Tennant Co (TNC) 2012 Q1 法說會逐字稿

Good morning and thank you for participating in Tennant Company's first-quarter 2012 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). We ask that you remain on the line for closing remarks by management after the question-and-answer session.

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

Thanks, Martina. Good morning, everyone, and welcome to Tennant Company's first-quarter 2012 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 Vice President and Controller.

Our agenda today is to review Tennant's performance during the 2012 first quarter and our outlook for the remainder of 2012. First Chris will brief you on our operations. Then I will cover the financials. After that, we will open up the call for your questions.

Before we begin, please be advised that 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 2012 first-quarter earnings release includes a reconciliation of full year 2011 non-GAAP diluted earnings per share to our 2011 GAAP diluted earnings per share.

There was no special non-GAAP items in the 2012 first quarter or the 2011 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 will turn the call over to Chris.

Thank you, Tom, and thanks to all of you for joining us this morning. Today I would like to review Tennant's first-quarter financial performance and operating highlights.

While the first quarter is seasonally our weakest, Tennant's 2012 first-quarter sales came in lower than anticipated. This was primarily due to order timing resulting in a higher than normal order backlog entering the second quarter. Based on the growing momentum of our strategic account orders and the strength of our overall business in the Americas, we are forecasting a good second quarter and a strong second half.

Our strategies are working and we expect 2012 full-year results to be within our previously provided guidance range for both sales and earnings per share. Tom will further discuss the confirmation of our annual guidance in a few minutes.

Looking at the details of our 2012 first-quarter results, there are a couple of important factors to keep in mind. We were lapping a record first quarter last year when sales grew 15% or about 13.5% organically and we did manage to slightly beat that. As we stated last quarter, Tennant is now back to prerecession seasonal sales patterns and growth rates which translates into higher sales and earnings in the back half of the year.

Our revenue guidance for the 2012 full year calls for mid to high single-digit growth consistent with our historical growth rates.

In the 2012 first quarter, net sales of $173.7 million grew nearly 2% organically versus the prior year quarter. Contributing to the results were higher sales of industrial rider-scrubbers equipped with our sustainable ec-H2O technology. Also performing well were our Green Machines, 500ze city cleaning sweepers, which are powered by and environmentally friendly lithium-ion batteries with zero carbon emissions.

In addition to the impact on first-quarter sales due to order timing, we also saw slower sales in Europe as a result of the European debt crisis, which made it more difficult for our customers to obtain equipment financing. Given the European credit environment, we are taking steps to help our customers secure financing.

Typically when revenues come in below expectations we can usually cut spending to protect our profitability. In the 2012 first quarter, we experienced a shortfall in our anticipated March revenues and we intentionally decided to continue our strategic investments in growth and process improvement initiatives to benefit the Company long-term.

We did also have higher than normal insurance claims in the first quarter and Tom will cover this in more depth. The combined effect of lower-than-anticipated sales in the 2012 first quarter, our ongoing investments in the business, and some higher-than-normal expenses generated quarterly earnings per diluted share of $0.28 compared to earnings per diluted share of $0.30 in the year-ago quarter.

Despite some challenges in the quarter, we are pleased that Tennant's first-quarter gross margin rose to 43.4% above our stated range of 42% to 43% and up 170 basis points from 41.7% in the 2011 first quarter.

Now turning to our operational highlights, we were very pleased to capture some significant strategic accounts businesses in the first quarter. Our wins included increasing our share to 100% of the scrubber business of a major big-box retailer as well as adding a new major supermarket chain to our list of customers.

As you know, one of our priorities is to expand our strategic account revenues and we are encouraged by the Company's progress in this area. We expect our strategic account initiatives to help drive revenue growth over the coming year.

We also had continued sales contributions from our ec-H2O technology. Scrubbers equipped with ec-H2O technology increased approximately 4% to $29 million in the 2012 first quarter compared to the prior year quarter. We saw particularly robust growth from Tennant's ec-H2O-equipped T16 rider-scrubber, which was introduced in 2011.

For the 2011 full year, sales of scrubbers equipped with ec-H2O totaled $140 million, up approximately 46% compared to the prior year. For the 2012 full year, we expect continued double-digit growth of ec-H20 sales in the range of 15% to 20%.

During the 2012 first quarter, we introduced durable Eco-ITS sustainable urethane coatings using a 95% plant-based BiOH polyol supplied under an exclusive agreement with Cargill. The environmentally friendly Eco-ITS is made with up to 50% fewer petroleum-based chemicals resulting in lower volatile organic compounds and reduced odor. Eco-ITS is another example of our commitment to create products and technologies that help our customers create cleaner facilities and meet their sustainability goals.

In all, new products accounted for approximately 30% of our equipment sales in the 2012 first quarter. This was in line with our ongoing goal to generate 30% of sales from new products introduced in the past three years. Our ec-H2O technology on rider-scrubbers led the way in helping us to continue to achieve this metric.

I would like now to take a moment to address some of the misleading noise from competitors that you may have heard in the marketplace about ec-H2O. As most of you know, Tennant's competitors are challenging our advertising statements about ec-H2O technology. The reality is that Tennant has a disruptive technology that is scientifically proven to work. We are gaining market share and our competitors have not had a comparable product to offer in response.

Here are the facts. Of the two concluded proceedings to date that have reviewed advertising challenges brought by our competitors, one was dismissed and the other upheld the efficacy of ec-H2O as an effective cleaner.

In addition, Tennant sought and received an interim injunction from the German Court prohibiting Kaercher from making misleading statements about our ec-H2O advertising.

The science of water electrolysis is the foundation of ec-H2O. It is well established and has been known for 150 years. Tennant has been in the marketplace with ec-H2O for over four years with cumulative sales of $303 million through 2011. We have thousands of satisfied customers and they have purchased more than 30,000 scrubbers equipped with our ec-H2O technology.

Since we first introduced ec-H2O, we have maintained and continue to state that ec-H2O cleans effectively, saves money, improves safety, and reduces environmental impact. These are all important tangible benefits to our customers. We and our customers stand behind this technology.

It is also important to note that ec-H2O is only the beginning for us. Our vision is to become a global leader in water-based and other sustainable cleaning technologies. To drive this vision and build off our success with ec-H2O, we are investing to create a suite of sustainable cleaning technologies and products under our Orbio Technologies brand. Using a three-phased approach, Orbio's goals are to expand the ec-H2O platform to all relevant current products which we have done with ec-H2O technology available now on all 15 applicable scrubbers, clean more spaces and customer environments beyond just floors, which we are just beginning to do with our Orbio 5000-Sc units and to develop new markets and applications that could have significant revenue potential.

Tennant's customers increasingly want to clean their facilities with cost-effective options that use fewer traditional packaged chemicals. To meet this need, we launched Orbio 5000-Sc as our first Orbio branded product in the spring of 2011. Orbio 5000-Sc is an innovative dispensing unit designed to replace a variety of conventional daily use cleaning chemicals. The system uses Orbio's Split Stream technology combining tap water, a small amount of salt, and electricity to generate an effective and eco-friendly ready-to-use multi-surface cleaning solution. We offer in the Orbio 5000-Sc for rental on a 24-month term with pricing based on level of use.

Over the past year, we expanded our rollout in North America and in 2012, we are introducing the 5000-Sc in Europe and select areas in Asia Pacific. This launch is on track and meeting our expectations.

We are excited about the progress our Orbio Technologies Group is making to enhance and expand our electrically converted water technology platform. Our growing portfolio of water-based cleaning technologies includes Orbio Blended Stream, which is offered as ec-H2O on Tennant scrubbers; Orbio Split Stream incorporated into the Orbio 5000-Sc unit; and Orbio Electroporation Technology, which has the capability to kill more than 99.9% of harmful bacteria. Tennant is in the development stage with this technology.

We remain committed to being the industry's innovation leader. In addition to funding the startup phase of Orbio, we continue to invest in our core business. In fact, we have one of the strongest new product and technology pipelines in Tennant's history. This will require our investments in R&D to remain around 4% of sales in 2012 as it was in 2011.

Moving forward, we anticipate increasing Tennant's revenues through continued market penetration with our sustainable cleaning technologies including scrubbers equipped with ec-H2O and the Orbio 5000-Sc; expanding our strategic accounts business with particular emphasis on global customers; growing in new or underserved market segments through channel partners; the introduction of new products and ongoing penetration of emerging markets.

Our goal remains to achieve an operating profit margin of 12% in the 2013 fourth quarter. We believe that we are capable of attaining this ambitious goal by successfully focusing on product innovation and growth, market expansion and margin and operating leverage.

Now I will ask Tom to take you through Tennant's first-quarter financial results. Tom?

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

Throughout 2010 and the first half of 2011, Tennant had achieved on average organic sales growth of about 13% in each of those six quarters. We estimated at the beginning of the 2011 third quarter that we were back to prerecession sales levels and we anticipated organic revenue growth going forward would be back in our traditional range of mid to high single digits. This was the case with organic revenue growth of approximately 7.4% in the 2011 third quarter and 5.7% in the 2011 fourth quarter.

As Chris noted, the organic sales growth of approximately 1.6% in the 2012 first quarter was lower than anticipated primarily due to order timing as well as the impact from the increased tightening of credit in Europe. We are maintaining guidance and still expect 2012 full-year sales to be within our previously provided range of between $790 million and $805 million.

For the first quarter ended March 31, 2012, Tennant reported net earnings of $5.3 million or $0.28 per share on first-quarter net sales of $173.7 million. In the year-ago quarter, Tennant reported net earnings of $5.9 million or $0.30 per share on net sales of $172.6 million.

Turning now to a more detailed review of the 2012 first quarter. 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 2012 first-quarter organic sales growth of approximately 3.5% excluding about 0.5% of unfavorable foreign currency impact. The growth in the Americas was driven by sales of industrial scrubbers equipped with ec-H2O technology and outdoor equipment.

As mentioned during the 2011 fourth-quarter conference call in February, we announced a selling price increase at North America effective in April 2012 with the benefits being primarily realized in the second half. We did receive many pre-price increase orders, however, they came in too late to ship in March. As a result, we are carrying a larger than typical order backlog into the 2012 second quarter.

In the Americas last year, we reported 2011 first-quarter organic sales growth of approximately 15.7%, driven by a number of large sales to strategic accounts. In 2012, we are anticipating stronger sales to strategic accounts in the second half of the year.

In EMEA, organic sales were down 0.5% excluding an unfavorable foreign currency impact of approximately 3.5%. EMEA sales of indoor equipment were adversely affected -- impacted by the European debt crisis as Tennant's customers found it more difficult to obtain credit in the first quarter. We are closely monitoring the situation and trying to help our customers secure third-party financing.

First-quarter 2012 outdoor city cleaning equipment sales growth was positive compared to the prior year quarter, with higher sales on Green Machines products offering -- offsetting the lower sales of Hofman's products that were discontinued last year. There is growing interest in the 500ze environmentally-friendly city cleaning sweeper that is lithium-ion battery powered with zero carbon emissions.

Some of the more notable European cities purchasing 500z's include Amsterdam, Rome, Cologne, and Paris.

In Tennant's Asia-Pacific region, organic sales were down approximately 5.3%, excluding a favorable foreign currency impact of about 3.5%. This reflects the unusually large shipments in the 2011 first quarter in Australia while this year we are anticipating some large shipments in the second half. In Asia-Pacific last year, we reported 2011 first-quarter organic sales growth of approximately 21.7%.

China achieved organic sales growth of approximately 15% in the 2012 first quarter and we remain very positive about the future growth potential in this region.

Tennant's gross margin for the 2012 first quarter of 43.4% was up 170 basis points versus 41.7% in the prior year quarter. The higher gross margin was primarily driven by improvement in gross margins in the Americas region due to product mix and production efficiencies. Tennant's gross margins were 42.9% in the 2011 third quarter and 43.2% in the 2011 fourth quarter.

We are pleased that Tennant again performed beyond the high end of our target gross margin range of 42% to 43%.

Research and development expense in the 2012 first quarter totaled $7.3 million versus $6.3 million in the prior year quarter. R&D expense as a percent of sales was 4.2% in the first quarter of 2012 compared to 3.6% in the prior year quarter. We are continuing to invest in our core business most particularly in preparation with early 2013 launch of the first model in our new large equipment modular product line.

Selling and administrative expense in the 2012 first quarter totaled $59.7 million or 34.4% of sales compared to $57.5 million or 33.3% of sales in the first quarter of last year. The increase in selling and administrative expense was primarily attributed to higher than usual expenses in the quarter due to large self-insured medical workers' compensation and auto claims, which tend to be infrequent and difficult to predict. We do not anticipate this adversely impacting our annual claims patterns.

We also continued to invest in our process improvement projects during the 2012 first quarter that are designed to standardize and simplify our global processes in the areas of pricing, invoicing and collections, and machine configuration. These efforts will help us build a scalable business model, reduce costs, and make it easier for our customers worldwide to do business with Tennant.

We are continuing to tightly control our spending to improve operating efficiencies. Our 2012 first-quarter operating profit was $8.3 million or 4.8% of sales compared to operating profit of $8.2 million or 4.7% of sales in the first quarter of last year.

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 in 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 goal, 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 standardizing and simplifying processes globally to enable the building of a scalable business model while minimizing any increases in our operating expenses.

We have been successful in leveraging our existing workforce and have continued to hold our employee count to about 2800. 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. Yet we have been able to grow sales from $596 million in 2009 to a record of $754 million in 2011.

During the first quarter of 2012, we had net foreign currency transaction losses of $200,000 compared to net foreign currency transaction gain of $500,000 in the year-earlier quarter. This is reported below operating profit and it was an unfavorable quarter-over-quarter impact of $800,000 or $0.03 of earnings per share. We do have non-speculative hedging programs in place, so swings in the related transaction gains or losses are primarily due to fluctuations in exchange rates.

We continue to successfully execute our tax strategies. The 2010 fourth-quarter restructuring and realignment of Tennant's international operations continues to provide 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 2012 tax rate as well as our long-term expected tax rate. Tennant's overall effective tax rate was 31.2% in the 2012 first quarter. The base tax rate excluding routine favorable discrete items was 32.1%, which was in line with our targeted range of 31% to 33%.

Note that the federal R&D tax credit has not yet been reenacted for 2012, so we are not allowed to include the favorable impact from that in our tax rate.

Turning now to the balance sheet, again we are pleased with the Company's progress. Net receivables at the end of the 2012 first quarter were $124 million versus $131 million a year earlier. Quarterly average accounts receivable days outstanding were 61 days for the first quarter versus 64 days in the 2011 first quarter.

Tennant's inventories at the end the 2012 first quarter were $68.1 million versus $66.7 million a year earlier. Quarterly average FIFO days inventory on hand were 93 days in the 2012 first quarter which were six days higher compared to 87 days in the year-ago quarter primarily due to higher levels of inventory to support the anticipated higher level of pre-price increase order activity, the majority of which will now be shipped in the 2012 second quarter.

Accounts payable totaled $44.2 million at the end of the first quarter versus $45.7 million in the year-ago quarter. Capital expenditures of $4.2 million in the first quarter of 2012 are higher than the $1.6 million in the prior year quarter due to investments in tooling related to new product development and process improvement projects.

Tennant's cash from operations, which is typically negative in the first quarter due to seasonality in the business was a negative $2.9 million in the 2012 first quarter compared to a negative $7.2 million in the year-ago quarter. Cash and cash equivalents totaled $39.5 compared to $38.9 million a year ago.

The Company's total debt of $36 million was $4.3 million lower than $40.3 million a year ago. Our debt to capital ratio was 13.8% at the end of the 2012 first quarter versus 15.2% at the end of the prior year quarter.

Regarding other aspects of our capital structure, Tennant is currently paying a quarterly dividend of $0.17 per share. We paid cash dividends of $12.9 million during 2011 and $3.2 million during the 2012 first quarter. Tennant has increased its annual cash dividend payout for 40 consecutive years.

During 2011, we purchased approximately 469,000 shares at an average price of $37.51 per share for a cash outlay of $17.6 million. During the first quarter of 2012, we purchased approximately 102,000 shares at an average price of $40.47 per share for a total cash outlay of $4.1 million. We have approximately 618,000 shares remaining under our current repurchase program. As of March 31, 2012, we now have 18.8 million shares outstanding.

Moving now to our outlook, based on our 2012 first-quarter financial results and our forecast for the second quarter and the rest of 2012, we are maintaining our full-year sales and earnings guidance for 2012. We estimate 2012 full-year earnings in the range of $2.30 to $2.45 per diluted share on net sales in the range of $790 million to $805 million.

Our current 2012 full-year financial outlook includes the following expectations -- the global economy stabilizes with modest improvement in North America, continued uncertainty in Europe, and steady growth in emerging markets. Unfavorable foreign currency impact on sales for the full year in the range of 1% a Q2%. Minimal inflation net of cost savings initiative and selling price increases, a gross margin at the high end of the targeted 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.

We anticipate a base tax rate excluding any special items in the range of 31% to 33% depending primarily upon the mix of full-year taxable earnings by country.

While we do not provide detailed quarterly guidance, we do expect sales in the second half of 2012 will be higher than the first half of 2012. We remain on track to reach our goal of a 12% operating profit margin in the fourth quarter of 2013 and we do anticipate improving our quarter-over-quarter operating profit margins in each quarter of 2012.

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

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

Thanks. Good morning, guys. I just want a little more color on your outlook for the year. Obviously the second half being stronger than first half and you laid out what you are doing to achieve that. Can you give us a little more on the seasonality? Typically prerecession Q2 has been a bit stronger than Q3. Is that what we should expect especially given basically a push out for Q1?

Yes, that would be a fair way to think about it. Broadly how I think, Joe, is if I take you back to how we talked about the seasonality at the last call in February, we talked about a mix of about roughly 48% of our revenue coming in the first half and 52% coming in the back half and we did comment at that time that it could even be more skewed, meaning we could have less than 48% in the front half. And that's kind of how things are playing out for us in the year.

But we do believe that Q2 will be higher than Q3 and we would certainly continue to believe that Q4 will be if not our highest quarter of the year, one of the highest quarters of the year.

Got it. And then are you looking for -- with some concerns in Europe currently, are you looking for North America to become a stronger piece of the total revenue?

Both North America and Latin America are quite robust at the current time and we have -- that's really what gives us the confidence in how we feel the second quarter is going to play out in the back half of the year. And Asia-Pacific is -- we feel that that business is going to be solid for the balance of the year also.

Got it. Talk about gross margins, that's a pretty good indication with stronger gross margin on a little bit lower revenue prior to the price increase. So should we be looking for gross margins above this 43%? Can you maintain that for the year?

It could play out that way. I would suggest that we shouldn't count on it. We like to take a conservative posture on gross margins but if you work your way through it with the modest inflation that we've seen to date, inflation in the first quarter, raw materials was somewhere slightly under 2%. We did get about 2% of pricing. We believe there will be some level of inflation in the balance of the year.

At a minimum we believe we will be at the high end of our range and there is a possibility that we could have a quarter or so that's outside of that range.

Right, lastly I'll just ask on the competitor noise, have you seen any impact? Are you hearing anything on the channel? What are they telling you?

It's noise. It's obviously a pain for us to have to deal with it. It takes a lot of time and attention and a few dollars to fight it. But I think in the marketplace, our customers, as we have always said, they are relatively sophisticated. Many of them are cleaning professionals. They do this for a living. They test ec-H2O side by side with their current cleaning solutions before they buy and they are convinced it works. And as I mentioned a few minutes ago, we have sold over 30,000 scrubbers equipped with ec-H2O to date. We have maintained kind of our guidance of 15% to 20% growth in ec-H20 sales for 2012.

One last thing, on the Orbio 5000, can you give us any color on demand? Is that as strong as ever? Have you seen any difference? Are you shipping more, shipping less than the last couple of quarters?

No, all we are saying, Joe, at this point is that the rollout is on track and it is meeting our expectation. In the current competitive environment we have absolutely no interest in divulging more information about our new technology in products than we absolutely have to. I think you can understand that.

I think we can comment that demand is increasing. We are shipping more units but we don't want to be more specific than that.

Very good. Thank you, guys.

Arnold Ursaner, CJS Securities.

Good morning, gentlemen. This is Andrew Gadlin in for Arnie. A couple of questions. On the revenue that was pushed out of Q1 into Q2, can you give a sense for how large that was?

We don't want to be specific about that. We can say that it is significant and our open orders are a backlog are a fair amount higher than we would traditionally see. And put it this way. It's big enough that it gives us a lot of confidence that we're going to see an improving second quarter and we have lots of indications of even a stronger back half than we've seen Q2.

Okay, and would this revenue be at similar margins to what you produced?

No reason to think any different than that.

Would SG&A rise as well with it?

You would see the typical level of variable expense that we would traditionally have with revenue, so it wouldn't be any different than that.

So meaning growth both -- COGS as well as SG&A?

Yes, but you will see significantly improved [S&A] leverage in Q2 relative to Q1. That's obviously one of the disappointing parts in Q1. It's at a lower revenue, you just don't create the leverage and we didn't pull back our spending. We continue to invest. You will see significantly improved year-on-year leverage in Q2 we believe and that we should expect to see improvement in the quarters throughout the year then.

Yes, you mentioned on the call as well as in the press release that you invested in process improvements, etc. You also highlighted insurance costs, I believe. What does that relate to?

We are self-insured and so there are times where we will see an unusually high level of claims, whether it be in medical or auto. We had it really effective in all three areas in this quarter so it was highly unusual and we don't see anything that gives us any over concerns for the balance of the year but it was we believe it's just an unusual activity within the quarter.

How large was that?

We haven't given a specific number, but it's somewhere in the vicinity of about 50 basis points or so, so it was meaningful in the quarter.

You mentioned in Europe that you are giving -- you are going to help some of your customers get financing. Could you give a little more color there?

Yes, it would be as straightforward as this. We are actively exploring other leasing partners and it happened a little quicker than we would've expected. It's certainly -- not that the customers can't go find their own leasing partners but it's definitely advantageous for us to have a few more leasing partners lined up and we are actively engaging some additional people to bring on board as leasing partners that our customers can utilize. So that's the predominant thing that we are doing.

When do you expect to have that lined up?

We hope very quickly.

Within Q2?

Yes, definitely within Q2. If we don't get that done within the quarter, it won't positively affect the quarter. Our expectation is we can move the needle a bit within Q2, so we are engaged in that as we speak.

Okay, I will get back in the queue. Thanks so much.

Robert Scott Graham, Jefferies.

Good morning, guys. This is (inaudible) sitting in for Scott here. Just a first question on could you guys discuss the monthly sales trend by region? I know you guys mentioned about like March was kind of weaker, so if you can explain it by which location, which geographic location was weaker, you can just can go by month?

Yes, all I would say broadly is that we would -- we had order patterns that were more normal within the first two months and March is always our largest month and we just didn't start to see the momentum in March come till later than we would have anticipated. We would've expected more orders in front of the pricing. But more importantly than that is really the strategic account businesses, it is just coming later in the year, coming in Q2 and in Q4. We believe it's lapping a tough quarter and also just typical timing that you have in business with our larger customers.

I know in the strategic account side, you've got to remember that over the last 2.5 years, we have won a lot of new strategic account business and we have a lot of existing strategic account business that is beginning to renew their contracts with us. And we also said that we won two new pieces of business with a big box retailer and a supermarket chain in the first quarter. Now nothing has shipped to those. They are all coming rest of the year.

But what we are able to pretty much predict over the course of a year is what a strategic account is going to buy because we have always said that they have somewhere around 36-month replacement cycles so we can estimate that within a year they're going to buy so much. What we are not good at doing is figuring out exactly quarter by quarter where those orders are going to, fall, and in this case, I think we overestimated what was going to fall in the first quarter and that kind of began in the beginning of the quarter. It was clear that some of those were going to get pushed out in the second quarter and beyond. But they should all fall in this year.

Okay. And you did clarify in the March decline here but which particular region was that based in?

We really had off of our original expectations, it was really across the board was -- we had some impact in virtually all of our geographies. So it wasn't isolated to just one area. The area that we saw of the biggest concern is economically driven is in Europe, which as we commented on, that's clearly the area that we are monitoring the closest.

Okay, just last question if you guys can update on your acquisition pipeline or anything you guys are looking at?

We really don't have anything more to say than we really have -- continue to have two focus areas and one of that is around extending our technology capabilities, which is similar to the Water Star acquisition we made last year. And we will look at opportunities that would increase our sales and service coverage in newer geographies. Beyond that, we really can't comment any further but I would not expect us to see any, as we commented before, any large transaction happening. Anything would be smaller and tactical.

Thanks a lot.

Will Hamilton, Granite Point Capital.

Good morning. I was interested given the timing issue for this quarter whether you could provide a little bit more detail on the backlog? How much it might be up year-over-year or what is -- I know historically you haven't provided the actual number, but --

Yes, which is why we are going to shy away from doing that. We'll just say that it is meaningfully higher than normal.

Okay, and since inventories only are up 2%, is that then timing in terms of you bringing in the raw materials and producing and then shipping?

It's really that the inventory component is predominantly we do bring in raw materials and have a small amount of finished goods that are -- we are going to put in place in front of a price increase. We also had orders that just didn't -- got shifted out into Q2, so that's really why our inventory is a bit higher than we would like it to be. It's kind of as simple as that.

Right, but I was referring to the fact that if the backlogs are stronger than normal, wouldn't the inventories also be a little bit higher? It was up 2% versus a 1% increase in the top line, but it seem it would suggest that that would be higher if the backlog was that much stronger or is the just simply that everything shifts very quickly?

Things can shift quickly and to try to get precise with inventory levels and backlog and deliveries is a pretty complicated puzzle.

Okay and then I was just wondering, you called out China in the press release of being up 15% year-over-year. How does that compare to the growth I guess last year? If you could provide a little bit more color on that and how much is China as a percentage of APAC at this point?

We haven't given specifics on the size of China in our market for obvious reasons. What I can say is we have seen growth periods that has been in excess of 15%, but I'm not going to comment specifically on any individual quarter. But we don't see any reason why we won't see higher growth rates than 15% as we look out to future periods.

Okay, and then last thing, you mentioned some renewals of strategic accounts going on. I was just wondering what the pricing environment might be, whether you might be taking some price additions?

We have -- what we can comment on there is we have already taken the pricing that we discussed. We took the most meaningful price increase was in North America and that went into effect on April 1. As far as future pricing activities, I am not going to comment on that at the current time.

But given the inflationary environment, I certainly wouldn't expect that we would take additional pricing the rest of the year, but that can also change quickly. But for now I would think we've taken the pricing that we're going to take for the year.

We renewed most of the contracts at current or better margins.

Okay, great. Thank you.

(Operator Instructions). Dana Walker, Kalmar Investments.

Thank you, good morning. Would either the pricing step that you took, the legal discussion going on in the courts or any other factor have affected the way that your orders and/or your shipments would have played out?

We don't believe so. Obviously the pricing we just would have expected that we would have had some of those orders come in a little bit earlier but we don't believe that any of the actions going on in the court system had any impact on our revenue levels in the quarter.

And you would then state that the renegotiations would have also had no effect on order timing and/or shipment timing?

Strategic account negotiation?

Yes.

No, as I said, what we know is that within a given year, we are probably going to get X number of orders from an existing strategic account. What's harder to determine is which [quarter], but I don't think that any of the price negotiations in the first quarter influenced the timing.

Pricing is about how we would expect it, Dana. We had about 2% of pricing benefit in Q1 and we would anticipate a level somewhere in that vicinity for the balance of the year. So pricing is playing out about where we would expect it to be in this type of inflationary environment.

If you have a price increase though about to go into effect unless that is similar to a price increase that you took at the same time last year, would that not auger for somewhat more pass through and thus more net price?

Are you pushing at the margin side of things there?

No, I am just wondering if you have -- you state that you have a price increase that is going in effect on April 1 or (multiple speakers) in effect on April 1. Unless a comparable price increase took place last year at this time, would that not suggest that that 2% net price increase that you talk about in the first quarter, that that wouldn't accelerate?

We would like to think you would have some increased pass through.

Okay, finally from me this comes out more in your segment reporting but with a somewhat better mix reflected in gross margin, would your parts business and/or your service business be growing at a faster pace than it has in the past?

You know, it's growing. It puts the growth rates in both our aftermarket business, whether parts and consumables or service, were above our average growth rates of 1%, 1.5%, 1.6% organically. We were roughly in the vicinity about double that growth rate on a reported basis in service and parts and the consumables, so there really wasn't a huge shift one way or the other in that part of our business.

Let me ask one more related to your plan to introduce the first of your modular industrial products in 2013. You have been talking about this for a while. What implications do you believe this has for share profit margin and for that matter just redefining the Company's internal (inaudible)?

Dana, let's put it in a broader context of the statement I made that we have now probably the most robust new product pipeline in the Company's history and the launch of a new series of large scrubbers and sweepers is only the beginning. We over the next several years have a great balance of industrial equipment coming out and commercial equipment and we are also working on some very interesting underlying technologies that we hope will -- we can incorporate into these products to enhance performance.

Our goal has been all along that whenever we launch a new product, it has to have a higher gross margin than the product it replaces and we see that happening across the board.

Thank you, Chris. Thank you, Tom.

(Operator Instructions). We have no further questions in queue. I turn the call back to the presenters.

We remain bullish about Tennant's future and we are committed to achieving our strategic visions.

Pardon me, presenters. We do have another question.

We do have another question. I like questions better than reading the closing remarks anyway, so go.

Zahid Siddique, Gabelli.

Thanks for taking my question. A couple of questions. The first one on the 12% margin goal by the end of 2013, we have only about seven quarters left and I'm wanting to see if that's still -- I guess you are expecting it to be still doable but given that even -- if you look at 2010, 2011 when your revenue was growing very rapidly, you were around 8% maybe and now you are -- Q1 was 4.5%, 4.6%. So what gives you the confidence over the next seven quarters or so you can actually get to 12%?

A couple things. We do believe that our growth for the rest of this year and into next year is going to be back within targeted range, although we were outside of it just for one quarter now, so I think that's an important point. We do believe our growth rate will return to the targeted range. I think we have shown that our gross margins we are very capable of seeing the higher of our range and you could take a more optimistic view that it might even be a bit better than that.

And we are beginning to gain momentum around our operating expense leverage. We did see meaningful improvement throughout all of last year. We expect to see improved leverage in each of the three quarters for the balance of this year. So our efforts around holding headcount flat, driving process improvement, the implementation of some of the projects that are under way right now gives us confidence that we will continue to see improvement quarter on quarter meaning year on year in the quarters and that will work its way through not only the balance of this year, but we expect all through next year also.

Okay, now moving on to the price increase, did you in today's call quantify that price increase? I might have missed that.

What we said was that our pricing benefit in Q1 was around -- right about at 2% and we expect pricing benefits to be at a similar level for the rest of the year, I guess somewhere in that vicinity, call it 1.5% to 2%.

Okay, and the actual increase on April 1 was 2% as well?

No, how we manage our price increase is we generally give a pretty broad range and that's a list pricing and we will give a given broad range and then we manage our pricing to the level of actual year-on-year increases. We call that price stick and that pricing stick was about 2% in Q1.

Okay, how are the municipal markets doing?

We would -- the one measure that we can look to is our outdoor business, which grew very nicely in Q1 and so it is certainly not great, but it's better.

Okay, last question. you mentioned something about the R&D credit not being taken. Could you quantify or maybe elaborate what that means?

Yes, it is about 100 basis points that is not in our current -- that we didn't take any of that benefit in Q1 because it hasn't been enacted yet and we can't build that into our tax rate as we go through the year, but for a full year, it would be about 100 basis points of improvement, so it does matter.

When do you expect that to be enacted?

It varies all over the place. We have certainly seen it where it didn't get enacted until really late in the year, so for now we will expect it will happen sometime during the year but it's anybody's best guess, in all honesty.

Thank you so much.

We have no further questions in queue.

All right, one more shot at the closing remarks. So we remain bullish about Tennant's future and we are committed to achieving our strategic vision, which is to become a global leader in water-based and other sustainable cleaning technologies. We plan to continue to grow sales through innovating in our core equipment business and advancing our water-based technologies. At the same time, we are focused on controlling spending across the organization, building a scalable business model with improved global processes and achieving further operating leverage and enhanced profitability.

So thank you for your time today and for your questions and we look forward to updating you on our 2012 second-quarter results in July. Take care, everybody.

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