Tennant Co (TNC) 2012 Q4 法說會逐字稿

Good morning. My name is Adam and I will be your conference operator for today. At this time I would like to welcome everyone to Tennant's fourth quarter and full year 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session.

(Operator Instructions)

As a reminder, today's call is being recorded. Please remain on the line for closing remarks after the Q&A session. I will now turn the call over to Vice President and CFO, Tom Paulson.

Thanks, Adam. Good morning, everyone, and welcome to Tennant Company's fourth quarter 2012 earnings conference call. I'm Tom Paulson, Vice President and Chief Finance Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO; Pat O'Neil, our Treasure; and Karen Durant, our Vice President and Controller. Our agenda today is to review Tennant's performance during the 2012 fourth quarter and full year and our outlook for 2013. 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. There were special non-GAAP items in the 2012 third and fourth quarters and in the 2011 second quarter. Our 2012 fourth quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results. Our earnings release was issued this morning via business wire and is also posted on the Investor Section of our website at www.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. As you saw in today's earnings release, we are pleased that our efforts to lower costs and improve margins have gained significant traction. In the 2012 fourth quarter, our operational excellence initiatives help generate our strongest gross margin since 1999 -- a fourth quarter double-digit operating profit margin for the first time in 12 years and record fourth quarter adjusted earnings. Also worth noting, fourth quarter operating profit increased 23% despite an approximate 2.4% organic decline in sales as compared to the prior year.

Overall, our fourth quarter sales were not where we wanted them to be. But importantly, the Company returned to revenue growth in North America, as we expected. You may recall that Tennant sales in North America, our largest geography, rose 4.7% in the 2012 first half and then declined 3.3% in the third quarter as economic uncertainty caused some customers to delay capital equipment purchases. In the 2012 fourth quarter we were pleased to see North America rebound to a 2.2% revenue growth.

Turning to a few highlights across our geographic regions. Contributing to Tennant's revenue in the Americas were sales to strategic accounts and continued double-digit growth in Latin America. Our strategic account business is a key revenue driver for us. Sales in the fourth quarter began to benefit from a global agreement to supply T1B Walk Behind Scrubbers to the worldwide retail stores of a high-end manufacturer of consumer electronics, computer software and personal computers. During 2013, we plan to build on our positive momentum in the Americas by further increasing our share of business with strategic accounts, successfully launching 25 new products and continuing to aggressively grow in Latin America.

Tennant sales in the Europe, Middle East, Africa, EMEA region, were down in the first quarter due to economic headwinds in Europe. Despite this, many good things are happening there operationally. We have worked to continue to improve profitability in EMEA and succeeded in lowering cost and enhancing margins in the fourth quarter. For instance, you may recall that in the 2012 third quarter we transitioned to a master distributor arrangement in the Central Eastern Europe, Middle East and Africa markets, which includes the divestiture of our Tennant Austria business.

This new model resulted in lower selling prices; however, a number of Tennant employees also transitioned to the master distributor, leading to reduced selling and back office infrastructure costs for us. Sales growth was positive for these markets in the 2012 fourth quarter and we remain confident this new go-to-market approach will enable us to grow more aggressively in the future.

Also worth noting, we have now duplicated our successful North America strategic accounts structure and processes in an EMEA. Already this new approach is beginning to produce results in Europe. In addition, we now have new leadership in the important market of France. While challenging economic conditions may persist in EMEA in 2013, we now have the right people, structure and strategies in place to take advantage of growth opportunities once the macro environment improves.

In our Asia Pacific region we recently filled key leadership positions in China, which will help support future growth there. We are in the process of making significant changes in our go-to-market strategy in China, including expanding into the western part of the country where we plan to open an office this year. Further, we are also expanding our manufacturing capabilities and we'll locally manufacture our first ever industrial product in China. In 2013, we expect to achieve double-digit sales growth in this high potential country.

Innovative products and technologies are another driver of Tennant sales. As I mentioned last quarter, we are starting to execute against one of the most robust, new product and technology pipelines in our history. In addition to introducing 17 new products in the 2012 fourth quarter, we plan to launch another 25 products in 2013. These include -- the T12 Rider Scrubber, which is the first new products in Tennant's redesign modular large equipment portfolio; T3 Orbital Scrubber, which provides a chemical-free way to clean and strip floors; and the B10, Tennant's first rider burnisher, which enables rapid cleaning and polishing of large areas.

These new, core equipment offerings are engineered to improve cleaning performance and operator safety, lower operating costs and reduced environmental impact. The rollout of these new products is proceeding as planned. At this point, we expect to launch a steady stream of industrial and commercial products through 2016 and the majority will be built on modular equipment platforms. Modularity allows us to offer a wider range of possible machine features in a more efficient and cost-effective manner. The next product in our redesigned large modular equipment portfolio will be introduced in 2014, followed by at least one new large equipment product in 2015 and 2016.

Let me comment now on our sustainable water based technologies. First, ec-H2O -- Tennant's ec-H20 technology converts water into an innovative cleaning solution that cleans effectively, saves money, improve safety and reduces environmental impact compared to daily cleaning floor chemicals. We continue to increase the market acceptance of this technology in 2012 and the majority of our sales of applicable scrubbers now have ec-H20 on board. In 2012, scrubbers sold with ec-H20 on board totaled $141 million. Excluding EMEA, 2012 ec-H20 sales increased a healthy 7% over 2011. Overall, we expect ec-H20 sales to grow approximately 5% in 2013.

Turning to Orbio -- you will recall that the first product under our Orbio technologies brand is the Orbio 5000-Sc. It is a self-contained unit that creates, stores and dispenses an effective, ready-to-use, multipurpose cleaning solution that works with most existing cleaning equipment and methods. The Orbio 5000-Sc uses split-stream technology to automatically generate a cleaning solution that is always at the right dilution so there is no need to mix concentrated cleaning chemicals. We are still in the early adoption stage with this new technology. However, having a broad cross-section of satisfied customers confirms that the technology performs well.

In the 2012 third quarter we began to offer a capital purchase option, in addition to the initial rental model, resulting in increased Orbio 5000-Sc sales momentum in the 2012 fourth quarter. Our Orbio technologies group continues to move forward on their product and technology road map. As I have previously mentioned, Orbio is currently developing an exciting new product with split-stream technology for release in 2014. It will deliver an antimicrobial solution as well as an effective multi-surface cleaner for use on hard surface floors, carpet and spray and wipe applications in a wide variety of customer segments. We expect the addressable market for this product to be much larger than the Orbio 5000-Sc.

Our enhanced profitability in 2012 is due in part to our continuing focus on process improvement programs. The first phase of these initiatives is designed to standardize and simplify our global processes in the areas of pricing, invoicing and collections, and machine configuration. We expect to complete the initiatives underway approximately one year from now. Our efforts are enabling us to build a scalable business model, reduce costs and make it easier for our customers worldwide to do business with Tennant.

Our strategies are working. We have demonstrated that the Company is capable of reaching our ambitious long-term goal of a 12% operating profit margin. As we have previously stated, however, obtaining this milestone requires a return to organic revenue growth in the mid to high single-digits. At this time, we are uncertain that global economic conditions, particularly in Europe, will support that range of sales increases in 2013. When the global economy rebounds and demand for our cleaning solutions gains momentum, Tennant is poised to return to our target revenue growth range and to meet our 12% operating profit margin goal.

Moving forward, we remain focused on growing Tennant's revenues through introducing a strong pipeline of core new products; increasing market penetration of our sustainable cleaning technologies, including scrubbers equipped with ec-H20 and Orbio cleaning solutions; expanding our strategic accounts business with particular emphasis on large regional and global customers; ongoing penetration of emerging markets; and building our share in new or underserved markets through channel partners. We are excited about Tennant's future.

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

Thanks, Chris. In my comments today all references to earnings per share on a fully diluted basis. Also, please note, as I go through the results, I will generally not comment on the 2012 full year financials as those were detailed in the earnings release.

In reviewing our 2012 fourth quarter results, I think it will be helpful to put them in context. As we recover 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 as we lap those very high growth quarters. That was a case in the second half of 2011 with organic sales growth of approximately 6.5%.

The organic sales growth of approximately 0.8% in the 2012 first nine months was lower than initially anticipated, primarily due to an organic sales decline in EMEA of approximately 3% as a result of the continued challenging economic conditions in Europe. Based on the continued economic uncertainty in our third quarter earnings release, we lowered our estimated 2012 full year net sales to a range of $735 million to $745 million. Our actual sales for the 2012 full year were within that range, coming in at $739 million.

For the fourth quarter ended December 31, 2012, Tennant reported net sales of $187.5 million compared to $193.2 million in the prior year quarter. Sales declined approximately 2.4%, excluding an unfavorable foreign currency exchange impact of approximately 0.5%. As Chris mentioned, despite lower sales, operating profit grew 23% and our operating profit margin was 10.1%. This was the first double-digit fourth quarter operating profit margin since 2000. Fourth quarter 2012 net earnings as adjusted were $11.8 million, or $0.62 per share as adjusted. These numbers exclude the tax benefit from an international entity restructuring of $2 million, or $0.11 per share. In the year ago quarter, Tennant reported net earnings of $11.3 million, or $0.59 per share.

Turning now to a more detailed review of the 2012 fourth quarter. Our sales were categorized in 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, 2012 fourth quarter organic sales increased approximately 3.3%, excluding about 0.5% of unfavorable foreign currency impact. Sales rebounded in North America due to higher sales to strategic accounts and particularly strong sales of the T1B Walk Behind Battery Powered Scrubbers. Sales in the emerging market of Latin America remained robust with organic sales growth of approximately 15% for the 2012 full year.

In EMEA, organic sales were down about 14.6%, excluding an unfavorable foreign currency impact of approximately 2%. EMEA sales in the 2012 fourth quarter continue to be adversely impacted by the macroeconomic conditions in Europe and we also have lower sales to large customers compared to the 2011 fourth quarter. In EMEA, sales of scrubbers equipped with our ec-H20 technology declined in 2012 due to the economy. It is worth noting, however, the percentage of applicable scrubbers sold with ec-H20 on board, which we call our attachment rate, increased 160 basis points in 2012. EMEA has a highest attachment rate compared to all of our other geographies.

In Tennant's Asia-Pacific region, organic sales decreased 4.9%, excluding a favorable foreign currency impact of about 0.5%, resulting from softening economies particularly in Australia. China is a key market for us. We achieved organic sales growth of approximately 5% for the 2012 full year with 15% in the first quarter, 30% in the second quarter, 10% in the third quarter and negative 20% in the fourth quarter. There was some unusually large sales of city cleaning equipment in the 2011 fourth quarter, so excluding those deals, China grew about 5% in the 2012 fourth quarter. As Chris said, we remain very positive about the future growth potential in China and expect double-digit growth in 2013.

Tennant's gross margin for the 2012 fourth quarter of 44.5% was up 130 basis points from 43.2% in the prior year quarter. Gross margins benefited from favorable product mix, stable commodity costs and production efficiencies. Despite the lower year-over-year sales level in the 2012 fourth quarter, Tennant was still able to perform above the high-end of our target gross margin range of 42% to 43%. Research and development expense in the 2012 fourth quarter totaled $7.7 million, even with the $7.7 million in the prior year quarter. R&D expenses as a percent of sale was 4.1% in the fourth quarter of 2012, compared to 4% in the prior year quarter. We continue to invest in our core business, most particularly in preparation for the recent January 2013 launch of the T12, which is the first new product in our redesigned modular large equipment portfolio.

Selling and administrative expense in the 2012 fourth quarter totaled $56.8 million, compared to $60.4 million in the fourth quarter of last year. As a percent of sales, S&A was 30.3% in the 2012 fourth quarter, compared to 31.3% in the prior year quarter. S&A spending decreased 6% on a dollar basis and was down 100 basis points as a percent of sales due to continued operating leverage improvement.

Our 2012 fourth quarter operating profit totaled $19 million, or 10.1% of sales, compared to operating profit of $15.5 million, or 8% of sales in the 2011 fourth quarter. Operating profit margin improved 210 basis points versus the 2011 fourth quarter due to higher gross margins and improved operating efficiencies. We have been successful leveraging our existing workforce and continue 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 $754 million in 2011 and, now, $739 million in 2012. We remain committed to our goal of a 12% operating profit margin by successfully executing our strategic priorities and assuming the global economy improves.

However, as we have previously stated, achieving this milestone requires a return to organic revenue growth in the mid to high single-digits. 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 of 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. If the economy continues to adversely impact our ability to reach targeted organic revenue growth in the range of mid to high single-digits, the achievement of our 12% operating profit margin will likely take a bit longer than our original target of fourth quarter 2013.

We continue to successfully execute our tax strategy. The 2012 fourth quarter and the previous 2010 restructurings and realignments of Tennant's international operations continue to provide commercial benefits and financial reporting efficiencies as well as a more tax efficient capital and legal entity ownership structure. It is 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 for 2012 is 30.6%. This includes the 2012 fourth quarter $2 million tax benefit, which primarily consisted of the recording of a foreign tax credit for our US taxes as a result of our international entity restructuring that created a new, more tax efficient intercompany financing structure in Europe.

The base tax rate, excluding a special item and routine favorable discrete tax items, was 34%, which was just above our targeted range of 31% to 33% due to the mix of full year taxable earnings by country. Note that on January 2, 2013, the Federal R&D tax credit was retroactively extended from January 1, 2012, through December 31, 2013. As a result, we will recognize the benefit of the 2012 Federal R&D tax credit of approximately $800,000 as the discrete tax item in the first quarter of 2013 -- the period in which the legislation, including the reinstatement, was reenacted -- was enacted.

Turning now to the balance sheet. Again, we are pleased with the Company's progress. Net receivables at the end of the 2012 fourth quarter were $138.1 million versus $128.9 million a year earlier. Quarterly average accounts receivable days outstanding were 60 days for the fourth quarter compared to 58 days in the 2011 fourth quarter. Tennant's inventories at the end of the 2012 fourth quarter were $58.1 million versus $65.9 million a year earlier. Quarterly average FIFO days inventory on hand were 78 days for the 2012 fourth quarter, down 10 days compared to 88 days in the year-ago quarter. Capital expenditures of $15.6 million in 2012 are higher than the $13.9 million in 2011 due to planned investments in tooling related to new product development, manufacturing equipment and process improvement projects.

Tennant's cash from operations was $47.6 million in 2012, a decrease of $9.3 million versus $56.9 million in 2011. Cash and cash equivalents totaled $53.9 million, an increase of $1.6 million compared to $52.3 million a year ago. Included in these 2012 results were cash contributions of $16.7 million to our US pension plan, of which $15 million was discretionary. This is an economically efficient use of cash and we had previously not made a cash contribution to the US pension plan since 1987. Note that this pension plan was closed to new participants back in 2000. The Company's total debt of $32.3 million declined $4.2 million from $36.5 million a year ago. Our debt to capital ratio was 12.1% at the end of 2012 versus 14.2% a year ago.

Regarding other aspects of our capital structure, Tennant is currently paying a quarterly dividend of $0.18 per share. We paid cash dividends of $12.8 million in 2012 and $12.9 million in 2011. Reflecting our commitment to shareholder value, Tennant has increased our annual cash dividend payout for 41 consecutive years. During 2011, we purchased 469,304 shares at an average price of $37.51 per share for a total cash outlay of $17.6 million. During 2012, we purchased 621,340 shares at an average price of $40.78 per share for a total cash outlay of $25.3 million. In April 2012, our Board of Directors authorized the repurchase of an additional 1 million shares of our common stock. As of December 31 2012, we now have approximately 1.1 million shares remaining under our repurchase program.

Moving now to our Outlook. Based on our 2012 results and expectations of future performance, we estimate 2013 full year earnings in the range of $2.20 to $2.50 per diluted shares on net sales of $750 million to $770 million. For the full year of 2012, adjusted earnings per share were $2.08 on net sales of $739 million.

Our current 2013 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 zero to 1%; gross margin performance similar to 2012; research and development expense of approximately 4% of sales; and capital expenditures in the range of $18 million to $20 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 the 2013 quarterly sales pattern to be similar to that back in 2011. Further, we also anticipate increasing our operating profit margin in 2013 with the majority of the improvement expected in the second half of 2013. And now we'd like to call -- open up the call to questions. Adam? Thank you.

Yes, I am.

(Operator Instructions )

And your first question comes from the line of Joe Maxa from Dougherty & Company. Your line is open.

Thank you. Good morning, gentlemen. Question on -- so you talked about the seasonality -- this expected this year similar to 2011. You had a pretty solid second quarter. Is that the -- I mean, are you seeing order patterns adjust to the similar things?

Yes. More along the lines, Joe, of -- that we would expect -- we certainly expect growth in Q2 versus the prior year, but we would expect a stronger back half. So the way to think about it is we're going to look and see our momentum build during the year. We think that the tougher comparable is in Q1 and Q2, obviously, but we expect to see some strengthening in the back half of the year. We don't expect -- we do expect revenue growth to be a bit higher and our absolute level revenue to be bigger in the back half, but not all the way back to kind of historical normal seasonality. But if you looked at the flow by quarters in 2011, that's a pretty good way of thinking about it.

Right. Okay. That's helpful. And I want to talk about the new product introductions. A number introduced last quarter and coming through this year -- how much of that is incremental, meaning new areas versus retrofit or upgrades of existing product lines?

Joe, this is Chris. You know, I think that the T12 industrial modularly built scrubber, while it is a replacement of an existing product, I think the changes we have made to it are substantial enough to have it be viewed as incremental, especially the fact that we are now able to move a product like that into China and build an industrial product for the first time in our history, which will give us an advantage in terms of the right product at the right price point in a very fast-growing market. So I would say that's semi-incremental to what we have done before. The Orbital Scrubber and the B10 Rider Burnisher are completely incremental. We did not have those products in our product line before. What we found was that they were important products to certain parts of our customer base. While we may have been the majority supplier to those customers, we were allowing our competitors in with those products because we just didn't have them. So we are excited about those prospects.

Thank you. And then on the -- was it the T12 -- I may have missed it -- that you had an agreement or a contract for a large retailer -- global retailer?

No. It's actually a T1B. It's a small walk-behind scrubber -- lithium battery-powered scrubber.

Okay. Thanks, guys. I will jump back in the queue.

Sure, Joe.

Andrew Gadlin from CJS Securities.

Good morning. Stripping out the effect of negative effects from your guidance next year comes up with a top line of 2.5% to 5% growth. Can you talk about some of the components of that -- stripping out pricing mix and volume?

Well I will make a couple of comments and let Chris add onto that. Yes, if you went down the middle of a range of our foreign currency impact, the actual organic growth would be 2% -- a bit over 4.5%. So you have that right, Andrew. If we looked at the most important elements of driving that organic growth, obviously new products are going to matter. That should be measurable within our business on a global basis. We expect to see growth in our ec-H20 business. And very importantly, we expect continued growth in North America and growth in our emerging markets of Brazil and China. We expect some return in portions of Asia Pacific and EMEA remains the question mark.

And in the best case, we hope we can eek out some growth and see growth on an organic basis year-on-year. We can also paint a scenario at the lower end of our range where that business could remain tougher.

I would just add to that -- if you look at the various growth elements, I think the important thing is that we have many different ways to grow. We hope we are being conservative, but at times remain uncertain. And we have just gone from strength to strength in our strategic account business and you see by the latest announcement of a big deal that, that continues. Remember, we launched no new products in 2012. Not -- right? And now we have the most robust new product pipeline in the Company's history with 42 major and incremental products being launched in 2013. I think that maybe our biggest opportunity, quite frankly -- emerging markets steady as we go double-digit growth and we have, actually, planned to eek out a little bit of growth in Europe in 2013 too.

Great. And you -- can you talk a little about the ramp in sales for new products with the back end loaded?

Well I think that we build momentum as the year goes on. We introduced a number of products in the fourth quarter. Most of those start to ship in the first quarter of this year and I think we just kind of ramp up the momentum as the year goes on. So I think you will see -- every quarter that we will be showing a stronger new product sales growth.

And for the strategic account that you signed in the fourth quarter, can you talk a little about how many quarters you would expect those orders to be spread over and if there's a ramp in that order as well?

Yes. There is a ramp. And the ramp in this case, I think, is something in the 6 to 12 month range. I mean we have some strategic accounts where we signed a deal and it can take 24 months to 36 months before they totally roll over their product portfolio. In this case, it's a new customer that we've never had before and they are going to be adopting our T1B lithium-ion battery-powered scrubber here over the next 6 months to 12 months.

Okay, great. Thank you very much.

You bet, Andrew.

Daniel Rizzo from Sidoti and Company.

Hi, guys. Just a quick question with the pension contribution -- I know that was the first time in a long time. Is that something we can expect going forward?

No. We really took the opportunity that we had the excess cash -- obviously returns as money sitting in the bank are pretty miniscule. And we could take the opportunity to really completely de-risk our pension plan and we should not ever have to make another contribution. And at the same time, it will lower our operating costs going forward as we manage that. So it was a really good use of cash and a nice opportunity to use our balance sheet to our advantage.

Okay. And then you mentioned that in the EMEA that you saw decline in the ec-H2O because I'm thinking it's so weak over there. Are you like noticing like a trade down during tough economic times that maybe they stopped buying that and start buying like lower priced or not as popular scrubber's or riders?

No. It's actually the reverse. What we said was that our attachment rate in EMEA improved by 160 basis points. So ec-H20 actually was one of the best performing products in the European product portfolio. And Europe continues to have the highest attachment rates for ec-H20 of any geography within Tennant.

So we are seeing deferral's of the purchase decision and they are taking longer but not a trade down in the types of products that they are buying.

Okay. All right. Thank you guys.

You're welcome.

Scott Graham from Jefferies.

Good morning.

Good morning, Scott.

Just wondering -- you guys did a remarkable job on the SG&A line. You indicated, I think in your comments, Tom, operating leverage but my suspicion is that there was a lot more structurally going on there than operating leverage on a sales number. They didn't really grow that much. So I was just kind of wondering what you are doing in SG&A right now to push that number down.

I mean, the biggest thing -- one of the biggest things is we are not adding heads. And we have created efficiency in our processes. We've begun to globalize. We made system changes. And that is lowering our operating -- you know, that is holding costs flat. We also executed against the project that we talked about in Eastern Europe, Middle East and Africa that actually moved employees from our side, as well as infrastructure costs, over to our partnership in our master distributor agreement. And the other area that we are seeing a benefit is from our indirect spending reductions. We are using our sourcing organization to negotiate with our suppliers and we are beginning to see that catch hold on large purchases that we are taking advantage of that. And we're seeing some of the same benefits flow through our indirect efforts that primary flow through operating expenses as we've seen go through the cost of goods sold over the last five or six years.

And then I just add, lastly, as we mentioned, we are beginning to see benefits start to flow through and impact our financial results from our process improvement projects. You know, the standardization and globalization of our processes.

Great. Thank you. The other question I have for you was actually fairly simple. Uses of cash for this year -- you guys are always a good cash generators. Maybe can you just give us an idea of how you see that?

Yes. Really no major change as we go forward. We will continue to fund our capital spending, are working capital needs, as we have. We obviously expect to grow, so we expect some working capital to go into the business. We will continue our dividend. It certainly our expectation and we will, more than likely, continue to repurchase shares. We have been aggressive over the last couple of years, relative to historical times. And assuming that the economics make sense, we will continue to be in the market repurchasing shares and using our authorization.

So it wouldn't be unreasonable to assume that we'd be buying back a similar number to what we bought back over the last couple of years. And also we will continue to look at modest acquisitions. And I wouldn't expect us to do anything significant. But our two focus areas there are transactions that would expand our sales and service coverage, like our previous Brazil acquisition, Alfa, and also technology deals that expand our innovation platform or our sustainability platform. So those will be areas that we would love to put our cash to use and create growth opportunities.

Would you say, Tom, that given that the debt is lower and in the absence of acquisitions, which are always difficult to project, that it would seem that share repurchases is going to be that -- may be the first place things stop? Apart, of course, from CapEx.

Stop or --

No, I mean that's where the cash would go toward.

Yes, it's been a significant cash outflow over the last couple years. And assuming the economics make sense, we will continue to go back going to the market and purchase our shares.

Great. Thanks a lot.

You're welcome.

(Operator Instructions)

John Rosenberg from Loughlin Water Partners.

Good morning. A couple questions -- I might have missed something. You mentioned how ec-H20 grew 7% throughout the Company, excluding EMEA. And then I believe, Tom, you amplified that a bit and talked about how EMEA was down around 3%. You mentioned attachment rates. What was the attachment rate from EMEA? Is that growing?

Yes. We said that it actually improved by 160 basis points. We didn't give a precise actual number. What we can say is it's north of 50% because we said a majority of our scrubber's are being sold with ec-H20 on and Europe is the highest attachment rate. So it's safely above a 50% attachment rate.

Can you give us an idea of what the attachment rates are in other geographies or throughout the Company?

You know, I would just say directionally Europe is the highest and it's comfortably above 50% -- and call it 60%, roughly. And other countries are similar but below that level.

Okay. And in addition to that, regarding attachment rates, are you guys seeing any type of pattern in terms of adoption of ec-H20? Do you -- when you sell into a large account, do they tend to buy incrementally and then go into the product or any particular patterns you could discern or talk about?

This is Chris. I mean, I think that our sales of ec-H20 are to a broad-based set of customers. We have had a lot of success in the retail vertical market. We've had a number of building service contractors in the US and in Europe also adopt the technology. But we are also seeing smaller companies who like the cost savings and the environmental benefits -- taking on the technology as well. So it's pretty broad-based.

Okay, great.

And the good news there too is that over time we do find that it does get us in the door of new customers who we have not done business with before. And so it helps us grow our market share, which has really been a nice thing. But I think it also protects our business with existing customers. When they come back in the next phase of the purchase cycle, they are so pleased with what ec-H20 has done for them that we get that business and return.

Great. Well, thanks very much and good luck continuing that. Thanks.

Thanks, John.

There are no further questions at this time. I will turn the call back to the presenters for closing remarks.

All right. Let me finish up with our closing remarks. Our strategies are working, as I noted. We achieved significant gains in our profitability in 2012. We remain focused on further enhancing profitability through our ongoing operational excellence, cost control and standardized global processes. We are pursuing growth through innovation in our court equipment business and a strong new product pipeline, which includes our upcoming launch of 25 new products in 2013 as well as advancing our water-based technologies. Tennant is well-positioned to drive additional profitable growth when the global economy improves and demand for cleaning equipment regains momentum.

Thank you for your time today and for your questions. We look forward to updating you on our 2013 first quarter results in April. Take care, everybody.

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