sweeper sales in the fourth quarter with growth for the 2010 full year of approximately 45% over the prior year. We estimate this is still about 10% to 15% below the pre-recession large sweeper sales levels but we are encouraged to have four consecutive quarters of year-over-year sales growth.

As you may recall, our organic sales rose approximately 2% in the 2009 fourth quarter, which was the first quarter-over-quarter sales growth posted since the third quarter of 2008. Now, we had double-digit organic sales growth in the range of 11% to 13% in all four quarters of 2010.

As I take you through our sales by geographic region, please remember that we have recategorized our three regions to cover -- the Americas, which now encompasses all of North America and Latin America; EMEA, which still covers Europe, the Middle East and Africa; and lastly Asia-Pacific, which includes China and other Asian markets, Japan and Australia.

In the Americas, we reported a fourth-quarter year-over-year sales gain of 11.2% with minimal foreign currency impact. The growth in the Americas was fueled by continued strong sales of scrubbers equipped with ec-H2O technology and also sales of industrial products, especially large sweepers.

In EMEA, sales increased 7.1%. Excluding the approximate impact from unfavorable foreign currency of 9%, organic sales grew about 16.1% in the fourth quarter. All countries in EMEA posted organic sales growth, except for the UK due to lower sales of outdoor city cleaning equipment to municipalities. On a sequential basis, the sales of outdoor city cleaning equipment were higher in the fourth quarter than the third quarter of 2010, and that is encouraging.

In Tennant's Asia-Pacific region, sales rose 23.4%. Excluding a favorable foreign currency impact of approximately 7.5%, organic sales growth was approximately 15.9% in the fourth quarter led by continued strong sales in China and Australia.

Tennant's gross margin for the 2010 fourth quarter was 42.2%, up 60 basis points versus 41.6% a year earlier, primarily due to higher volume, flexible production management, and a net favorable inventory adjustment, somewhat offset by higher prices of certain commodities. We continue to see inflationary pressures in select areas such as lead, copper, steel and resins, that are negatively impacting the cost of our batteries, motors, and coatings. However, we still hit our goal of saving $20 million from global sourcing in 2010, a year earlier than originally planned, despite some commodity price pressures and lower volumes than originally anticipated due to the economic slowdown.

Research and development expense in the fourth quarter totaled $6.9 million versus $6.1 million in the prior-year quarter. R&D as a percent of sales was 3.8% of the fourth quarter of 2010, compared to 3.7% in the fourth quarter of 2009.

Selling and administrative expense in the fourth quarter of 2010 totaled $60.8 million or 33.2% of net sales, compared with $56 million or 34.1% of net sales a year earlier. The fourth-quarter 2010 expense was $4.8 million higher than the prior-year period, primarily due to three factors -- a net $1.4 million of restructuring activities that we noted as special items; accelerated marketing expenses related both to the recently introduced T16 battery-powered rider scrubber; and the first-quarter 2011 introduction of the first Orbio branded new product; and lastly, the more routine increase in variable selling expenses and incentives.

Our fourth-quarter 2010 restructuring action was focused on realigning approximately 40 positions within our workforce to better meet our evolving business needs. The majority of these changes have already occurred in the fourth quarter 2010 and the first few months of 2011. We are committed to our process improvement efforts which are expected to result in higher levels of productivity, which should help us keep our overall headcount at current levels for the foreseeable future, subject to adjustments due to sales growth or other business developments. As we improve our business processes, the skill sets required for various positions evolve and it becomes necessary for our employees to also evolve. Otherwise, they may be redeployed or discharged and offered severance in accordance with our business practices. Excluding the net $1.4 million of restructuring activities, fourth-quarter 2010 selling and administrative expense was $59.4 million, or 32.5% of net sales, versus 34.1% of net sales a year earlier.

We gained operating expense efficiencies in 2010, and we expect continued improvement in 2011. Our 2010 fourth-quarter operating profit was $9.5 million, or 5.2% of sales. Excluding special items, adjusted operating profit was $11.5 million, or 6.3% of sales, which was up $5.2 million or 250 basis points compared to operating profit of $6.3 million or 3.8% of sales a year ago.

As Chris mentioned, our operating profit margin of 6.3% was lower than anticipated based on our sales level due to a higher mix of equipment sales and lower mix of parts and consumables than what we typically have in a quarter. We also had a higher level of discretionary spending in the 2010 fourth quarter primarily in marketing as we accelerated some new product introduction activity. We remain on track to continue our operating profit margin improvement, and our goal is to achieve a 12% operating profit margin during the 2013 fourth quarter.

Tennant's total tax in the 2010 fourth quarter was a net benefit of $8.5 million. This included a $10.9 million one-time tax benefit associated with the restructuring and alignment of our international operations. The restructuring will provide commercial benefits and simplify financial reporting, as well as establishing a more tax efficient capital and legal entity ownership structure. The one-time tax benefit will generate cash tax savings over the next six years, and we also anticipate a positive impact to our overall tax rate in 2011 and in the long-term. Excluding this one-time benefit, our 2010 base tax rate was 33.1%, which included the impact of federal R&D tax credits that were formerly reenacted in the fourth quarter.

Turning now to the balance sheet, again we are pleased with the Company's progress. Net receivables at the end of the 2010 fourth quarter were $127.5 million versus $121.2 million a year earlier despite much higher sales compared to the prior-year quarter. Quarterly average accounts receivable days outstanding were 59 for the fourth quarter, down from 67 days in the 2009 third quarter. We continue to proactively manage our receivables both by enforcing tighter credit limits and successfully collecting past-due balances.

Tennant's inventories at the end of the 2010 fourth quarter increased to $61.7 million from $56.6 million in the fourth quarter of 2009. Quarterly average FIFO days inventory on hand declined to 83 days for the 2010 fourth quarter compared to 87 days in the year-ago quarter. The improvement in days is due to higher sales levels and the continued strides we are making to managing our inventory. Our lower inventory levels reduce prior-year cost layers in our LIFO inventory valuation calculation, which resulted in a net favorable adjustment in the income statement of $1.4 million. Somewhat offsetting that was a $0.7 million unfavorable inventory valuation from a change in a functional currency designation due to our international entity restructuring.

Accounts payable totaled $40.5 million at the end of the fourth quarter, down from $42.7 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 take cash discounts when economic conditions warrant. We've now started taking the more attractive cash discounts from a select number of our suppliers.

Capital expenditures totaled $10.5 million in the 2010 full year, versus $11.5 million in the prior year. We continue to tightly control capital spending and implemented a rigorous prioritization process to ensure we approve projects that best align with our strategies and are designed to offer an attractive return on investment.

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

Please note that by leveraging our existing workforce, we have continued to hold our employee count to 2800, which is flat with when we completed the restructuring effort that began in the 2008 fourth quarter. That is down 11% from Tennant's pre-recession peak.

Tennant generated $42.5 million in cash from operations for the 2010 full year, compared to $75.2 million in the prior year. Total cash and cash equivalents at the end of 2010 was $39.5 million, compared with $18.1 million a year ago.

The Company's total debt of $30.8 million is $3.4 million lower than $34.2 million a year ago. The debt reduction and the increase in our cash balance resulted from our ongoing focus on cash optimization, lower capital spending, and improved working capital management. Our debt-to-capital ratio declined to 12.5% at the end of 2010 versus 15.7% at the end of 2009.

Regarding our capital structure, as Chris noted, we increased our quarterly cash dividend 21% in the 2010 fourth quarter from $0.14 to $0.17, and our Board of Directors authorized a new share repurchase program of up to 1 million shares of our common stock. This is in addition to approximately 200,000 shares remaining under our current repurchase program. This provides us the financial flexibility to offset any dilution effect of stock-based compensation programs and to consider repurchases to create value based on overall market conditions.

Moving now to our outlook, we saw continued improvement in the Company's performance in the 2010 fourth quarter, but we will continue to manage the business conservatively with a focus on operational excellence and rigorous cost controls while making selective investments in key strategic priorities. For the 2011 year, we anticipate steady continued recovery in North America, strong growth in emerging markets, and modestly improving conditions in Europe. We are closely monitoring commodity prices which have risen recently, and we are prepared to increase our selling prices when market conditions warrant such actions.

Additionally, our 2011 full-year financial outlook includes the following expectations -- minimal foreign currency impact on sales for the full year; minimal inflation out of cost savings initiatives and selling price increases; a gross margin in the range of 42% to 43%; research and development expense of approximately 4% of sales; and capital expenditures in the range of $16 million to $18 million.

As I previously mentioned, with our international entity restructuring, we anticipate a continued positive impact to our overall tax rate in 2011 with a base tax rate in the range of 31% to 33%, depending primarily upon the mix of full-year taxable earnings by country. As you can tell and as we've said when we released our 2010 third-quarter earnings, we have been working very hard on our business and tax planning initiatives and are extremely pleased with the projects we've implemented thus far.

Based on our 2010 financial results and expectations of future performance, we estimate 2011 full-year net sales in the range of $705 million to $725 million. We anticipate earnings for the full year 2011 in the range of $1.70 to $1.90 per diluted share. We remain committed to profitably growing our traditional business and expanding our global footprint in chemical-free cleaning.

Now we would like to open up the call to questions. Steve?

(Operator Instructions). Scott Graham, Jefferies.

Good morning. Just a question about the margin goal, and I know you guys have been bandying this number about for a while and I'm certainly glad to see that you guys seem pretty fixed on getting this done in the next couple of years. If I look at the trajectory of the gross margin implied in -- or actually spelled out in the 2011 guidance and assume that sort of the midpoint of that implies X charges 50 to 70 basis points. Not that you never want to straight-line everything, but if you did straight-line that, the implied decline in SG&A is something like 400 to 500 basis points to a level you guys have never been at before. So, A, maybe you can just check my math for me, and, B, how do you do that?

Let me comment on that. Your math is directionally correct. We -- the most important leverage point that we anticipate creating over time is in the operating expense line. We have been open in the past that we have a forward-looking target of getting that number in the 27% to 28% range of revenue. We are about 1.5 years into our efforts behind significant process improvement efforts as we leverage our ERP system, SAP globally, and also continue to put consistent global processes in place. We are beginning to create leverage.

I think what you'll see over the next several years is that you'll see particular leverage created in our international businesses where we have been quite focused on growth. We will now begin to leverage that growth that we've seen as that piece of our business has become a larger part of the total. We also will create leverage in our global centralized expenses as we move over time. So, that is a critical part of how we get to our 12% operating margin as we anticipate getting there in the fourth quarter of 2015.

The other thing I would say, Scott, if you look at our headcount, we did say that headcount has remained flat since our 2008 restructuring. We are going to work very hard to keep it flat here over the three-year time horizon to get to the 12%. That should maybe give you some comfort that we are already beginning to see a little bit of leverage, but that should accelerate as the many programs we are executing against right now come to fruition.

Two follow-ups if I may? You guys have done a great job with your sourcing programs. Can we expect a similar number of savings out of sourcing in 2011 as we got in 2010, A? B, could you give us what percentage of your SG&A is actually fixed in nature?

I'll comment on both of those. One, we do anticipate a sourcing benefit similar to what we have seen over the last couple of years, although we'd be straightforward about the fact that, as we have now cumulatively saved $20 million, it is getting harder. We are also increasing our efforts in our indirect spending. Indirect spending is really all spending that's non-related to our producing our products and is really -- in compensation expense is about 40% of our overall spending. We are now using our sourcing organization to really drive a deep dive into our indirect spending efforts. We believe, while it doesn't have the opportunity, say, the levels you've seen in sourcing of materials, it is a very meaningful opportunity as we go forward over time. (multiple speakers)

(multiple speakers) SG&A, right? That's 40% of SG&A spend you're talking about?

Yes. It really includes -- it also includes non-build material spending that's in our factories. As you look, there's a lot of other spending that goes in the factory besides what goes into build materials and a product. But the biggest opportunity area is within our core operating expenses, excluding people's compensation costs or salaries.

Commenting on your piece of the variable component of operating expenses, we have shied away from giving any specificity around that in the past. The level of detail that we can say is traditionally obviously our comp, meaning salaries and benefits, are something modestly in excess of 50% of the total of our spending, but we have not gone into specifics around what component of that is truly variable, because it does vary quite a bit period-to-period.

That's fine. Thanks very much.

Joe Maxa, Dougherty & Co.

Thank you. I was wondering if you could give us a little more color on your growth in your ec-H2O product. You indicated substantial growth this year. Should we expect another 50% growth, maybe half that, given you are starting to see some solid numbers now and there is a limited of course market at some point?

I'll answer that. What we said is we are expecting substantial growth. I think we are not willing to comment beyond that right now for competitive reasons, which is consistent with the way we've handled this the last couple of years. As the year progresses, we will be a little bit more forthcoming with sales results.

But we now have the technology on all relevant rider and walk-behind scrubbers. There are still many customers out there that don't have ec-H2O that we are working to penetrate, so we remain bullish. But we are not going to say more than it is going to be substantial yet again this year.

But the other thing that is interesting I think is that we are bringing out our first Orbio product at the end of this first quarter. Again, we are not going to talk very much about what that is right now. Our hope is, when we announced first-quarter earnings, we will have a more complete story to tell around that product.

But we've always said that we are looking at the technology in three phases. The first was to leverage it on our existing product portfolio of scrubbers, which we've done very successfully. The second was to start to clean more of our current customers' environments in more environmentally friendly ways, creating cleaning devices that clean beyond just floors. This new product does that. It gets us off the floor really for the first time ever. We're pretty excited about it.

The third phase is really looking at new markets and new applications. We are starting to make some progress there. We have -- we are working with a consulting firm that is an expert in opportunity evaluation and commercialization of disruptive technologies. I'll tell you the name of the firm is Innosight. It was founded by Clayton Christiansen, who is now at Harvard. But Clayton Christiansen wrote the famous book "The Innovators' Dilemma" and a number of other books. So he and his team are definitively experts on disruptive technology. They have really helped us think through how to take this technology to market in new applications and in new segments. So, that's pretty exciting as well.

Sounds promising. I know you don't give guidance on a quarterly basis here in Q1, but should we be expecting normal seasonality roughly down 10%, is that fair?

I'd say, if you looked at it, you should see a normal -- a return to normal seasonality. As you know, we would see our first quarter would typically be a couple hundred basis points below our lowest quarter. So if you [set it], our normal Q2 and Q3s are in the 25% range of the total in each of those quarters, somewhere directly Q1 is going to be clearly down from Q4 and lower than Q2 and Q3. Our anticipation is that Q4 will be the largest quarter of the year, so call it a return to normal seasonality.

That makes sense. Europe, you're expecting some pick-up in activity. Are you getting a sense for new customers, where that might come in next year -- 2011 I should say?

We had a great fourth quarter in Europe, but our expectations for 2011 remain modest. We are hopeful we are being conservative, but it's still a tough market. I think that's really all we are willing to say at this point.

And last from me is can you comment on the maybe percentage-wise the increase in your commodity pricing that you've talked about?

It's moving fast and furiously is what we are saying. If we went back and looked at our planning assumptions, commodity cost increases have certainly gone up even in the last 30 days. With our pricing actions and what we are going to do is we are taking a hard look at it at the current time. I would call it in the mid single-digit range just to give you a sense it's meaningful. We're putting forth our best efforts on multiple fronts, and we still -- our objective is to get to zero net percent inflation. It won't be a simple task this year. We will clearly need to take pricing in order to do that, given where the environment stands today.

Thank you.

Zahid Siddique, Gabelli & Co.

Good morning. A follow-up on the commodity. I think, in your outlook, you're assuming minimal impact from the dynamics. Isn't that being too aggressive in terms of your assumptions?

We would say our goal is to be at 0% net inflation. Given the environment we are seeing right now today, that's going to be a really difficult task. We will be honest and straightforward there, but we believe through our continued sourcing efforts, our lean efforts, attacking indirect spending and also the fact that we have not taken any meaningful pricing actions for the last couple of years, that we are poised to take those type actions. It is still our goal to mitigate as much of that as we can and maintain our margin structure in the 42% to 43% range.

This will be a tougher year this year than we had in the last couple of years being able to do that. We also believe that, clearly, we will continue to create leverage as we grow the top line, as we anticipate another meaningful year of top line growth this year too.

When should we expect the price increases?

For competitive reasons, I really can't say that. It's under evaluation. It's -- I really can't say specifically. But more than likely, given the environment today, sooner versus later would be the simple way to say it.

Did you buy back any shares during the quarter and the year?

We only bought back 100,000 shares during the year, so it's really a minimal amount. We bought back no shares in the prior year, so -- but minimal amount of share repurchases during 2009 -- or 2010, I'm sorry.

Just last question on large equipment -- what kind of growth are you seeing and if you could also comment on the financing around that? Thank you.

The growth on large equipment has accelerated over the course of 2010, but it's important to note that both on our large scrubbers and our large sweepers, we are not back to prerecession levels yet. We hope to get back to those levels and hopefully surpass them in 2011.

Tom, maybe you're better prepared to comment on where we are on the financing.

Yes, let me comment on lease financing as I look globally. It's getting a little better. We saw just lease approval ratings drop dramatically during the downturn. It took a lot of time for there to be any improvement, but we are seeing some approval of leases with our customer base in various markets. So, there's some encouraging news there, but certainly not back to where we were pre downturn.

Thank you so much.

[Matthew Levenson], Matthew Levenson and Associates.

Gentlemen, pretty much the [rigor] that we look at events in the Middle East. Roughly what proportion of your equipment sales would be of equipment which is electric powered or susceptible to being converted to electric power? Roughly what would your sales level be actually in the Middle East itself?

Well, in terms of our sales in the Middle East, they are relatively small. I would say, at this point, they are not material for overall results.

In terms of the split between electric and industrial -- or internal combustion, I don't have that number.

Yes, we've never provided that breakout between internal combustion and electrical or battery-powered. What we can say is that, from a competitive standpoint in the industry that we are in, we believe we are at the forefront of converting our internal combustion products to battery-powered, but we have not provided any details on that.

What we do say is that the split between industrial business and our commercial business today is around 50-50. The majority of our industrial equipment is internal combustion. The majority of our commercial equipment is battery-powered. So that gives you kind of a sense. But I would say more and more of our equipment as we continue to grow will be battery-powered.

Graham Tanaka, Tanaka Capital Management.

Good year. On the cost price, the timing of cost increases and price increases, what kind of flexibility do you have in terms of matching cost increases coming out of inventory with price increases relative to contracts?

Yes, we need to be pretty aggressive in moving forward. What we've seen to date is we haven't seen a lot of those commodity pressures come through the P&L in Q4. We started to see some uptick. It certainly had some level of impact on our margins in Q4. We are beginning to feel it in Q1, but we don't think it will have a meaningful impact on our margins in the quarter we're in right now. But given what we're seeing, it will start flowing through the P&L in Q2. Therefore, if we are going to mitigate it for the full year, assuming that pressures stay the same, we need to get going on our pricing actions. We don't have an abundance of inventory to pull from, and we don't have long-term contracts to offset it. We're pushing off those price increases where ever we can, but it's a tough environment relative to what we've seen over the last few years.

So you don't have long-term sourcing contracts for protection in terms of like --?

We do not. We -- there will be times where we'll take a bit longer position if we see favorable actions, but as a general rule, we do not have long-term fixed pricing agreements with our suppliers.

Your contacts go out how far as far as delivery times and the lagging or [tagging] affect?

It's -- they are very short. It would be rare that we would have contractual situations that are even over 90 days. They are short-term contracts.

What is purchase materials as a percent of either percent of sales or cost of goods sold?

Things that we buy from other people runs the gamut from batteries to motors to brake hydraulics, etc. It's approximating 60% of our cost of goods sold, 55% to 60% of our cost of goods sold. So it's -- purchase parts and components are the biggest part of our cost of goods.

Great. Now, ec-H2O, what is the percent of sales that has ec-H2O today roughly, just to get a feel for that, and what could that go to?

We were $665 million of revenue last year and our ec-H2O was $96 million, so that's about 14% of revenue.

That will be trending higher. Is there much difference geographically from one region to another for --?

Europe was very quick to get on board. They tend to be more environmentally conscious. I think the adoption rates in Europe have been the highest, followed by North America, and then the emerging markets, but quite frankly we have been very pleased by the adoption rates in emerging markets like China and Brazil for the technology as well. So, we're seeing it succeed around the world. There is not a geography where we are not bullish with the technology going forward.

Terrific. How would you characterize the moves by competitors in the last year coming out of the recession globally, and how aggressive are they in price of technology, etc.?

I would say our major competitor is Nilfisk-Advance, which is part of the NKT Group out of Denmark. I think, with ec-H2O, quite frankly, they have done a couple of things. One is they try to compete on price to win contracts because they don't have a comparable technology. You may have seen that they actually went out and discredited our ec-H2O technology publicly in the third quarter of 2010. But with Nilfisk, interestingly they are a public company, so these are reported results due in the third quarter. If you look at the Americas, which is North America and Latin America, our growth rates, our reported growth rates were more than double theirs. In Asia-Pacific, our growth rates were four times theirs. In EMEA, Europe, Middle East, and Africa, our reported sales were down 3.5% and theirs were up 7%. But you've got to remember that a big piece of our business in Europe is our city cleaning business to municipalities, which is struggling right now. So if you back that out, there is a much smaller gap between us and them of about 3 percentage points. So overall it's clear that we are taking significant share from them, and we anticipate we are doing the same against our other competitors. But the others are German companies, they are privately held, and we don't have access to their information.

Congratulations, thanks. Good luck.

(Operator Instructions). Dana Walker, Kalmar Investments.

Thank you. Good morning. The new win that you described for ec-H2O in Q4 with a big-box retailer, given that you've been gaining share, gaining presence for some time, what's distinctive about this development?

What's distinctive is that it is one of the biggest box -- biggest big-box retailers in the country. It's a business that we've had, but we've had a very small position with them for a long time. We finally broke through and got the majority of their business in a four-year contract. We took it away from one of our major competitors.

I suppose we could fill in our own blanks, but maybe you could detail why you think you broke through?

I think it's a number of things. I think it's they view us as the innovation leader in the industry, right? So in this contract, we did not sell ec-H2O. It is basically our standard machines. The fact that we have ec-H2O and we're innovating around the cleaning process brought us to the table. Then I think they just felt that our service organization, our customer service capabilities, the way we handled the whole negotiating process, the way we laid out the way the partnership would work, the fact that we can tell them we'd be able to service them consistently coast-to-coast and in every major city in which they were located at the end of the day is what won us the business.

Is there a reason why you can't put a name to this win?

They don't allow us, and we respect that. That's what we find with a lot of our major customers. They have a policy of not allowing suppliers to name them when we win a big piece of business. It's unfortunate, but common.

I believe you did have some account wins that you would've put into your marketing materials earlier this past year. Does that mean that this particular big-box retailer was not mentioned in those releases?

Yes.

Yes.

If -- since Europe showed more positive change in the rate of change in the fourth quarter, is that a function of better traction, or was the prior year's comparison very weak?

It's partly, the comparative period is certainly part of it. We wouldn't -- like we said, we have modest expectations for the growth in EMEA in the upcoming year; we expect it to grow. We hope we are surprised, but we would certainly not claim that we could grow anywhere near the levels throughout the year that we saw in Q4. So it was a bit timing and a bit comparables. But will still take it. It was nice organic growth quarter.

But they had strong sales of ec-H2O, which is really good. You've got to remember you've got to look at our business in Europe really in two pieces. We have the [fitted] cleaning piece, where we sell outdoor sweepers to the municipal -- in the municipal market. That business was extremely weak in 2010. Good news -- sequentially we had improvement in the fourth quarter, but we anticipate it's going to continue to be weak in 2011.

The other part of our business, our indoor kind of scrubber and sweeper business and other products, is actually stronger. There our hope is we're going to see better growth and accelerating growth as we go through 2011.

Are the things that you believe you would need to do on a continent from a selling, marketing, or product design standpoint to accelerate the tone you're seeing elsewhere in the world there?

We believe that we are in the major markets. We are actually pretty well set up. We've done a lot of restructuring in our European business. We've restructured the organizations. We've brought in new talent in all of the key countries. I think we're well-positioned. When the economy picks up, we will hopefully win more than our fair share of that business. So, we really truly feel that the vast majority of it is the economy and not our internal operations at this point.

Of course that's helpful. You mentioned that you were mildly underwhelmed with our product mix and therefore your gross margin in Q4. What leads you to believe that that's a transitory matter?

Yes, let me comment on that. One, it was, again, a bit of an aberration that we had as much business in EMEA as we had in the quarter as a higher percent of our total. We have a bit better profitability in our North American business than we do in Europe, so that had a negative impact on mix.

The other piece that was unusual is the weather, which we have never commented on that before. We are reluctant to even talk about it. But the reality of it is we had horrific weather across many parts of North America and also in Europe, and that had a big impact in our service business, surprisingly. Not only was service labor down, it also drives inefficiencies. Most importantly, we don't hang as many parts from a parts and consumables standpoint. So that's a profitable part of our business and was surprisingly effective in the quarter. So we don't see that being faced-about as we go forward in future periods. A bit of an unusual quarter from a gross margin -- or a profitability standpoint.

Tom, when you have a service issue prompted by weather like that, what happens when the weather clears up? Does that activity immediately pick up and you catch up or does that not happen?

You know, that's a tough one for me to comment. We like to think so, but for us to comment specifically on that, I wouldn't say we have the data that we could really give any empirical data on that.

But the phenomenon you're describing is related -- I guess I'm having a hard time visualizing what happens. If your service people can't get to an account, does that mean that (multiple speakers) scrubber that account doesn't work?

You'd like to think we eventually get there, but there's other ways they're going to fix it too. It's not like they are incapable or they can't use another service provider if we are not able to get there. So it's -- but for us to comment specifically on that, I really wouldn't be capable of doing that.

One final comment, one final thought on price costs. You indicate that you have relative confidence that you would expect to maintain your gross margin in this band that you're in now. Is there anything going on in environments, given that you're innovating, that would not allow you to have pricing power?

No, we think we really have shied away from pricing over the last couple of years because of the state of the economy. Also, if you remember, we have been, for the most part, in a deflationary environment. So for us to take price in a weak economy and in a deflationary environment, we just think was the wrong thing to do. Inflation came back in the back half of last year, and we think the environment is the right time to be looking at it and we don't honestly see significant barriers.

But the other thing is many industrial companies have already announced that they are going to take price increases, so we are operating in a very different environment right now. People I think almost anticipate these price increases are going to come, so it's going to be a little bit easier to sell them through than it's been in the last couple of years.

One inferentially then concludes that when you announce a big win like you had in the fourth quarter with a big-box retailer, that you didn't have to do something on price that would handcuff you.

True. We -- obviously the bigger the account, the more aggressive the pricing situation (inaudible) but we look at it holistically in that, so we are the innovation leader. We won't use pricing as our primary mechanism to compete.

Remember, with our strategic account business, the gross margins for that business are somewhat lower, but because you negotiate centrally that you don't need the same follow-up on a local level to service the business, so the net margins from it are pretty attractive.

Continued good luck. Thank you.

There are no further questions at this time. I'll turn it back for closing remarks.

Well, we are pleased with our financial performance in 2010. We made progress across our operations that produced significant top and bottom-line gains. At the same time, we continue investing in new products and we believe -- that we believe will fuel Tennant's future revenue growth. We remain committed to achieving our 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 for your questions. We look forward to updating you on our 2011 first-quarter results in April. Take care.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.