Tennant Co (TNC) 2011 Q3 法說會逐字稿

Good morning and thank you for participating in Tennant Company's third-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 speaker's remarks there will be a question-and-answer session. (Operator Instructions).

We ask that you remain online for closing remarks by management after the question-and-answer session. Beginning today's meeting is Tom Paulson, Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

Thanks, Amanda. Good morning everyone and welcome to Tennant Company's third-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, and Karen Durant, our Vice President and Controller.

Our agenda today is to review Tennant's performance during the 2011 third quarter and first nine 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 will 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 Investors section of our website at tennantco.com.

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

Thank you, Tom, and thank all of you for joining us this morning. As you saw in today's earnings announcement, Tennant generated topline revenue growth and continued to gain leverage in our operating efficiency.

Notably our third-quarter sales surpassed any third-quarter revenues in Tennant's history, including the strong revenue gains we reported in the same period last year.

The quarter's higher sales volume, coupled with our ongoing emphasis on controlling and improving our cost structure, led to increased gross margins and operating profit margins, and produced higher earnings per share versus the prior-year quarter.

Looking at our topline. Tennant's net sales in the third quarter increased approximately 11% to $187 million. Organic net sales, which exclude acquisitions and foreign currency impact, were up approximately 7.4% in the quarter, lapping double-digit organic sales gains in the prior-year period.

The higher revenue was driven by further growth across all of our geographies, with organic sales rising approximately 7.5% in the Americas, 6.6% in the EMEA and 5.4% in the Asia-Pacific region. In particular, we are pleased to see the increase in EMEA organic sales due to higher sales of large scrubbers and city cleaning equipment in Europe.

As I mentioned, we leveraged Tennant's sales growth and continued to improve operating efficiencies. Gross margins rose to 42.9% and came in at the high end of our targeted range of 42% to 43%.

Selling and administrative expense as a percentage of sales was down 160 basis points to 30.6%. And the Company's operating profit margin increased 220 basis points to 8.4%. As a result, earnings per share rose 28% to $0.50 in the 2011 third quarter.

Now I will share with you some of the factors behind these numbers. Topping the list are strong contributions from strategic accounts and our sustainable water-based ec-H2O cleaning technology.

First, I will touch on our efforts to grow strategic accounts. We are confident that we continued to increase our marketshare with large retailers and building service contractors. As discussed last quarter, we recently fine-tuned our strategic account structure to provide additional focus on targeted global customers.

By operating as a unified, global strategic accounts sales organization, we are better leveraging all of our relationships, especially with our top 15 targeted global customers. This enables us to more quickly expand business with these customers in both the mature markets of North America and Western Europe, and also in emerging markets such as China, Brazil and Mexico.

Part of our growth strategy also involves increasing access to underserved markets through new channel partners. In this area we are now partnering with two additional companies, W.W. Grainger and Staples.

Grainger is a Fortune 500 industrial supply company known for its extensive online and catalog offerings to the maintenance, repair and operations market. Through Grainger we are selling our Nobles commercial equipment line, including ec-H2O equipped scrubbers, as well as a select line of Tennant industrial machines. We are also providing service through our extensive network of service technicians.

In addition, we established a partnership with Staples Advantage, which is the business-to-business division of Staples, Inc., another Fortune 500 company. Staples Advantage focuses on large and regional business customers, many of them in our targeted education and health care markets. We offer Staples customers our Nobles commercial equipment line and, as with Grainger, we provide service through Tennant's national network of service technicians. We anticipate both of these accounts will be multimillion dollar annual revenue opportunities for us in the near future.

These channel partners, in combination with our existing distributor network, support our overall strategy to expand our reach to customers we currently don't serve or underserve.

During the third quarter Tennant saw higher sales across nearly our entire product portfolio throughout our traditional business, and notably on scrubbers equipped with ec-H2O. As you are aware, our proprietary ec-H2O platform is a sustainable, water-based cleaning technology that 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.

Sales of scrubbers equipped with Tennant's ec-H2O technology grew approximately 32% in the 2011 third quarter compared to the prior-year quarter. Year-to-date sales of scrubbers equipped with ec-H2O totaled $101 million versus $64 million in the same period last year.

We continue to 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.

Once again, this technology fueled the percentage of sales from new products introduced in the past three years. New products accounted for approximately 36% of equipment sales year-to-date. This compares favorably to our goal of 30% of sales from new products.

As most of you know, one of our competitors, Karcher, recently filed claims alleging false advertising related to our ec-H2O technology. We are vigorously defending our Company, technology, and advertising against these baseless attacks. We have been in the marketplace with ec-H2O for over three years, have satisfied thousands of customers, and this technology continues to experience significant sales growth.

Our ec-H2O technology has firmly established Tennant as an innovator in sustainable water-based cleaning. We remain committed to further leveraging this technology platform through our Orbio Technologies Group.

Orbio is developing a suite of products and solutions that set the standard for sustainable cleaning for our customers around the world. An example of this is our Orbio 5000-Sc. As you'll recall, we launched the 5000-Sc as our first Orbio branded product at the end of the 2011 first quarter, and we began a carefully controlled rollout in the second quarter. In the third quarter we expanded our rollout in North America and introduced the 5000-Sc in Europe and the Asia-Pacific regions.

The 5000-Sc is an innovative dispensing unit designed to replace many daily cleaning chemicals. The patent pending system 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. It matches or exceeds the performance of many daily cleaners, allowing customers to reduce the use of more costly chemicals.

The Orbio 5000-Sc is only available for rental on a 24-month term with pricing based on level of use. Our rollout is on track and meeting our expectations.

Funding the startup phase of Orbio and continuing to innovate with our core business -- within our core business, requires a higher level of R&D investment, as we have previously stated. We expect that Tennant's R&D spending levels for 2011 will be around 4% of sales.

In addition to investing in our products and technologies, we constantly assess the ongoing organizational needs of the Company. I am pleased to note that we recently promoted three individuals to Vice President. Karla Leis leads our Orbio Technologies Group and its development of new water-based cleaning technologies. Lisa Blocher is in charge of rolling out and leading our new global strategic accounts initiative. And Karen Durant oversees our global financial reporting, accounting and Investor Relations functions.

These positions are critical to support our strategic objectives for Orbio, global strategic accounts, and our worldwide business reporting and process improvement efforts. We appreciate the continued contributions that these three accomplished professionals give to Tennant.

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 portfolio 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 Mexico. Growing a sizable, robust water-based cleaning business under the Orbio Technologies brand. And reaching an operating profit margin of 12% during the 2013 fourth quarter. We are on track to attain this ambitious long-term goal by successfully executing against these strategic priorities, and assuming the global economy grows at a modest rate.

Tennant's fourth quarter has historically been a difficult quarter to predict. It is even more challenging this year with the uncertainty in the current macroeconomic environment. That said, we believe that Tennant can continue to post solid growth going forward by successfully executing our current strategy and assuming the global economy as a whole stabilizes and experiences modest growth.

We are confident that our strategic direction, coupled with rigorous cost controls, improved operating efficiency, and new products will further enhance our value creation potential.

Now I'll ask Tom to take you through Tennant's third-quarter financial results. 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 third quarter. Prior to this quarter Tennant had achieved on average organic sales growth of about 13% in each of the previous six quarters. As we mentioned during our call last quarter, we estimated at that time we were back to pre-recession sales levels. As such, we would now expect organic revenue growth to be in our traditional range of mid- to high-single digits.

For the third quarter ended September 30, 2011, Tennant reported net earnings of $9.7 million or $0.50 per share on third-quarter net sales of $187 million. Included in the $0.50 per share is a $0.05 loss per share for net foreign currency exchange losses due to the volatility of foreign exchange rates. This was partially offset by $0.03 per share of favorable discrete tax items primarily related to the settlement of routine tax audits.

In the year-ago quarter Tennant reported net earnings of $7.5 million or $0.39 per share on net sales of $168.6 million. The $0.39 per share included a favorable special discrete tax items of $0.01 per share.

Turning now to a more detailed review of the 2011 third quarter. Tennant's consolidated net sales of $187 million increased 10.9% over the prior-year third quarter. For the 2011 third-quarter consolidated net sales were favorably affected by a foreign currency exchange impact of approximately 3.5%. Organic sales, which exclude the foreign currency impact, grew approximately 7.4%. Sales grew across all our geographies, with strong contributions from strategic accounts and our ec-H2O technology.

Again, we estimate we are now back to prerecession sales levels. For our large industrial equipment this is somewhat attributable to the improved economy. We also now offer ec-H2O on large scrubbers. And we 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.

In the 2011 third quarter large scrubbers grew approximately 20% over the prior-year third quarter due to the availability of ec-H2O on them and the very successful introduction of the new T16 scrubber.

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 third-quarter organic sales growth of approximately 7.5%, excluding about 1% of favorable foreign currency impact. The growth in the Americas was driven by strategic account sales in North America, including scrubbers equipped with ec-H2O technology and strong gains in Latin America, particularly in Brazil, where we have expanded our market and increased sales of large equipment.

In EMEA, organic sales rose approximately 6.6%, excluding a favorable foreign currency impact of approximately 8.5%. The growth in EMEA was primarily due to increased sales of large scrubbers. In addition, we did have positive quarter-over-quarter growth of outdoor city cleaning equipment, some of which stemmed from final buys of our recently discounted -- discontinued Hofmans products.

However, sales of Green Machine products also increased in the quarter. We sold a record number of 500ze's in the third quarter, and there is growing interest in this environmentally friendly city cleaning sweeper that is lithium-ion battery powered with zero carbon emissions. From a geographic perspective, sales growth in EMEA was particularly strong in Eastern Europe, Germany and France.

In Tennant's Asia-Pacific region organic sales rose approximately 5.4%, excluding a foreign -- a favorable foreign currency impact of about 11%. The growth in Asia-Pacific was also chiefly due to increased sales of large scrubbers, especially in China. The growth rate in the quarter was lower than the trend in previous quarters due to some selling price decreases related to movements in foreign exchange rates. We are also lapping organic growth of approximately 29% in the 2010 third quarter. We still remain very positive about the future growth potential in this region.

Tennant's gross margin for the 2011 third quarter was 42.9 -- Tennant's gross profit margin for the 2011 third quarter of 42.9% was up 30 basis points versus 42.6% a year earlier. Sequentially the 2011 adjusted gross margin has increased each quarter from 41.7% in the first quarter to 42.2% in the second quarter to 42.9% in the third quarter.

Gross margins were impacted by quarter-over-quarter inflation in raw materials in all geographic regions. We did raise our selling prices effective mid-May which benefited the 2011 second quarter by approximately 1.5% and the 2011 third-quarter by approximately 2%.

The 2011 third-quarter benefit of 2% was partially offset by some selling price decreases in selected regions related to movements in foreign exchange rates. The overall net impact from selling prices in the third quarter was approximate 1.5%. We are pleased that Tennant is performing within our targeted range of 42% to 43% gross margin.

Research and development expense in the third quarter totaled $7.2 million versus $7.1 million in the prior-year quarter. R&D expense as a percentage of sales is 3.9% in the third quarter of 2011 compared to 4.2% in the prior-year quarter.

Selling and administrative expense in the third quarter of 2011 totaled $57.3 million compared to $54.2 million in the third quarter 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 2011 third-quarter selling and administrative expense as a percent of sales, however, was down 160 basis points to 30.6% from 32.2% in the prior-year quarter, due to improved operating efficiencies.

Our 2011 third-quarter operating profit was $15.8 million or 8.4% of sales compared to the operating profit of $10.5 million or 6.2% of sales in the third quarter last year. The 220 basis point improvement in operating profit margin was primarily due to greater selling and administrative operating efficiencies and higher gross margins.

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 this ambitious long-term goal by successfully executing our strategic priorities and assuming the global economy grows at a modest rate.

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 had 7.4% organic sales growth in the 2011 third quarter and achieved on average 13% organic sales growth in the previous six quarters.

By successfully leveraging our existing workforce we have continued to hold our employee count to about 2,800. This number is essentially flat with when we completed the restructuring effort that began in the 2008 fourth quarter and is down about 10% from Tennant's prerecession 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 to our long-term expected tax rate.

Tennant's base tax rate in the 2011 third quarter was 32.8% within our targeted range of 31% to 33%. Tennant's overall effective tax rate in the 2011 third quarter was 30.2%, including a favorable discrete tax items primarily related to the settlement of routine tax audits.

These tax rates exclude the 2011 second-quarter limited $0.5 million tax benefit associated with the $5.5 million of pretax special charges related to the Hofmans' product obsolescence.

Also excluded is the international executive severance, which materially impacted the overall effective tax rate. Tennant's overall year-to-date effective tax rate including these items is 35.1%, and excluding these items the overall year-to-date effective tax rate is 31.4%.

Turning now to the balance sheet. Again, we are pleased with the Company's progress. Net receivables at the end of the 2011 third quarter was $128.8 million versus $114.6 million a year earlier. Quarterly average accounts receivable days outstanding were 63 days for the third quarter versus 62 days in the 2010 third quarter.

Tennant's inventories at the end of the 2011 third quarter were $77.4 million versus $68.5 million a year earlier. Quarterly average FIFO days inventory on hand were 92 days for the 2011 third quarter compared to 91 days in the year-ago quarter.

Accounts Payable totaled $51.5 million at the end of the third quarter versus $44.5 million in the year-ago quarter.

Capital expenditures totaled $7.7 million in the first nine months of 2011 versus $6.7 million in the first nine months of 2010. We continue to tightly control capital spending by 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.

Tennant generated $36 million in cash from operations in the first nine months of 2011, which was higher than the $30.2 million generated in the first nine months of 2010. Cash and cash equivalents at the end of the 2011 third quarter totaled $44.3 million compared with $33.7 million a year ago, an increase of $10.6 million.

The Company's total debt of $36.9 million was $5.1 million higher than $31.8 million a year ago. The increase in debt was chiefly due to taking out $20 million of 4% fixed rate long-term debt, $10 million in each of the first two quarters of 2011. This was partially offset by paying down our revolving credit facility by $15 million. Our debt to capital ratio was 14.5% at the end of the 2011 third quarter versus 13.7% at the end of the year earlier quarter.

Regarding other aspects of our capital structure, effective in the 2010 fourth quarter we increased our quarterly cash dividend 21% from $0.14 to $0.17 per share. And in February 21 of 2001 our Board of Directors authorized a new share repurchase program of up to 1 million shares of our common stock. This provides us the financial flexibility to offset dilution effects of stock-based compensation programs and to consider repurchases to create value based on overall market conditions.

In the 2011 second quarter we purchased approximately 243,000 shares at an average price of $37.64 per share for a total cash outlay of $9.2 million. In the 2011 third quarter we purchased approximately 214,000 shares at an average price of $37.36 for a total cash outlay of $8 million.

We have approximately 731,000 shares remaining under our current repurchase program. As of September 30, 2011, we now have about 18.8 million shares outstanding.

Maybe now to our outlook. Based on our 2011 first nine months financial results and expectations of future performance, we are adjusting our full-year sales and earnings guidance for 2011 by broadening the range at the low end, due primarily to the current economic volatility. As Chris said, the fourth quarter has historically been a difficult quarter to predict, and it is even more challenging this year with the uncertainty in the economy.

We now estimate 2011 full-year net sales in the range of $745 million to $765 million. We now estimate adjusted earnings for the full year 2011 in the range of $1.80 to $2.05 per diluted share.

For the full year 2010 adjusted earnings totaled $1.31 per share on net sales of $667.7 million. Anticipated 2011 year-over-year growth in adjusted earnings per share is now in the range of 37.4% to 56.5%.

We will continue to track economic trends and commodity prices and will manage the business with a focus on operational excellence and rigorous cost controls, while making selective investments in innovative technologies and other key strategic priorities.

Our 2011 full-year financial outlook includes 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 $14 million to $16 million.

We anticipate a base tax rate, excluding special items, in the range of 31% and 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 would like to open up the call to any questions. Amanda.

(Operator Instructions). Arnie Ursaner, CJS Securities.

My question relates to your guidance. We are already [a month into] the quarter and you have an extraordinarily broad range, given that it is the final quarter of the year. Can you walk us through in your mind the differences between the low and the high end, what would need to occur to be at the bottom of the range; what would need to occur to be at the higher end of the range?

I will take that and see if Chris wants to follow up. What we are seeing -- and typically we do see a bit slower start in Q4, so I want to comment on that. But we have seen our order pattern be below where we would have expected it to be to deliver the higher end of our range where we obviously are targeting to. And it has gone on below that target -- below that range for a little longer than we had anticipated.

What we need to hit the high end of the range is obviously for a meaningful move in our daily order patterns for the balance of the quarter to deliver the high end. If we stayed consistent with the kind of order patterns we are seeing right now for the entire quarter, which we would like to believe that is not good to happen, that would cause us to deliver towards the lower end. And that is the revenue picture.

From the high end of the profit side we basically need to deliver the revenue. That is the bigger driver of it. At the low end we have been -- the low end of our EPS range we have been quite conservative and taken a position that, one, we want to ensure that we can cover even a worst case scenario with some of the issues that are going on with Karcher, and that we would have higher than the kind of run rate legal expenses we have had to date, and we want to ensure that we could cover virtually any scenario.

And the other element of that is we will continue to drive towards the middle -- the higher end of our revenue range, which if we were not to achieve that that, that could cause a pretty significant LIFO hit. And we have also covered that in the lower end of our guidance.

So we have taken, we think, a very conservative -- obviously, a very conservative approach on the lower end. But given our order patterns and some of the things going on in our business, we just felt that it was prudent to lay those facts on and be completely transparent about the economic uncertainties that we are in.

I would just add to that that while our order patterns have been softer than expected here in October, it is worth remembering that our fourth quarter is extremely backend loaded. So really it is mid-November to the end of December that determines the performance of the quarter.

And the other thing worth noting is that we feel strongly that everything that is within our control is on track and working just fine. So we believe we have a lot of interesting opportunities and projects in the pipeline. And we are -- the fact is that we are maintaining the high end of our guidance. The reason we are doing that because that is still the number we are shooting for, and I want all of you to understand that.

If I can ask one more question regarding ec-H2O, you mentioned, I think, that you have $101 million revenue to date versus $64 million, a gain of about $37 million. And yet when I -- and 32% growth this quarter year-over-year -- yet when I look at your full-year guidance of $130 million to $140 million it basically implies a flat fourth quarter. Is there a more specific reason why you're that cautious, or is that again just a general Midwest view of the world (multiple speakers) (laughter)?

We hope we are being conservative.

Well, are you, in fact, seeing a meaningful enough slowdown that you think it would be flat?

We continue to expect double-digit earnings growth in our ec-H2O business based on current trends, but we are being conservative given the volatile economic environment.

Again, you mentioned something I would like to try to see if you can answer. Maybe you would prefer not to for competitive reasons. But you mentioned the Karcher lawsuit. Is that a factor that in and of itself could have lowered the range of guidance by as much as $0.10? Could it be that expensive for you from a legal point of view?

We certainly don't believe so. And we don't want to imply any specific numbers, we really wanted to just give you a sense of a few of the types of things that could, in their worst-case scenarios, cause us to be at the low end of that range. We certainly don't believe that it is going to be that expensive, but we wanted to at least ensure that we can cover ourselves under a worst-case scenario in the quarter.

It is also important to note that the Karcher lawsuit has had no impact on our business so far. As a matter of fact, we were at our industry's annual tradeshow, ISSA in Las Vegas last week, where we met with some of the -- of our largest customers around the world. And all of them basically shrugged this off as pretty much sour grapes. It does not in any way impact their view of Tennant, our technology or their buying patterns of ec-H2O in the future.

Thank you very much.

Joe Maxa, Dougherty & Company.

To follow up on the Karcher, are you spending that currently? (multiple speakers).

We are. And what we can say to that is it really was not a meaningful spend in Q3. It wasn't large enough that we felt the need to point out specifically what that amount was. We do expect that it will go up in Q4. And like I said, at the low end we have covered ourselves with a significant increase in the run rate.

Has there been any new developments other than the original information that came out from Karcher?

No.

Okay. I wanted to talk about the gross margin profile for fourth quarter. It appears commodities have come down. Is there a shot that your margins really tick over this 43% range?

At the higher end of our revenue range that is certainly a possibility. We have seen -- we have seen, call it, the beginning of stabilization in commodities. I wouldn't see we are seeing any meaningful declines. But given the quietness on that front, and we have felt less pressure than we felt in the front part of the year, if that continued to move forward on that basis and we were in the higher quadrant of our revenue, that is clearly a possibility that we could inch up to or slightly above 43%.

And back on the guidance on the revenue side, I understand what you're saying, but I am curious if you are seeing any changes, particularly in the ordering patterns of your larger accounts. I know it is probably early, but you are a month into it just about.

Nothing really specific by account. It is more -- we obviously monitor by product line, by geography, by customer. We couldn't speak to specificity around customer. It is really just on an absolute basis the orders -- the daily order sizes are more volatile. And while we have had some big order days, we have also had lower order days. And typically by now the slowdown that we always see in the front-end of October would have turned, and it just hasn't yet. So we are being careful.

Do you think it is related more to a product line like larger equipment versus --?

No it is pretty broad-based. So we would say it is nothing specific to any of our products.

And, lastly, I just want to touch base on Orbio. Are you out of your controlled rollout stage now, are you ruling that out more aggressively?

We introduced it at ISSA last week in Las Vegas and the reception was extremely strong, and in some respects exceeded our expectation. That part of our booth was absolutely jampacked the entire show. So with that we are indeed beginning to accelerate the rollout in North America. And it is important to note that we also are confident enough in the technology and our business model that we have introduced it in Europe and Asia-Pacific as well.

Very good, thank you very much.

Scott Graham, Jefferies.

So the slower order pattern that you're seeing in the month of October, you're saying it is pretty broad-based, is it also pretty regionally-based?

I would say that it is fairly similar across all of our regions. Obviously, the region that matters the most is North America. So that is -- the Americas is still in excess of 60% of our revenue so that is the piece that matters the most -- it all matters, but it is really pretty similar across the breadth of our geographies.

Okay, so if memory serves -- actually I'm looking at an estimate of your sales by market, you guys are in a lot of markets where there are -- there is a lot of people traffic involved, of course. So -- and I'm wondering, you know, you marry that up with today's consumer confidence number, I am just wondering are your customers saying that the slowdown in orders is due to is just slower traffic trends in general?

No, we are not hearing anything specifically from our customers around any deferrals of orders, canceling of orders, slowdown in that regard. It is really just the pace of the orders relative to the expectation within our original revenue forecast.

As a matter of fact, there is nothing concrete that leads us to the low end of the range at this point, other than the volatile economic circumstances we find ourselves in and a lower and slower order rate here at the beginning of October.

Again, at ISSA last week we met with many of our biggest customers, none of them who expressed significant concern about their business going forward in terms. And I'm -- when I talk about their business, the business with us going forward here over the next three months.

The other point I want to make too is that just given the -- we can't immediately meet demand if the demand comes later in the quarter than we would like to see it that could cause us problems where demand could go back to normalized levels and our order patterns could return. If that comes too late in the quarter we can't react fast enough to it.

Obviously, those orders would then come through in the first part of next year. But part of our consciousness is our ability to react quickly to if we get back to a completely normal flow of orders.

Understood.

Which again (multiple speakers) backend loaded in the fourth quarter.

Right. Now this is the last question and this is more towards the operating margin goal. So if we -- if you are, in fact, on track as you're saying that you are verses your plan, and organic growth drops into this sort of mid- to upper-single digit normalized rate, my back of the envelope math -- and, Tom, you will tell me if I am wrong on this -- is that the SG&A number for 2012 to track toward a 12% margin in 2013, that SG&A number has to come down if gross margin is still in the 43% range, correct?

That can be relatively flat, it doesn't actually have to decline. And one of the things that -- but it does -- we do have to hold the line. And the thing that we have done to date, and will continue to do, is hold the line on headcount. And then we will begin to see bigger benefits in our indirect spending targets as we really attack our indirect spending efforts, just like we attacked our global sourcing efforts. That effort has been going on for about five years now.

We are just at the front end of that benefit, so the combination of holding the line on heads and aggressively going after our indirect spending are the two components that we believe will allow us over a period time to hold that operating expense relatively flat.

So your model is not showing a decline in S&A next year to get to whatever margin you are thinking?

No, but very modest increases though, modest increases to flat. And that obviously varies depending upon the geography and depending upon the functions. As we look at our overhead areas those are the areas that we got to hold -- be a lot tougher on, hold a lot flatter. Because we want to fund our growth markets, and there are markets and we have to add heads in.

So we will -- we have to continue to do what we have been doing, holding the line on headcount. And we are also going to begin seeing some of the benefits of our process improvement efforts, leveraging our SAP system that will allow us to continue to hold headcount flat.

You know, we need to get to 27% to 28% operating expenses as a percent of sales, either get it down to 27% to 28% by the fourth quarter of 2013. We are heartened by the fact that we achieved 30.6% in the third quarter of this year, which is the lowest it has ever been for Tennant.

Okay, very good. Thank you.

Arnie Ursaner, CJS Securities.

I wanted to, if you won't mind, expand a little bit on the new agreements you announced. Perhaps explain why this approach, what do you hope to gain, and why would you go at it this way versus direct?

It is really about economics. And I mean it is -- what we found is as important as our current distributor bases are to us, there is places they just don't have -- they are not as successful at getting at. And to use our direct organization would be quite expensive. We are really capitalizing on existing infrastructure with people like Grainger and Staples that allows us to put product through an existing infrastructure and attack customer bases that they are already successful going after. So it is really about leverage.

You got to remember, we sell a limited number of products. And so to put salespeople in all of these geographies to sell to some of these customers and only sell a scrubber, is extremely expensive. You have a Staples or a Grainger that goes in there with a broad portfolio of products sold to that one customer, now they are just adding our scrubbers to that portfolio. It is much more cost effective for them. So there is no way we could economically serve some of these customers that we just don't go to today or underserve today.

Also remember that our distributors basically are very good at serving a discrete part of their marketplace. They are farmers; they are not hunters. They develop relationship with a portfolio of customers. They serve those customers extremely well. But they are not good at going out and acquiring new customers that we need to acquire at a more aggressive rate than we have historically. And we believe that Grainger and Staples do that for us in a great way.

A couple of follow-ups there. Would the products you sell it to them, I assume, our across your product line or would these be more in the commodity like older type machines or all of your products and (multiple speakers)?

No, I mean they are getting -- what we are doing with both Grainger and Staples is we have a second brand, which is our Nobles brand, but that is basically state-of-the-art technology fairly similar to the Tennant product line. They have access to those. They are going to be buying mostly commercial equipment, scrubbers on down. Grainger has access to the ec-H2O technology and also do a limited part of our industrial portfolio.

For now, given just started with Staples, they have access to our Nobles commercial line because that is most relevant to the education and health care markets that they are serving on our behalf.

When they make a sale will you automatically be given the service-related contract or warranty work?

I would think in the majority of cases, yes.

Okay, thank you.

We have no further questions at this time.

We are pleased with our financial performance in the third quarter and the first nine months of 2011. We are focused on continuing to control costs across the organization in order to achieve further operating leverage and enhanced 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.

So thank you for your time today and for your questions. We look forward to updating you on our 2011 fourth-quarter and full-year results in February. Take care everybody.

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