Tennant Co (TNC) 2011 Q1 法說會逐字稿

Good morning, and thank you for participating in Tennant Company's first quarter 2011 earning conference call. This call is being recorded. If you do not wish to participate, you may disconnect at this time. After the speaker's 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. Mr. Paulson, you may begin.

Thanks, Laurie. Good morning, everyone, and welcome to Tennant Company's first quarter 2011 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 first quarter and our outlook for the remainder of 2011. First, Chris will brief you on our operations; 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 will also provide the most directly comparable GAAP measure.

Our 2011 first quarter release includes a reconciliation of full year 2010 non-GAAP diluted earnings per share to our 2010 GAAP diluted earnings per share. There were no special non-GAAP items in the 2011 first quarter or the 2010 first quarter.

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, and thanks to all of you for joining us this morning. We are very pleased to report that Tennant generated record sales for our first quarter and significantly higher earnings. Based on these strong results and our expectations for the remainder of the year, we are raising our full-year sales and earnings guidance for 2011. We are excited to share this news, and Tom will provide further details on our outlook in a few moments.

In the first quarter, Tennant's net sales increased 15% to $172.6 million, with sales rising across all of our geographic regions. We had particularly robust results in the Americas and Asia-Pacific regions. Earnings per share rose 43% to $0.30, up from $0.21 in the prior-year quarter.

Turning to Tennant's organic sales, which exclude the impact of foreign currency, we reported our fifth consecutive quarter of double-digit organic sales growth. First quarter organic net sales grew approximately 13.5%. Organic sales by geographic region rose approximately 16% in the Americas, 6% in EMEA, and 22% in the Asia-Pacific region. Once again, Tennant's first quarter sales gains benefited from the continued demand for our proprietary ec-water platform, which is a sustainable, water-based cleaning technology. All major product categories grew versus year-ago levels, led by strong sales of industrial sweepers and scrubbers equipped with ec-water.

Let me go deeper on our water-based technology platform, which continues to gain marketplace momentum. As you may know, ec-water converts plain tap water into a cleaning solution. This eco-friendly technology cleans as well as, or better than, traditional general-purpose chemicals, and provides a lower total cost of ownership and safety benefits. General-purpose cleaning encompasses the majority of cleaning applications.

Ec-water has been the primary contributor to Tennant's success in exceeding our stated goal to generate at least 30% of equipment sales from new products launched in the last three years. In the 2011 first quarter, approximately 36% of equipment sales came from new products.

This year, ec-water is available on 15 of the Company's scrubbers, up from 12 in the 2010 first quarter. Sales of scrubbers equipped with ec-water grew approximately 65% in the 2011 first quarter compared to the prior-year quarter. We continue to expect significant growth in 2011 from products equipped with this water-based technology.

Building on the success of ec-water, we launched our first Orbio branded product in the 2011 first quarter. The new Orbio 5000-Sc is an innovative dispensing unit that automatically generates a cleaning solution onsite and is designed to replace most daily cleaning chemicals. The patent pending 5000-Sc uses Orbio's split-stream technology that combines tap water, a small amount of salt, and electricity to create an effective and eco-friendly multipurpose solution.

The Orbio 5000-Sc cleans fats, proteins, organic oils, and other soils. It matches or exceeds the performance of most daily cleaners, allowing customers to eliminate the use of many costly and potentially harmful chemicals. Initially, the unit will only be available for rental on a 24-month term, with pricing based on level of use.

The Orbio 5000-Sc illustrates how Tennant is cleaning more of our customers' spaces in more environmentally friendly ways.

In a related development, in late March, ARAMARK, a world leader in providing professional services, introduced its environmentally friendly Blue Cleaning program to custodial management customers across North America. ARAMARK's Blue Cleaning program uses Tennant's Orbio 5000-Sc in place of daily chemicals to safely clean most floors, carpets, and hard surface areas.

In partnership with our Orbio Technologies Group, ARAMARK tested and validated Tennant's Orbio 5000-Sc at several of its client locations, including universities, school districts, convention centers, and businesses across the United States. ARAMARK's testing found this technology was highly effective in a variety of routine cleaning applications, including spray-and-wipe cleaning, hard floor scrubbing, and carpet cleaning.

These are a few examples of how Tennant, through our Orbio Technologies Group, is committed to the global expansion of our water-based cleaning technologies. We are successfully offering our customers a suite of products and solutions that are setting the standard for sustainable cleaning around the world.

As we've previously stated, our plans to continue innovating within our core business and funding the startup 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 at around 4% of sales.

Now turning to our gross profit margins. In the first quarter, Tennant's gross profit margin was 41.7% versus 42.5% in the prior-year quarter. This decline was due to rapidly rising inflation in material costs that were only partially offset by the favorable impact of higher production volume. While we anticipated inflationary pressures, the increase was higher and swifter than initially projected. In response, we have already announced a price increase, and we expect Tennant's gross margins to improve and return to the targeted range of 42% to 43% for the 2011 full year.

Our operating profit margin of 4.7% of sales was higher than the 4.3% reported in the 2010 first quarter. As I outlined in our last conference call, we are committed to reaching an operating profit margin of 12% during the 2013 fourth quarter. We believe that the Company is capable of attaining this ambitious long-term goal by successfully executing against our strategic priorities, and assuming the global economy continues its current rate of improvement.

Moving forward, we 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, Brazil, and India; and grow a sizable, robust water-based cleaning business under the Orbio Technologies brand.

Now I'll ask Tom to take you through Tennant's first quarter financial results and 2011 outlook. Tom?

Thanks, Chris. In my comments today, all references to earnings per share are on a fully diluted basis.

As Chris noted, we are pleased with the Company's performance in the 2011 first quarter -- in particular, our continuance of double-digit organic sales growth. Tennant has now achieved, on average, organic sales growth of about 12% in each of the last five quarters.

For the first quarter ended March 31, 2011, Tennant reported net earnings of $5.9 million, or $0.30 per share, on first quarter net sales of $172.6 million. In the year-ago quarter, Tennant reported net earnings of $4.1 million, or $0.21 per share, on net sales of $150.1 million.

Turning now to a more detailed review of the 2011 first quarter, Tennant's consolidated net sales of $172.6 million increased 15% over the prior-year first quarter. For the 2011 first quarter, consolidated net sales were favorably affected by foreign currency exchange impact of approximately 1.5%. Organic sales, which exclude the foreign currency impact, grew approximately 13.5%. The growth was primarily driven by sales of industrial sweepers and continued strong global sales of scrubbers equipped with ec-water technology.

We continued to have year-over-year increases in large sweeper sales in the 2011 first quarter, in line with the approximate 45% growth we had for the 2010 full year. We estimate this is still about 10% to 15% below the pre-recession large sweeper sales levels, but we're encouraged to have five consecutive quarters of year-over-year sales growth. While this is somewhat attributable to the improving economy, Tennant has recently updated the styling, reduced the noise levels, and improved dust control on many large sweepers, and these new features have been extremely well received by our customers.

Our sales are categorized into three geographic regions, which are the Americas, which encompasses all of North America and Latin America; EMEA, which 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 first quarter organic sales growth of approximately 15.7%, excluding about 1% of favorable foreign currency impact. The growth in the Americas was fueled by continued strong sales of scrubbers, the majority of which were equipped with ec-water technology, and also sales of industrial products, especially large sweepers.

In EMEA, sales increased 6.1%, with minimal foreign currency impact. Growth in EMEA was also primarily due to strong sales of scrubbers, the majority of which were equipped with ec-water technology. Sales of outdoor city cleaning equipment in the first quarter of 2011 were below the year-earlier quarter due to continued slow sales to municipalities. There is, however, growing interest in the environmentally friendly 500ze city cleaning sweeper that is lithium-ion battery powered with zero carbon emissions.

In Tennant's Asia-Pacific region, sales rose 30.7% in the first quarter. Excluding a favorable foreign currency impact of about 9%, organic sales growth was approximately 21.7%, with strong growth in all major product categories. Tennant's service, parts and consumables activities are increasing due to the growing base of installed equipment in this region.

Tennant's gross profit margin for the 2011 first quarter was 41.7%, down 80 basis points versus 42.5% a year earlier. As Chris mentioned, we experienced higher-than-anticipated inflation in material costs -- in costs in areas such as lead, copper, steel, and resins that are negatively impacting the costs of our batteries, motors, and coatings. This inflation more than offset the favorable impact of higher production volume in the first quarter. Our global sourcing organization is working very hard to mitigate the inflationary pressures, and we have announced an increase in our selling prices. Based on the current outlook and economic forecast, we believe we can still achieve gross margins in our targeted range of 42% to 43% for the 2011 full year.

I do want to make note of the recent events in Japan, and our sympathies certainly go out to all those affected. Tennant does do business in Japan, and while the impacts from the events in Japan are not material to our financial results, we have taken a number of steps to protect our workforce and the continuity of our operations there. To date, there were no material adverse impacts from the supply side either, but we still continue to closely monitor the situation in Japan.

Research and development expense in the first quarter totaled $6.3 million versus $5.5 million in the prior-year quarter. R&D expense as a percent of sales was 3.6% in the first quarter of 2011 compared to 3.7% in the prior-year quarter.

Selling and administrative expense in the first quarter of 2011 totaled $57.5 million compared with $51.7 million a year earlier. The first quarter of 2011 expense was $5.8 million higher than the prior-year period, primarily due to variable selling costs related to the $22.5 million increase in sales and investments in new product launch activities, including the recent launch of the Orbio 5000-Sc.

However, selling and administrative expenses as a percent of sales was 33.3% in the first quarter of 2011, down 120 basis points from 34.5% in the prior-year quarter, reflecting the success of our initiatives to control costs.

Our 2011 first quarter operating profit was $8.2 million versus $6.5 million, an increase of 26.2% as compared to the 2010 first quarter. Operating profit margin was 4.7% of sales, up 40 basis points compared to the 4.3% of sales a year ago. We remain on track to continue our operating profit margin improvement and our goal to reach a 12% operating profit margin during the 2013 fourth quarter.

As Chris stated, we believe that Tennant is capable of attaining this ambitious long-term goal by successfully executing our strategic priorities and assuming the global economy continues its current rate of improvement. As we work towards 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 volume rises; 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.

It is important to note that we've had five consecutive quarters of double-digit organic sales growth, and by successfully leveraging our existing workforce, we have continued to hold our employee count to 2,800, 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.

We are also successfully executing our tax strategies. The 2010 fourth quarter restructuring and realignment of Tennant's international operations is providing commercial benefits and financial reporting efficiencies as well as a more tax-efficient capital and legal entity ownership structure. As anticipated, there is a positive impact to our overall 2011 tax rate as well as to our long-term expected tax rate. Tennant's base tax rate in the 2011 first quarter was 32%, squarely within our targeted range of 31% to 33%, including discrete net favorable tax items. Tennant's overall effective tax rate in the 2011 first quarter was 30.2%.

Turning now to the balance sheet. Again, we are pleased with the Company's progress. Net receivables at the end of the 2011 first quarter were $131.1 million versus $111.2 million a year earlier. Quarterly average accounts receivable days outstanding were 64 days for the first quarter, down from 67 days in the 2010 first 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 2011 first quarter were $66.7 million versus $58.2 million a year earlier. Quarterly average FIFO days inventory on hand declined to 87 days for the 2011 first quarter compared to 93 days in the year-ago quarter. The improvement in days is due to higher sales levels and the continued strides we are making in managing our inventory.

Accounts payable totaled $45.7 million at the end of the first quarter versus $43.5 million in the year-ago quarter. With our increased focus on conservative cash management during the recession, we worked closely with our suppliers to extend payment terms while retaining the flexibility to take cash discounts when economic conditions warrant. We are now taking the more attractive cash discounts from a selected number of our suppliers.

Capital expenditures totaled $1.6 million in the 2011 first quarter versus $1.8 million in the year-ago quarter. We continue to tightly control capital spending, utilizing 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.

As expected, Tennant's cash from operations in the 2011 first quarter was a negative $7.2 million compared to a positive $14.1 million in the year-earlier quarter, primarily due to higher working capital to support sales growth and higher incentives and rebate payments. Total cash and cash equivalents at the end of the 2011 first quarter was $38.9 million compared with $27.3 million a year ago, an increase of $11.6 million.

The Company's total debt of $40.3 million was $7.2 million higher than $33.1 million a year ago. The increase in debt was primarily due to taking out $10 million of fixed-rate, long-term debt with an attractive interest rate of 4%. Our debt-to-capital ratio was 15.2% at both the end of the 2011 first quarter and the end of the year-earlier quarter.

As you know, regarding other aspects of our capital structure, we increased our quarterly cash dividend 21% effective in the 2010 fourth quarter, from $0.14 to $0.17 per share. And in February 2011, our Board of Directors authorized a new share repurchase program of up to 1 million shares of our common stock in addition to the approximately 200,000 shares remaining under our current repurchase program. This provides us the financial flexibility to offset any dilutive effect of stock-based compensation programs and to consider repurchases to create value based on overall market conditions.

Moving now to our outlook. Based on our 2011 first quarter financial results and expectations of future performance, we are raising our full-year sales and earnings guidance for 2011.

We now estimate 2011 full-year net sales in the range of $710 million to $730 million. We estimate earnings for the full year 2011 in the range of $1.75 to $1.95 per diluted share. Previously, we anticipated 2011 full-year net sales in the range of $705 million to $725 million, and we anticipated earnings for the full year 2011 in the range of $1.70 to $1.90 per diluted share. For the full year 2010, adjusted earnings totaled $1.31 per share on net sales of $667.7 million.

We will continue to manage the business 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 continue to closely monitor commodity prices which have risen recently.

Additionally, our current 2011 full-year financial outlook includes the following expectations -- minimal foreign currency impact on sales for the full year; minimal inflation net 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 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.

We remain committed to profitably growing our traditional business and expanding the global growth of our water-based cleaning and other sustainable technologies.

And now we'd like to open up the call to any questions. Laurie?

(Operator Instructions.) Daniel Rizzo, Sidoti & Company.

Could you give me the number of actual sales for ec-water?

We're not prepared to do that at the current time. We didn't disclose first quarter ec-water last year, and we, just for competitive reasons, are not ready to do that. We just want to talk about the percentage growth, which was obviously significant in the quarter.

Okay. Can you talk about the percentage growth for the street sweeper?

It was in the range of 40% growth that we saw during the prior year last year, 40% to 45% growth.

Okay. And then I understand that your raw material input costs are rising. Is there anything particular -- any one in particular -- that's really the problem, or is it just across the board?

You said commodity costs, Dan?

Yes.

No, it's really, the pressures are really, honestly, quite across the board. We would say that lead might be leading the charge. But really, it's really pretty prevalent across all of the commodities that impact our material costs.

Okay. And then you're anticipating raising prices as needed. Is there going to be any pushback, or has there been pushback in the past when you've tried to do this before?

We have -- obviously, the execution of price increases are never easy. But we have announced those increases, and we believe that, given the inflationary times, that it's a pretty common occurrence nowadays that people are taking prices up. So we know it's going to be difficult, but we are comfortable that we'll be able to execute the level of pricing that will allow us to maintain our targeted gross margin range on a global basis.

Okay, thank you, guys.

(Operator Instructions.) Joe Maxa, Dougherty & Company.

I wanted to ask on the operating expense levels. The sales and administrative costs in Q1, do you think we should be using that as a base level going forward? Or should we see that come back a little bit in Q2 if you had some of these launch expenses?

How I would think about that, Joe, is you're better off looking at our operating expenses -- again, excluding R&D -- because we're really precise on that at being, counting on that being at 4%. And assuming that you will see continued improvement year on year as operating expenses as a percent of revenue. You know, we created leverage in the first quarter. We'll continue to see improved leverage as we go through the year. So I think that's just a better way to think about it. That's in fact how we manage it, and because there are expenses that are coincidental to given quarters. So we're really focused on improving our leverage year on year in each and every quarter. And as you --

Is that the number -- I'm sorry, go ahead.

And as you know, we are a ways from our longer-term target, but our longer-term target is, in order to get to our 12% operating margin target, is to take our operating expenses as a percent of revenue down to the 27% to 28% range. So it's a necessity that we continue to create leverage as we move forward quarter to quarter.

Got it. On the gross margin side, what needs to happen for you to get back to that 43%?

That, really, we need to execute our pricing. And so we have announced the pricing. We will -- those, for the most part, will begin to take effect in about the middle of the quarter as we look around the globe. And we need to continue to be successful in our global sourcing efforts. We need to continue to hold our fixed costs essentially flat in our factories. And we need to continue to capitalize on our lean efforts as revenue grows.

So this is a multifaceted approach to improving our gross margins, but we remain comfortable that we'll be capable of doing that.

And maybe, Chris, can you give us a little more color on the Orbio 5000, what you're expecting this year out of this relationship with ARAMARK, and what are you seeing so far from additional potential customers?

When we launched the product, we said it was going to be a controlled launch. This is new technology. This is a new product for us, and we want to make absolutely sure that we have it right before we go full bore from a sales perspective. So what I would say is the 5000-Sc will most likely not be material to our results in 2011. I think you'll begin to see it ramp up toward the end of the year, and definitely in 2012.

When we launched ec-water, we didn't talk about what we thought the potential was. It's very hard to do that with new technology and new products. I tell you, if I gave you a number, I'd probably be wrong.

But what I can tell you is that if you look at where we have tested the 5000-Sc over the last 18 months, and then you calculate how many of those types of locations exist in North America and in Europe, there are at least 200,000 of them. Then I would leave it to you to speculate about the penetration rates over time and figure out what the potential is.

But we are extremely excited about this technology, and we think it has very, very broad appeal.

Did you anticipate the gross margin on this product line in line with your 42% to 43%, or should we see something a little bit better than that?

We'd hope that it would be in line or higher than our existing gross margin structure.

All right. Thanks, guys.

(Operator Instructions.) At this time, there are no further questions. I'll now return the call to Mr. Paulson for any closing remarks.

Actually, Mr. Killingstad will provide the remarks. But we are pleased with our financial performance in the first quarter of 2011. We are firmly resolved to continue to control costs across the organization and achieve operating leverage to further improve profitability. At the same time, we will continue investing in new products that we believe will fuel Tennant's future revenue growth.

We remain committed to achieving our strategic vision -- to become a global leader in water-based and other sustainable cleaning technologies. 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 second quarter results in July. Have a great day.

Thank you for participating in Tennant Company's first quarter 2011 earnings conference call. You may now disconnect.