Tennant Co (TNC) 2012 Q2 法說會逐字稿

Good morning and thank you for participating in Tennant Company's second 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 the closing remarks by the 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, Andrea.

Good morning, everyone, and welcome to Tennant Company's second quarter 2012 earnings conference call. First of all, I'd like to apologize for the slight delay. We did have some technical difficulties. So we will just move right forward.

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 second quarter and first six months, and our outlook for the remainder of 2012.

First Chris will brief you on our operations and then I'll cover the financials. After that, we'll open up the call for your questions.

Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations of future performance. Such statements are subject to risks and uncertainties, and our actual results may differ material 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 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'll also provide the most directly comparable GAAP measure.

There were special non-GAAP items in the 2011 second quarter and no such items in the 2012 first six months. Our 2012 second-quarter earnings release also includes a reconciliation of full-year 2011 non-GAAP diluted earnings per share to our 2011 GAAP diluted earnings per share.

Our earnings release was issued this morning via Business Wire and is also posted on the Investors section of our website at tennantco.com.

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

Thank you, Tom. And thanks to all of you for joining us this morning.

In what continues to be a challenging economic environment, Tennant delivered a solid second quarter with revenues of $199.5 million coming in just shy of last year's record-breaking results. And we are very pleased to report a record operating profit of $21.6 million, and higher earnings.

Net earnings rose to $13.7 million or $0.74 per diluted share, up from adjusted net earnings of $10.9 million or $0.56 per diluted share in the second quarter of last year. This performance was driven by our ongoing focus on leveraging our cost structure and improving margins. We are successfully executing our strategies and controlling what we can control.

Let's take a closer look at Tennant sales. Although Tennant's growth in the second quarter was constrained by global economic headwinds, especially in EMEA and Asia-Pacific, the company's organic sales rose about 3%. We are very pleased with the 7% organic sales increase in our largest market, North America, as well as continued steady growth in priority emerging markets such as Brazil and China.

Strategic accounts remain a key driver for our business. And we posted a record second quarter for strategic account sales. We continue to add large national retailers and building service contractors and to fill orders for strategic accounts that we've won over the past couple of years. In addition, two of our environmentally-friendly offerings contributed significantly to Tennant sales in the 2012 second quarter. These included our Industrial Rider Scrubbers equipped with ec-H2O, and the Lithium-Ion Battery Powered Green Machines 500ze City Cleaning Sweepers.

As you know, ec-H2O technology converts water into an innovative cleaning solution that cleans effectively, saves money, improves safety, and reduces environmental impact compared to daily cleaning floor chemicals. The Green Machines 500ze City Cleaning Sweepers offer zero carbon emissions with reduced noise levels to quietly sweep anywhere at any time. These two products illustrate that we're making progress on our goal to be an industry innovation leader and set the global standard for sustainable cleaning.

Regarding our ec-H2O water technology, sales of scrubbers equipped with ec-H2O totaled $67 million in the 2012 first half, which is flat with the prior-year first half. However, we are pleased that in our largest market, North America, ec-H2O sales grew approximately 11%. This was offset by lower international sales primarily in Europe due to the economic conditions, a continued tight credit environment that made it difficult for Tennant customers to obtain financing and an unfavorable foreign exchange impact.

It is important to note that when customers decide to purchase new equipment, they are more frequently turning to ec-H2O. We've tracked this to what we refer to as the attachment rate, which is the percent of scrubbers sold with ec-H2O on board. This percentage increased in EMEA in the 2012 second quarter. And EMEA has consistently had the highest attachment rates compared to all our other geographies. This demonstrates the growing acceptance of ec-H2O even in adverse economic conditions.

Tennant's overall equipment business is down in EMEA, which obviously affects our growth prospects for ec-H2O. Therefore, we are lowering our 2012 full-year sales growth estimate for scrubbers equipped with ec-H2O to a range of 5% to 10%. We remain very confident about the continued success of this innovative technology.

Sales of new products introduced in the past three years generated approximately 27% of equipment sales in the 2012 first half. This is slightly lower than our goal of 30% and is primarily due to all of our 2008 and early 2009 ec-H2O equipped scrubber launches falling out of the calculation of new products.

Being a bit below our goal of 30% is temporary as later this year we start executing against one of the most robust new product and technology pipelines in Tennant's history. We have a number of new products coming out in 2013 including the first product in our new redesigned modular large equipment portfolio. So stay tuned.

Tennant is not alone in facing challenges in the current volatile economic environment. And we are doing everything in our control to increase sales and profitability. Our continuing cost control and process improvement efforts are now all the more timely and beneficial to our bottom line performance.

The company's initiatives to lower Tennant's cost structure are positively impacting gross margins. We are pleased that the second quarter gross margin rose to 44.6%, up from 43.4% sequentially and 42.2% as adjusted in the prior-year quarter. This is above our targeted range of 42% to 43%. All geographies contributed to the improvement.

Our record operating profit reflects the accelerating traction we're gaining from strong expense control and targeted process improvement programs. As I noted, operating profit reached $21.6 million or 10.8% of sales compared to an adjusted operating profit in the prior-year second quarter of $15.8 million or 7.8% of sales. Although we will likely see some seasonal quarterly fluctuations on our way to reaching our ambitious operating profit margin goal, we are on track and remain committed to attaining a 12% operating profit margin in the fourth quarter of 2013.

Moving forward, we anticipate growing 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; increasing our share in new or under-served market segments through channel partners; the introduction of new products and ongoing penetration of emerging markets.

Our strategies are working. And Tennant is performing well in a tough economic environment. We have industry-leading products and technologies, and more in the pipeline. Our strategies to enhance productivity are resulting in greater operating leverage and higher profits. We believe our future remains bright and full of potential.

Now I'll ask Tom to take you through Tennant's second 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.

In reviewing our second quarter results, I think it'll be helpful to put them in context. As we recovered from the recession 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 pre-recession sales levels, and we anticipated organic revenue growth going forward would return to our traditional range of mid to high single digits. This has generally been the case as we have been lapping those very high growth quarters.

The organic sales growth of approximately 1.6% in the 2012 first quarter was lower than anticipated primarily due to order timing in the Americas, as well as the impact with the increased tightening of credit in Europe. Now in the 2012 second quarter, organic sales growth was approximately 2.6% with about 6.8% growth in the Americas, which more than offset the decline in EMEA and Asia-Pacific.

Based on the ongoing economic uncertainty primarily Europe and larger-than-anticipated unfavorable foreign exchange impact on sales, we are lowering our 2012 full-year net sales to a range of $770 million to $785 million. This is expected result in organic sales growth for the 2012 full year in our traditional range of mid to high single digits. Due to our demonstrated improvement in profitability, we are maintaining our earnings guidance and still expect 2012 full-year earnings per share to be in the range of $2.30 to $2.45.

Turning now to a detailed review of the 2012 second 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 second-quarter organic sales growth of approximately 6.8% excluding about 2% of unfavorable foreign currency impact. The growth in the Americas was driven by North America sales of scrubbers equipped with ec-H2O which grew about 11%.

In the Americas last year, we reported 2011 second quarter organic sales growth of approximately 18.9%. So we were pleased with our 2012 second quarter organic sales growth of approximately 6.8% on top of that very good prior-year quarter.

And as Chris noted, 2012 second-quarter sales strategic accounts were especially strong in North America as we continue to gain momentum with our focus on large customers.

In EMEA, organic sales were down about 3.6% excluding a large unfavorable foreign currency impact of approximately 8.5%. EMEA sales of indoor equipment were adversely affected by the European economic conditions and a continued tight credit environment that made it difficult for Tennant customers to obtain financing. We are working diligently to identify additional leasing companies to help our customers secure third-party financing.

Second quarter 2012 outdoor city cleaning equipment sales growth was a positive compared to the prior-year quarter. Higher sales of Green Machines more than offset the lack of Hofmans products that were discontinued in the second quarter of last year. There is sustained interest in the Green Machines 500ze environmentally-friendly city cleaning sweeper that Chris mentioned.

In Tennant's Asia-Pacific region, organic sales were down approximately 7.9%, excluding an unfavorable foreign currency impact of about 1%. Sales were lower in mature markets such as Australia, primarily due to softer economic conditions. Note that in Asia-Pacific last year, we reported 2011 second-quarter organic sales growth of approximately 17.9%.

China is a key market for us. We achieved organic sales growth of approximately 15% in the 2012 first quarter and then 30% in the 2012 second quarter. We remain very positive about the future growth potential in this region.

Tennant's gross margin for the 2012 second quarter of 44.6% was up 240 basis points from 42.2% as adjusted in the prior-year quarter. Gross margins improved in all geographies due to product mix, stable commodity cost and production efficiencies. Tennant's gross margins have strengthened over the past year, rising from 42.9% in the 2011 third quarter to 43.2% in the 2011 fourth quarter, and 43.4% in the 2012 first quarter.

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

Research and development expense in the 2012 second quarter totaled $6.9 million versus $6.7 million in the prior-year quarter. R&D expense as a percent of sales was 3.5% in the second quarter of 2012 compared to 3.3% in the prior-year quarter. We are continuing to invest in our core business, most particularly in preparation for the early 2013 launch of the first model in our new large equipment modular product line.

Selling and administrative expense in the 2012 second quarter totaled $60.4 million or 30.3% of sales compared to $62.5 million as adjusted, or 31% of sales as adjusted, in the second quarter of last year. The 70 basis points improvement stemmed from continued tight cost controls and improved operating efficiencies.

On a sequential basis, selling and administrative expense as a percentage of sales decreased from 34.4% in the 2012 first quarter to 30.3% in the 2012 second quarter. We had higher than usual expenses in the 2012 first quarter due to large self-insured medical workers' compensation and auto claims, which tend to be infrequent and difficult to predict. As I mentioned in our 2012 first-quarter conference call, we did not anticipate this adversely impacting our annual claims patterns.

We continued to invest in our process improvement projects during the second quarter. These initiatives 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 second quarter operating profit totaled $21.6 million or 10.8% of sales compared to adjusted operating profit of $15.8 million or 17% of sales as adjusted in the 2011 second quarter.

As Chris said, the $21.6 million is an all-time operating profit record for any quarter. And it's also interesting to note that the last time we achieved an operating profit of 10.8% was in the fourth quarter of 1999.

We remain on track to continue our operating profit 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 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 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 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 pre-recession peak. Yet we have been able to grow sales from $596 million in 2009 to a record of $754 million in 2011.

During the second quarter of 2012, we had net foreign currency transaction losses of $0.9 million compared to net foreign currency transaction gain of $0.9 million in the year-earlier quarter. This is reported below operating profit, and it was an unfavorable quarter-over-quarter impact of $1.8 million or $0.06 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 to our long-term expected tax rate. Tennant's overall effective tax rate was 32.5% in the 2012 first half. The base tax rate excluding routine favorable discrete tax items was 32.8%, 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're 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 receivable at the end of the 2012 second quarter was $135.1 million versus $140.2 million a year earlier. Quarterly average accounts receivable days outstanding were 60 days for the second quarter compared to 60 days in the 2011 second quarter.

Tennant's inventories at the end the 2012 second quarter were $68.4 million versus $74.4 million a year earlier. Quarterly average FIFO days inventory on hand were 82 days for the 2012 second quarter compared to 81 days in the year-ago quarter.

Accounts payable totaled $49 million at the end of the 2012 second quarter versus $55.7 million in the year-ago quarter. Capital expenditures of $7.5 million in the 2012 first half are higher than the $4 million in the 2011 first half due to planned investments in tooling related to new product development and process improvement projects.

Tennant's cash from operations was $12.5 million in the 2012 first half versus $12.7 million in the 2011 first half. Cash and cash equivalents totaled $38.4 million compared to $41.5 million a year ago.

The company's total debt of $34.3 million declined $7 million from $41.3 million a year ago. Our debt to capital ratio was 13.3% at the end of the 2012 second quarter versus 15.6% a year ago.

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 $6.4 million during the 2012 first half. Reflecting our commitment to shareholder value, Tennant has increased our 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 total cash outlay of $17.6 million. During the first half of 2012, we purchased 360,000 shares at an average price of $42.50 per share for a total cash outlay of $15.3 million.

In April of 2012, our Board of Directors authorized a repurchase of an additional 1 million shares of our common stock. In total, we now have approximately 1.4 million shares remaining under our repurchase program. As of June 30, 2012, we had 18.6 million shares outstanding.

Moving now to our outlook. Based on our 2012 first-half financial results and our forecast for the remainder of 2012, we are maintaining our full-year earnings guidance for 2012 in the range of $2.00 and $2.45 per diluted share as I previously mentioned. We are lowering our net sales range to $770 million to $785 million from our earlier range of $790 million to $805 million. The lower net sales range reflects the ongoing economic uncertainty, primarily in Europe, and the larger-than-anticipated unfavorable foreign exchange impact on sales.

For the full-year 2011, adjusted earnings per share were $1.95, a net sales of $754 million.

Our current 2012 full-year financial outlook includes the following expectations -- modest economic 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 2% to 3%; minimal inflation net of cost savings initiatives and selling price increases; a gross margin slightly above 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 fourth quarter of 2012 to be higher than the third quarter of 2012. The fourth quarter historically has been seasonally very strong for Tennant. Further, we also anticipate improving our profit margins in each quarter of 2012 compared to the same quarter in the prior year as we move toward 12% in the fourth quarter of 2013.

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

Andrea?

(Operator Instructions).

Your first quarter comes from the line of Scott Graham with Jefferies.

Your line is open.

Hey, good morning. Very nice quarter.

Scott. Thank you.

Thanks.

Hey, I just wanted to ask you about the goal -- the 12% margin goal. When we started this thing, it was a lot of SG&A leverage being the primary tenet of this, no pun. I would just tell you that from what I've heard in the last couple of quarters, it sounds to me as if there's going to be a fair amount -- more balance between cost reductions potentially hitting the gross margin line, as well as some mix aiding the gross margin line. Can you kind of comment kind of on where you were in your thinking when you first announced this last year versus kind of what's going on now, which seems to be a lot more cost-reduction oriented?

Yes, I'll take that one, Scott.

Yes, first of all, we set our targeted range of gross margins when we marched down the path of hitting 12% to be 42% to 43%, hoping that we might have the opportunity to do better than that. So we had that expectation going in. But in all honesty, we thought it was really important to change some things in our organization to put more pressure on getting tougher on managing operating expenses.

And we've been successful on both fronts, we believe. We do believe now that we potentially have the opportunity to stay above our 43% gross margin range. And some of that's due to circumstances today around the commodity cost and mix and just the great management of our supply chain. We'd also say that we are starting to see some of our indirect spending benefits that we thought would primarily benefit our operating expenses flowing through the gross margin line.

So that is driving some of our gross margin improvement. And we still see room for implementation in our operating expenses. So I would acknowledge probably we'll eventually adjust our targets a bit, not the 12% but the mix between the pieces might be adjusted. We're not ready to formally do that yet, but I'd say on par, we are a bit more balanced in our approach.

Thanks a lot.

You bet, Scott.

Your next question comes from the line of Joseph Maxa with Dougherty & Company.

Your line is open.

Thank you. I just want to talk about the mix in the back half as far as the quarterly revenues. I mean you did talk about Q4 being stronger than Q3. But given the uncertainties in Europe and your holidays, should we be thinking at Q3, you may see a little more of a decline than you did in a year ago sequentially from Q2?

I would say it should be potentially a little bit more. I think that would be fair to say, Joe, I mean on an absolute dollar basis.

How we think about it is that the typical mix in the back half would be we would typically do about 2% more revenue as just a percent of the total in Q4 than we do at Q3. That would kind of be the historical mix. And 2 percentage points difference is a pretty big number. And I would say it could even skew a little bit more that the percent of the total of your revenue might even be a bit higher than 2% higher than Q3 in Q4.

But your sequential comment is directionally correct also.

And on the gross margin front, slightly above 43% seems a bit conservative given what you've accomplished in the first half.

Yes. And part of that depends upon what you determine slightly. But yes, I mean it's -- we remain conservative in our approach to gross margin. And we would tell you that that's prudent in the world of commodities and how fast things can move on you. We -- but you have to always remember we've historically seen significant inflation. And that can shift very quickly on us. But based on our performance, it's a fair comment to say we're being pretty conservative there.

I mean lastly, I just wanted to maybe get a little more color on your strategic account focus. You've been focusing here for a while having some success.

Is there significant opportunity still in those accounts?

And this is Chris.

Absolutely. You saw that we had the strongest strategic account quarter ever in the second quarter. And we're continuing to win national strategic accounts. And we're making great progress on the global strategic accounts that we are focusing on. And we expect that to continue. I mean, if you look at the back half of this year, strategic accounts will continue to be a growth driver. North America will continue to be a growth driver, emerging markets, as well as ec-H2O.

But we've been in our long strong run with the strategic accounts, and we still think the best is yet to come.

Very good. Thank you.

(Operator Instructions).

Your next question comes from the line of Andrew Gadlin with CJS Securities.

Your line is open.

Good morning.

Hi, Andrew.

I was wondering if you could elaborate a little more on the China and Brazil growth. Obviously there's been some news out about weakness in China, and if you could give us more detail there, as well as kind of the trend within the quarter. Did it exit the quarter as strong as it started it?

I'll take that one, Andrew.

We would -- there certainly is GDP forecast in both of those geographies that are slower than they've been if you look backwards. We would tell you that in both instances, particularly China, that our respective shares are so low and that we just don't think that a GDP differential of a few percentage points, whether it's 7% or 9%, will impact the momentum we have in our business. And our business is really about -- in a country like China, it's about the mechanization of cleaning, and it's replacing labor, and it's driving economical improvement. So we don't see the economy having a material impact on our business.

We had constant demand in the quarter. And we expect to see, at minimally, a consistent back half that we saw in Q2 from a growth perspective. And we see really nice strength in Brazil also. And so we were -- remain extremely bullish on both of those economies.

And it's important to note we had stronger sales in China in the second quarter than we did in the first. As a matter of fact, growth rates were about double.

Wow. Are the comps in the back half for the year more difficult or similar to the first half?

They're a little bit more difficult in China. But they're not all that much different. I mean we did finish the year pretty well in Q4 in China. But we -- they're not materially different.

Okay. You had a pricing increase you've put in this quarter. Has that stuck?

We actually took it at the very beginning of the quarter in the Americas. And the answer is we did get about 1.5% of pricing benefit in Q2. And that's lapping a quarter where we took pricing about halfway through the quarter last year.

Year-to-date, our pricing benefit is around 2%. And we expect to see pricing benefits for the rest of the year in the 1.5% to 2% range. And we always like to remind people, I mean we did go through a period of significant inflation. And while we're seeing cost moderating now, we think the pricing was warranted and we think it will continue to stick on the market.

And then, Chris, one of the machines that you mentioned was the Green Machines City Sweeper. And I --

Yes. The 500ze.

And I believe that that's a largely European product or -- that the majority of sales there are to Europe. Is that right?

Yes.

So, I mean, obviously it must have been pretty strong. But it would suggest that the rest of the European business was down significantly given I think it was negative 12% generally. So that was strong.

Yes.

The other piece of the business must have been weaker. Is there -- are people waiting for some of the larger equipment product launches in 2013?

No. I mean, our city cleaning business has performed extremely well in the first half versus, again, remember, a very weak 2011. So it's really the strongest part of our business in Europe.

And you're absolutely right. If you look at our organic sales decline in Europe, which was 3.6%, that means that the indoor business is not performing quite as well. But it's not because of our strategies or how we're executing; it's based on economic conditions. And what we're seeing is, as we've mentioned, tight credit means our customers can't get financing. We're working on that. We have a couple of partners where we're in depth. Again, we're hoping to have that resolved relatively quickly.

And a lot of our customers have not cancelled orders. What we're seeing is that they are beginning to delay some of them, or that they are ordering fewer machines than what they initially had anticipated and delaying the rest of the order until the back half of this year.

Okay, thanks. And final question just on Europe, how would you compare where Europe is today versus your expectations, say, three months ago?

It deteriorated a bit. I mean, we commented on that at -- after we released Q1 that we didn't expect any improvement in Europe for the rest of the year and then maybe into next year, and in fact that we could see things get even a little bit worse. And I'd say they're a bit worse than we had anticipated in Q2 than Q1. And we continue to expect that it's going to be rocky the rest of the year.

So we're -- but it did come in a little lower than we would have anticipated when we gave our guidance back in -- after Q1.

But it doesn't sound like it's a drastic change.

Not dramatic. I mean, it's obviously -- it's our number one concern that we have right now as is with many other companies. We think we're doing a great job of managing it. Our margins are getting better. We're focused on the right things. But it's the number one concern on our list. And I think everything in our control is being aggressively managed. And we're not -- so when things get better, we're managing accordingly.

Thanks very much, gentlemen.

Thank you.

(Operator Instructions).

And your next question is a follow-up from the line of Scott Graham with Jefferies.

Your line is open.

Yes, I think very simply, I was just kind of wondering a little bit about capital allocation. I know that you guys have made a living on keeping your balance sheet really clean. But I'm just curious; is there anything out there beyond share re-purchases -- I'm obviously talking about M&A -- that might be of interest right now with maybe asset prices a little bit lower in Europe, the dollar is stronger? Is there anything internationally where you guys might be focused on going forward to kind of spread the Tennant brand out a little bit?

Scott, I wouldn't say that anything's changed in a meaningful way from how we're looking at things just because the economy's a bit weaker and maybe prices are lower. But we are continuing to look at a -- possible acquisitions. And they'd really be focused in two areas. One would be on technology deals, similar to the Water Star acquisition we made a year ago where we could accelerate our innovation platform, particularly around water-based technology. So we're aggressively looking at things that could drive our innovation agenda.

And that would -- that's our number one priority from an acquisition standpoint or partnership standpoint. And number two would be things outside of North America. And they would be acquisitions that would allow us to expand our sales and service coverage and aggressively move faster in a given market, similar to what we did with the Alfa acquisition in Brazil.

And there's -- our deals were interested in other parts of the world. And I can't be specific there. But we'll continue to look at those. And those are always tricky and tactical. But if the opportunity presented itself, we wouldn't hesitate to look at a deal like that and accelerate our growth patterns.

Okay. Thank you.

Could you also maybe elaborate on the large equipment launch next year, kind of when, what, where, what's the target to the market? Maybe just give us a little bit more on what's going on with that.

Right. What we've done is we've really pretty much fully reinvented our -- or in the process of reinventing our large equipment portfolio. And we're -- they're being redesigned. And they are going to be built on a modular basis. So we're taking common components -- the operator compartment, the engines, water recovery systems, steering, braking systems that are common across most of the line -- and ensuring that we can plug and play those modules in as needed on the manufacturing line itself, which will help us reduce costs -- the cost of manufacturing the products.

We are maintaining and, in many cases, enhancing the performance of these machines and lowering the total cost of ownership to our customers. And so this is a big initiative for us. Our -- we built this company based on our large industrial equipment. It represents still today around 40% of our sales. It has been a little bit soft over the last number of years; part of it because of the economy and part of it is that we have aging products. The first new product will be launched in the first quarter of next year. And because we're building these off of platforms, our expectation is that once we launch the first one, we should be able to follow up on a more regular cadence over the next several years as we really replace the entire line.

But it's not the only thing we're doing. As we said, we have the most robust new product and technology pipeline in the company's history. We start executing against that in the fourth quarter of this year as both industrial products as I just talked about, it's also some interesting new commercial products. And also -- and it really is the first time we're working on some underlying technologies that we can plug and play into these products as they launch that we also think will add tremendous value to our customers and help us grow sales.

So over the next three-plus years, we're pretty excited about what we're doing on the new product side and our core business. And then on top of that, you have what we're doing in sustainable water-based technologies as well.

Thanks very much.

Thanks, Scott.

And as there are no further questions in the queue, I turn the call back over to the presenters for any closing comments.

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.

Thank you for your time today and for your questions. We look forward to updating you on our 2012 third quarter results in October.

Take care, everybody.

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect.