Tennant Co (TNC) 2011 Q2 法說會逐字稿

Good morning and thank you for participating in Tennant Company's second-quarter 2011 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 of Tennant Company. Mister Paulson, you may begin.

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

Our earnings 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 Investor Section of our website at tennantco.com. At this point I will turn the call over to Chris.

Thank you, Tom, and thank you all for joining us this morning. We are very pleased to report that Tennant had a great second quarter. The Company generated record second-quarter sales, surpassing the revenues of any previous quarter in our history. This also was our sixth consecutive quarter of double-digit organic sales growth which was on top of double-digit sales gains in the same quarter of last year.

Our strong second quarter is a continuation of the favorable trends we saw in the first quarter. As a result, Tennant is off to an excellent start in the first half of 2011. Therefore we are increasing our full-year guidance.

Tom will provide more details on our outlook in just a moment.

In the second quarter, Tennant's net sales grew by approximately 21% to a record $201.3 million. And adjusted earnings per share rose 75% to $0.56. Organic net sales, which exclude acquisitions and foreign currency impact, rose approximately 15.6% in the quarter. The increased revenue was driven by robust growth across all of our geographies, particularly in the Americas and Asia-Pacific regions.

Sales to strategic accounts in the Americas were especially strong in the 2011 second quarter as we continued to increase our traction with large national retailers and building service contractors.

We recently fine-tuned our successful strategic accounts structures to provide additional focus on targeted customers. By operating as a unified global strategic account sales organization, we will better leverage all of our various local relationships in order to more quickly expand business with large customers, in both the mature markets of North America and Western Europe and also in emerging markets such as China, Brazil and Mexico.

Contributing to the quarter were higher sales across nearly our entire product portfolio. Throughout our traditional business and notably on scrubbers equipped with ec-H2O. The sole exception was city cleaning. Sales of city cleaning products in our EMEA region were down versus the prior year quarter, due to continued slow sales to municipalities.

During the second quarter, Tennant recorded a special charge related to the obsolescence of the two Hofmans outdoor city cleaning products in Europe. The decision to obsolete Hofmans products was made after a thorough review of our city cleaning portfolio.

With the ongoing economic issues affecting municipal purchases of city cleaning equipment in Europe, coupled with our emphasis on value creation, we determined that it is in Tennant's best interests to focus on the innovative Green Machines products. We believe that the Green Machines line has the highest potential for long-term growth and margin expansion.

We also took a charge in the second quarter for the previously announced apart your of Tennant's Vice President of our international business unit whom we will not replace at this time. Instead, we are leveraging the strengths of our regional leaders based in Europe, China, and Australia.

Tennant's second-quarter sales again benefited from the continued demand for our proprietary ec-H2O platform, which is a sustainable water-based cleaning technology. Ec-H2O converts plain tap water into a cleaning solution that cleans as well as or better than traditional general purpose chemicals. It also provides a lower total cost of ownership and safety benefits.

This technology was the primary contributor to our increased percentage of sales from new products introduced in the past three years. New products accounted for approximately 39% of equipment sales in the 2011 first half. This compares favorably to our goal of 30% of sales from new products.

Additionally, we continue to attract new customers because of ec-H2O, another testament to the power of this innovative technology.

Sales of scrubbers equipped with Tennant's ec-H2O technology grew approximately 85% in the 2011 second quarter compared to the prior year quarter. In the first six months of 2011, sales of scrubbers equipped with ec-H2O totaled $67 million. We expect 2011 full-year sales of ec-H2O scrubbers to be in the range of $130 million to $140 million, up significantly from $96 million in 2010.

We are very pleased that our ec-H2O technology has firmly established Tennant as an innovator in sustainable water-based cleaning. We expect ec-H2O will continue to help us achieve significant penetration of existing and new customers in the 2011 second half.

Now, let me give you an update on other important developments in the second quarter. First, we have opened two new sales offices in China. One in Beijing and one in Guangzhou. And we are also moving into a larger leased manufacturing and office facility in the Shanghai area. We expect to complete this move by the beginning of 2012.

In April, we introduced two new small scrubbers. The T1 Battery Micro-Scrubber is our first compact machine to offer multiple battery choices, including a lithium ion battery option. And the new T2 Walk-Behind Automatic Scrubber offers superior cleaning alternatives for environments with confined spaces.

The advantages of both scrubbers are that they are easy to maneuver, quickly clean, and dry confined spaces and mitigate the safety concerns of wet floors associated with using a mop and bucket. Both scrubbers are ideally suited for around-the-clock cleaning applications in retail, healthcare, and education facilities. Customer reaction to these new scrubbers has been very positive.

In June, Tennant and our Orbio Technologies Group acquired Water Star Inc., which is an Ohio-based firm specializing in electrochemistry. This acquisition is consistent with our strategy to expand our intellectual property to develop sustainable cleaning technologies. Water Star brings proprietary knowledge and specialized expertise in electro-chemical systems that we believe will open new opportunities and accelerate our pursuit of sustainable cleaning, sanitizing, and disinfecting solutions for a variety of industries.

We are excited about our combined potential.

Now I'd like to give you an update on our Orbio 5000-Sc. This innovative dispensing unit automatically generates a cleaning solution on site 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 cleaning solution.

The Orbio 5000-Sc solution 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 chemicals.

As you will recall, we launched the Orbio 5000-Sc as our first Orbio-branded product at the end of the 2011 first quarter. We began a carefully controlled rollout of the Orbio 5000-Sc in the second quarter.

We are placing units with key customers in North America and Europe across a wide variety of applications. It is only 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.

Since late March, ARAMARK, which is a world leader in professional services, has used Tennant's Orbio 5000-Sc in place of daily cleaning chemicals as part of ARAMARK's environmentally friendly Blue Cleaning program for its custodial management customers across North America. In partnership with our Orbio Technologies Group, ARAMARK has begun to roll out the Orbio 5000-Sc for application at several of their 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.

Revenues from the Orbio 5000-Sc will not be material to our results this year. But we expect them to be next year.

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

As we have previously stated, 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 at around 4% of sales.

Moving forward, we remain focused on efficiently running the business as well as capitalizing on a select number of strategic priorities. These include leveraging our IT systems and driving process improvements and operational efficiencies to build a scalable business model; strengthening 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; continuing to expand our presence and aggressively grow in emerging markets such as China, Brazil, and India; growing a sizable robust water-based cleaning business under the Orbio Technologies brand 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 these strategic priorities and assuming the global economy continues its current rate of improvement.

Overall, we have had a great start to the year with strong sales and earnings gains in the first six months. And we expect further growth in the second half of the year.

Now I'll ask Tom to take you through Tennant's second-quarter financial results and raised guidance for 2011. Tom.

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

Also, please note as I go through the results, I will generally not comment on the year-to-date financials as those were detailed in the earnings release.

As Chris noted, we are pleased with the Company's performance in the 2011 second quarter. Tennant has now achieved on average organic sales growth of about 13% in each of the last six quarters.

For the second quarter, June 30, 2011, Tennant reported net earnings of $5.9 million or $0.30 per share on second-quarter net sales of $201.3 million. Net earnings excluding special charges of $5 million after-tax or $0.26 per share were $10.9 million or $0.56 per share. In the year ago quarter, Tennant reported net earnings of $6.2 million or $0.32 per share on net sales of $166.1 million.

Turning now to a more detailed review of the 2011 second quarter. Tennant's consolidated net sales of $201.3 million increased 21.1% over the prior year's second quarter. For the 2011 second quarter, consolidated net sales were favorably affected by foreign current city exchange impact of approximately 5.5%. Organic sales which exclude the foreign currency impact grew approximately 15.6%. The revenue increase was driven by robust growth across all of our geographies and throughout our entire product portfolio with the exception of city cleaning.

Once again in the 2011 second quarter, we continued to have a robust year-over-year sales increases of our large industrial equipment. We have now had six consecutive quarters of solid year-over-year sales growth. Large sweepers led the way during the four quarters of 2010 and large scrubbers gained momentum during the first two quarters of 2011 due to the availability of ec-H2O on large rider-scrubbers and the very successful introduction of the new T16 scrubber.

Large industrial equipment grew approximately 40% in the 2011 first half, and we estimate we are now back to prerecession sales levels. While this is somewhat attributable to the improving economy, we now offer ec-H2O on large scrubbers and we have recently updated the styling, reduced the noise levels and improved dust control on many large sweepers. These new offerings have been extremely well-received by our customers.

Our sales are categorizing the 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 second-quarter organic sales growth of approximately 18.9% excluding about 1.5% 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-H2O and also sales of industrial products, especially large sweepers.

In EMEA, organic sales increased approximately 6.3% excluding a favorable foreign currency impact of approximately 12.5%. The growth in EMEA was also primarily due to the strong sales of scrubbers, the majority of which were equipped with ec-H2O technology. Sales of outdoor city cleaning equipment in the second quarter of 2011 were still below the year-earlier quarter due to continued slow sales to municipalities. There is, however, growing interest and the environmentally friendly 500 [ZE] city cleaning sweeper that is lithium ion battery powered with zero carbon admissions.

As Chris mentioned, we made the strategic decision in the 2011 second quarter to discontinue our 2 Hofman outdoor city cleaning products in order to focus our resources on the more innovative Green Machines line. This action resulted in an after-tax special charge of $3.8 million or a loss of $0.20 per share, which consisted of the following items. Increased inventory preserves and fixed asset write-offs of about $1.5 million; a non-cash runoff of technology and customer list intangibles of about $1.8 million; accrued severance of about $1 million and a tax benefit of about $0.5 million.

Also per our June 14 announcement the departure of our Vice President of International resulted in a special charge of $1.2 million or a loss of $0.06 per share for severance related to the settlement agreement.

In Tennant's Asia-Pacific region, organic sales rose 17.9% excluding the favorable foreign currency impact of about 14%. Sales growth was solid in all geographies and sales of scrubbers equipped with ec-H2O were particularly strong in the 2011 second quarter.

Tennant's gross profit margin for the 2011 second quarter was 41.5%. The adjusted gross margin of 42.2%, excluding the special charges of $1.5 million that I previously mentioned, was down 90 basis points versus 43.1% a year earlier. Sequentially, however, the adjusted gross margin was higher than the 41.7% in the 2011 first quarter and back in our target range of 42% to 43%.

Gross margins were impacted primarily by inflation of raw materials in all geographies and lower production and sales volumes in city cleaning products in the EMEA region. These items more than offset the favorable impact of higher production volume in other regions. We did increase our selling prices effective mid-May which benefited the 2011 second quarter by approximately 1.5%. We expect further improvement in gross margins in the second half of the year as the full affect of our pricing actions are realized.

Research and development expense in the second quarter totaled $6.7 million versus $6.4 million in the prior year quarter. R&D expense as a percent of sales was 3.3% in the second quarter of 2011 compared to 3.9% in the prior year quarter.

Selling and administrative expense in the second quarter of 2011 totaled $66.5 million or 33% of sales in $62.5 million or 31% of sales excluding special charges of $4 million. This compares to $54.5 million or 32.8% of sales in the second quarter of last year. The increase in selling and administrative expense was primarily attributed to investments in our sustainable cleaning business and higher variable costs stemming from increased sales.

The [2000] second quarter adjusted selling and administrative expense as a percent of sales, however, was down 180 basis points to 31% from the 32.8% in the prior year quarter due to improving operating efficiencies.

Our 2011 second-quarter operating profit was $10.2 million or 5.1% of sales and was $15.7 million or 7.8% of sales excluding special charges of $5.5 million. This compares to operating profit of $10.6 million or 6.4% of sales in the second quarter of last year. Adjusted 2011 second-quarter operating profit margin improved 140 basis points versus the prior year quarter.

As Chris mentioned, we remain on track to continue our operating profit margin improvement and our goal is to reach a 12% operating profit margin during the 2013 fourth quarter. We believe that Tennant is capable of attaining its ambitious long-term goal by successfully executing our strategic priorities and assuming that 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 cost 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 have now had six 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. The number is flat with when we completed the restructuring effort that began in the 2008 fourth quarter and 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 more tax-efficient capital and legal entity ownership structure. As anticipated, there is a positive impact on our overall 2011 tax rate as well to our long-term expected tax rate.

Tennant's base tax rate in the 2011 second quarter was 32% squarely within our targeted range of 31% to 33%. Tennant's overall effective tax rate in the 2011 second quarter was 45.4%. This was due to the limited $0.5 million tax benefit associated with the $5.5 million of pretax special charges related to the Hofmans' product obsolescence and international executive severance, which materially impacted the overall effective tax rate.

Turning now to the balance sheet and, again, we are pleased with the Company's progress. Net receivables at the end of the 2011 second quarter were $140.2 million versus $112.4 million a year earlier. Quarterly average accounts receivable days outstanding were 60 days for the second quarter, down from 62 days in the 2010 second 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 second quarter were $74.4 million versus $62.4 million a year earlier. Quarterly average FIFO days inventory on hand declined to 81 days for the 2011 second 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 in managing our inventory.

Accounts payable totaled $55.7 million at the end of the second quarter versus $49.9 million in the year ago quarter. With our increased focus on conservative cash management during the recession, we work 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 select number of our suppliers.

Capital expenditures totaled $4 million in the 2011 first half versus $4.2 million in the 2010 first half. We continue to tightly control capital spending utilizing a rigorous prioritization process to ensure we approve projects that best align with our strategies and our design to offer an attractive return on investment.

Tennant generated $12.7 million in cash from operations in the 2011 first half which was lower than the $24.4 million generated in the 2010 first half, primarily due to higher working capital to support sales growth and higher incentives and rebate payments.

Cash and cash equivalents at the end of 2011 second quarter totaled $41.5 million compared to $34.5 million a year ago, an increase of $7 million. The Company's total debt of $41.3 million was $8.9 million higher than $32.4 million a year ago. The increase in debt was chiefly due to taking out $20 million of 4% fixed long-term debt, $10 million in each of the first two quarters of 2011. This was partially offset by paying down our a balding credit facility by $10 million.

Our debt to capital ratio was 15.6% at the end of 2000 -- at the end of 2011's second quarter to versus 14.5% at the end of the year earlier quarter.

Regarding other aspects of our capital structure, I mentioned last quarter that 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 approximate 200,000 shares remaining under our current repurchase program. This provides us the financial flexibility to offset dilutive effects of stock-based compensation programs and to consider repurchases to create value based on overall market conditions.

In the 2011 second quarter we did buy back the approximate 240,000 -- 243,000 shares at an average price of $37.65 per share for a total cash outlay of $9.2 million. As of June 30, 2011, we now have about 18.9 million shares outstanding.

Moving now to our outlook. Based on our 2011 first-half 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 $750 million to $765 million. We do expect typical seasonality in the second half of 2011 with third-quarter sales lower than the second quarter and fourth quarter sales our highest sales quarter in the year.

We estimate adjusted earnings for the full year 2011 in the range of $1.95 to $2.05 per diluted share. Previously, we anticipated 2011 full year net sales in the range of $710 million to $730 million and we anticipated adjusted earnings for the full year 2011 in the range of $1.75 to $1.95 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 include the following expectations. Favorable foreign currency impact on sales for the full year in the range of 3% to 4%. 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 I previously mentioned, as a result of our 2010 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 water-based cleaning and other sustainable technologies.

And now we would like to open up the call to our questions. Vernelle?

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

You indicated that ec-H2O was up 85% for the quarter year over year. What was the dollar amount that you recorded for that? For the quarter?

We had just given the first half which was $67 million in the first half. We did not break that by quarter.

And then how much sales are you getting from Water Star?

It's very minimal. It's a very modest amount so we -- it's small enough that we are actually not going to need to break that out. It won't be material to either revenue or to EPS.

It's more about the technology and the know-how?

Very much so.

Okay, and then, it just seems that everything is going fairly strong across the board in the different geographic regions. Are you seeing any kind of a slowdown now since the end of the quarter?

No. I mean we have really seen a continuation of the trends. The thing I would say is we had a natural slowdown in our order patterns in Q3, and that is really driven by the fact that our Q3 will be seasonally lower than Q2 and that's just the typical seasonality in our business. And we -- just like I commented in the script here that we then expect the fourth quarter to be our highest quarter of the year. So that's really a return to the historical seasonality of our business.

And what about -- it looks like sourcing in raw material costs. I mean, I know petroleum prices have kind of eased back a bit. I was just wondering if you are feeling any effect of that at all or if it is just still kind of a somewhat --?

It's still mixed. We are continuing to see pressure on commodities. We certainly saw a meaningful level of inflation through the first six months, but we think we are in a position with our pricing and our continued effort to reduce our cost structure that we will see improving gross margins in the back half of the year, even with the inflation that exists.

Thank you.

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

Thank you. Congratulations.

Thanks, Joe.

Thanks, Joe.

Question on the Q3 seasonality. I mean, it looks like Q2 was historically stronger than typical. What should we thinking about in Q3 like a 5% pullback from Q2 or 10%? Give us a ballpark idea what you're thinking.

That's a -- if you went back and looked at history, that would be a rational way to think about it. I don't really want to comment too much more than that. What I can say is fourth quarter we expect any way to be above second quarter, not by a significant amount as you'd obviously see based on our guidance at the higher end if you would just use that as a parameter.

But and then you can use your own judgment on Q3, but 5% would be a reasonable way to think about it.

That makes sense. On the -- on Europe, Europe in general, I mean we don't know what is going to happen there. Do you have any concerns? It sounds like you expect that to continue to see some recovery.

Well, and I think that we obviously have an issue with our city cleaning business because of the weakness in the municipality market. But we did grow organically by 6.3% and if you back out the city cleaning piece and just look at Tennant's traditional indoor scrubber-sweeper business service and aftermarket, it was up close to the organic growth rate for the entire Company around 16%. So I think the underlying strength of the European business is pretty good.

You know, we continue to struggle with city cleaning, which is why we made the decision to obsolete products we did not think would be competitive, nor could they create the value we were looking for going forward in the city cleaning in Europe.

That's helpful. Just on the Orbio 5000 traction it sounds like that is going very well right now. Do you expect to start giving us some more details as we approach the end of the year? Maybe Q4 type of outlook for next year or -- you talked about materials to your business, maybe an idea of what that might mean?

Well, I am not going to make any promises as to when we are going to divulge financial information. It depends on how this thing progresses, but we have said it is not going to be material to our results this year. You know you have got to remember that unlike the rest of our business which is a capital purchase we record the sales up front, this is a rental model.

So one of the things you have to remember it is going to take -- even take a while for the sales to build up with the rental model. But what I would tell you is that ARAMARK continues to roll it out with great success. The units that we've placed with key customers in North America are performing well and the feedback we get is extremely positive.

We said from the beginning that you have one chance to make a first impression with a new disruptive technology, so we are making absolutely sure that it works in all of these applications the way we expect and that we can install and service to our standards before we open the floodgates.

Thanks. Sounds great. Good luck.

(Operator Instructions). Claus Almer. Carnegie.

Strong quarter. About the revenue growth, could you put some flavor on what you see as your own growth and what is the market growth? In other words do you take market share to achieve this kind of strong growth numbers?

We, I mean we certainly think that in the environment that we are in today, that we are gaining share and, I mean, we are not prepared to quantify that. I think really the best barometer to go back and take a look at the impact that we are having would be to look at actual data that we could compare to which would be in Q1. We know that our organic growth in that quarter was about 13.5% and Nilfisk was around 5%.

That would show that we have to be gaining share in the market. We certainly don't know what Nilfisk's growth will be in Q2. We know our growth was approaching 16% organically and if we were to estimate at the current time, we think we would probably gain some more share in the quarter.

And you have to remember this historically has been pretty much of a GDP growth industry. Right.

Yes.

GDP is what? You know, in the 2% to 3% range. Now we have traditionally managed to grow a little bit of outside of that, but when you see 16% organic growth, I think we are benefiting from the economic recovery, but I think our new technologies and our strategic account efforts are paying dividends and we are indeed taking share.

Yes, pretty amazing. And maybe if it was on the EMEA performance, you said that excluding city cleaning it was around 15%. And that, I guess that's a sharp increase from what we have seen in the last couple of quarters or many quarters. Did anything specific happen in Q2 or what could you put in flavor on the performance in Q2?

No. Not -- and you know, there was no real new products, no real new initiatives. I just think that the team in Europe is really getting traction and executing well with the programs that we have in place. A lot of that growth is driven by strategic accounts. We had some significant wins and by ec-H2O where the majority of our scrubbers that we sold were with ec-H2O technology.

Can you say anything about the ec-H2O? Do you attract better prices and exhibit better margins on these machines?

Yes, I'll comment briefly on that, Claus. We do charge a premium and we do have slightly better gross margins in our ec-H2O products. And that's really, really nothing new in our efforts as we introduced any new product. Our objective is we, at a bare minimum, want to hold margin flat, but our typical target is to increase margins.

We also ideally want to continue to be able to charge a premium because of what we are bringing to the market place and I would say that ec-H2O is an example where we have been able to charge more than we would typically be able to with a new product. But again that is what we are always trying to do when we introduce new products and new technologies to the market.

I hope. Well, thanks a lot.

There are no further questions one -- we do have a question from Graham Tanaka with Tanaka Capital.

Congratulations. (multiple speakers). Just wanted to get into maybe the cost structure. Ec-H2O, you have slightly better margins. Are the incremental margins in terms of variable versus fixed costs different from other products?

Not meaningfully, no. I mean when I say better margins, they are modestly better gross margins. It is not a big materiality change in our business. Scrubbers tend to be some of our higher margin products in general. On top of that, ec-H2O is modestly higher. So it is not a material shift in our margin structure, though.

And the purchase material costs. What do you expect for the second half in terms of percentage change versus a year ago?

We would see it to be fairly similar to what we saw in the front half of the year. And what we have seen is material cost inflation has been in the first half of the year in that 2% to 3% range and we expect to see similar year-on-year moves in the back half of the year. And but as always, it's very volatile and we are always cautious about what is going on with commodities. It can shift very quickly.

You know, based on what we're seeing today, we are even a little bit more confident that we can get to the kind of margins we would like to get to by the end of the year. Which would be get us very similar to where we were last year, which would be at the higher end of our range in the 42% to 43% range.

And how far out do you produce in terms of quarters ordering?

We are pretty much a make to order shop. We carry some inventory, but we typically are producing to orders.

Yes, the average lead time for our products is really four to six weeks. With more complicated larger products it's a max of 12 weeks.

Perfect. Congratulations. Thanks.

There are no further questions at this time. I will turn the call back over to Mister Killingstad.

All right. Thank you. Well, needless to say, we are pleased with our financial performance in the second quarter and the first half 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 efficiencies, and new products will further enhance Tennant's long-term value creation potential.

Thank you for your time today and for your questions. We look forward to updating you on our 2011 third-quarter results in October. Take care, everyone.

Thank you for your participation in today's conference call. You may now disconnect.