Tennant Co (TNC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 Tennant Company earnings conference call. My name is Regina and I'll be your conference operator for today. At this time, all participants are in listen-only mode. Later, we will be conducting a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Tom Paulson, Vice President and Chief Financial Officer for Tennant Company. Please go ahead.

Thanks, Regina. Good morning, everyone, and welcome to Tennant Company's first-quarter 2013 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 2013 first-quarter and our outlook for the year. 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 and future performance. Such statements are subject to risks and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we file with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement, for a description of the risks and uncertainties that may affect our results.

Additionally on this conference call, we will discuss non-GAAP measures that include or exclude special or nonrecurring items. For each non-GAAP measure, we also provide the most directly comparable GAAP measure. There were special non-GAAP items in the 2013 first-quarter. Our 2013 first-quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results, as well as a reconciliation of full-year 2012 non-GAAP diluted earnings per share to our 2012 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. As you saw in today's earnings release, our sales in the first quarter were lower than we expected. Our first quarter is traditionally our slowest and most unpredictable quarter. I will provide more details about sales levels in a moment. But I also want to note several bright spots.

Despite lower sales volume, our gross margin came in within our target range of 43% to 44%. We had improved S&A leverage in the first quarter, reflecting our focus -- our ongoing focus on cost-containment companywide. We generated positive cash flow from operations in the first quarter, which is the quarter that is typically cash flow negative. And, despite lower sales volume, our earnings per share came in very close to our expectations.

Now let me discuss the sales picture. While sales in January and February came in as anticipated, March sales were a bit below our expectations. This was primarily due to a slower-than-anticipated transition to new products, and sluggish sales of city cleaning equipment, chiefly to municipalities in all of our geographies.

Regarding the new products, as you will recall, Tennant is in the process of launching the largest new product pipeline in the history of our company. The transition to new products is always complex. During the first quarter, we sold out of certain older models faster than we anticipated instead of over the course of a few quarters as planned. We also encountered supply chain issues that delayed some new product launches. These timing issues led to unfilled demand, as we didn't have enough products in our inventory to fill the gap.

With the benefit of hindsight, we would have started producing the new models sooner. That said, we are very pleased with the positive response to our new product offerings and their revenue-generating potential, as we move through the year. We are especially encouraged by our customers' reception of the T12 rider scrubber. The T12 is the first new product in our redesigned modular large equipment portfolio.

We received higher orders than expected, which has pushed out lead times, and it will take a number of months to satisfy the outstanding demand. In addition to growing momentum in new product orders, we anticipate continued growth in our global strategic accounts and our overall business in the Americas. For this reason, we are reaffirming our full-year guidance with the expectation that we'll have a stronger back half of the year than first half.

Turning to our sales by geography. Tennant sales rose in the Americas, which, as you know, is our largest market. Contributing to the increase was broad-based growth in Latin America, as well as sales of industrial equipment in North America, including scrubbers equipped with our environmentally-friendly ec-H2O technology. Our strategic accounts business remains a key revenue driver for us. During the -- during 2013, we plan to further expand our share of business in the Americas with strategic accounts, successfully launching new products, and continuing to aggressively grow in Latin America.

Sales in our Europe, Middle East and Africa, or EMEA region, were down, with city cleaning equipment sales continuing to be constrained due to economic headwinds and tight municipal spending in Europe. Excluding the city cleaning business, sales rose in several key EMEA markets, including France and the United Kingdom. As the challenging economic situation persists in EMEA, we have taken steps to rightsize our European operations during the 2013 first quarter. Specifically, we are reducing the size of our sales and service organization to reflect current business conditions and to better focus on the biggest opportunities.

We have also duplicated our successful North America strategic account structure and processes in EMEA. We have new leadership in the important market of France and we are launching a steady stream of new products. All of these actions give us confidence that we will be well-positioned to take advantage of growth opportunities once the macro environment improves in EMEA.

In the Asia-Pacific region, sales were in line with our expectations. Notably, while sales in China overall declined, that again was due to unusually large sales of city cleaning equipment in the prior-year first-quarter. Excluding those deals, our sales in China grew about 20% in the 2013 first quarter. As I mentioned, on our last conference call, we are in the process of making significant changes in our go-to-market strategy in this important emerging market. Our initiatives include expanding into the western part of the country, where we plan to open a sales office within the next 12 months. We are also extending our manufacturing capabilities. We'll locally manufacture our first-ever industrial product in China and expect to achieve double-digit sales growth there for the 2013 full-year.

Taking a look at our product roadmap. Innovative products and technologies help drive Tennant's sales. As I said earlier, we are starting to execute against an incredibly robust new product and technology pipeline. We plan to launch 25 new products in 2013 on top of the 17 new products that we introduced in the 2012 fourth-quarter. In addition to the T12, which I mentioned a moment ago, these new offerings also include the 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 reduce environmental impact. At this point, we expect to launch a steady stream of industrial and commercial products already planned out 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 modular product in 2015 and 2016.

Regarding our sustainable water-based technologies, scrubbers equipped with ec-H2O technology continue to outperform our overall equipment portfolio in the 2013 first quarter. Compared with a year ago, sales of scrubbers equipped with ec-H2O were essentially flat in the 2013 first quarter versus an overall revenue decrease. And in Europe, our ec-H2O sales grew in the 2013 first quarter compared to the prior-year quarter. As you know, Tennant's 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. Overall, we expect ec-H2O sales to grow approximately 5% in 2013.

On 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, multi-purpose cleaning solution that works with most existing cleaning equipment and methods. We are still in the early adoption stage with this new technology and are building a broad cross-section of satisfied customers.

Our Orbio Technologies Group continues to execute on their product and technology roadmap. Orbio is developing an exciting new product with split stream technology that will deliver an antimicrobial solution as well as an effective multi-surface cleaner for use in a wide variety of customer segments. We plan to introduce this new Orbio product in 2014. At this time, Orbio is not material to Tennant's results, but it is a very important piece of our future.

The Tennant team continues to make strides on our process improvement initiatives in the areas of pricing, invoicing and collections, and machine configuration. Our efforts are enabling us to build a scalable business model, lower operating costs, and make it easier for our customers worldwide to do business with Tennant. We remain committed to reaching our long-term goal of a 12% operating profit margin. As we've previously stated, however, attaining this milestone requires a return to organic revenue growth in the mid to high-single digits. At this time, we are doubtful 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 are focused on growing Tennant's revenues by introducing a strong pipeline of new core products; increasing market penetration of our sustainable cleaning technologies, including scrubbers equipped with ec-H2O water, and Orbio-developed 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 market segments through channel partners.

Now I'll 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. In reviewing our 2013 first-quarter results, I think it will 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 normal traditional range of mid to high-single digits, as we lapped those very high-growth quarters. That was the case in the second half of 2011, with organic sales growth of approximately 6.5%.

Organic sales growth for the 2012 full-year was approximately 0%, with organic growth in the Americas of about 3.1% being offset by organic declines in EMEA and the Asia-Pacific region of approximately 6.3% and 4.2%, respectively. EMEA sales in 2012 were again adversely impacted by the macroeconomic conditions in Europe. The mature markets in Asia-Pacific were also impacted in 2012 by weaker economic conditions. China achieved organic sales growth in 2012 of about 5%.

Now for the first quarter ended March 31, 2013, Tennant reported net sales of $168.1 million compared to $173.7 million in the prior-year quarter. Sales declined approximately 2.2%, excluding the unfavorable foreign currency exchange impact of approximately 1%. Despite the lower sales volume, operating profit margin as adjusted improved 20 basis points to 5%, compared to 4.8% in the prior-year quarter. First-quarter 2013 net earnings as adjusted were $5.5 million or $0.29 per share as adjusted. These numbers exclude the European restructuring charge of $1.4 million pre-tax or $0.05 per share, and the $0.6 million tax benefit from 2012 R&D tax credits, or $0.03 per share. In the year-ago quarter, Tennant reported net earnings of $5.3 million, or $0.28 per share.

Turning now to a more detailed review of the 2013 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, 2013 first-quarter organic sales increased approximately 2.6%, excluding about 1% of unfavorable foreign currency impact. As Chris mentioned, broad-based growth continued in Latin America, and sales growth in North America was due to increased sales from industrial equipment, including scrubbers equipped with ec-H2O technology. In EMEA, organic sales are down about 10.5%, with minimal foreign currency impact. EMEA sales in the 2013 first-quarter continue to be adversely impacted by macroeconomic conditions in Europe.

The sales of city cleaning equipment experienced the largest impact, as the majority of these sales are to municipalities that are purchasing less equipment due to fiscal constraints. Excluding city cleaning, we were encouraged by sales growth in key markets, such as France and the United Kingdom. We did record a $1.4 million restructuring charge in the 2013 first-quarter, which was primarily focused on reducing the size of our European sales and service organization. Excluding that special item, EMEA's profit margin improved in the 2013 first-quarter compared to the prior-year quarter, despite the lower overall sales volume. Going forward, we anticipate further increases in the EMEA profit margin as a result of the process improvement projects and the benefits from the restructuring.

In Tennant's Asia-Pacific region, organic sales declined approximately 12.4%, excluding an unfavorable foreign currency impact of about 3%. The mature markets are still facing economic headwinds and some political uncertainties. China is a key market for us. While 2013 first-quarter organic sales in China declined approximately 15%, this was primarily due to unusually large sales of city cleaning equipment back in the 2012 first-quarter. Excluding those deals, sales in China grew about 20% in the 2013 first-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 2013 first-quarter was 43.1% as compared to 43.4% in the prior-year quarter. This was within our target range of 43% to 44%. Gross margin was adversely impacted by lower sales volume and mix of products sold. Research and development expense in the 2013 first-quarter totaled $7.5 million or 4.5% of sales compared to $7.3 million or 4.2% of sales in the prior-year quarter. We continue to invest in our core business, as well as investing in our Orbio business, which is focused on advancing a platform of chemical-free and other sustainable water-based cleaning technologies.

Selling and administrative expense in the 2013 first-quarter totaled $58.1 million or 34.6% of sales, and $56.7 million as adjusted or 33.7% of sales as adjusted. This compares to $59.7 million or 34.4% of sales in the first quarter of last year. S&A spending decreased 5.1% on a dollar basis and was down 70 basis points as a percent of sales, due to continued operating leverage improvement. Our 2013 first-quarter operating profit as adjusted totaled $8.3 million or 5% of sales, compared to operating profit of $8.3 million or 4.8% of sales in the 2012 first-quarter. Operating profit margin improved 20 basis points versus the 2012 first-quarter, due to improved S&A leverage more than offsetting the slightly lower gross margin and higher R&D spending in the 2013 first-quarter.

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 toward 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. 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 margin goal will likely take a bit longer than our original target of fourth-quarter 2013.

We continue to successfully execute our tax strategies. Tennant's overall effective tax rate for the 2013 first-quarter was 18.6%. This includes a $0.6 million tax benefit related to the 2012 R&D tax credit recorded in the 2013 first-quarter and the taxes related to the European restructuring charge. The base tax rate was 32% and was 28.1% excluding these special items and routine favorable discrete tax items. The base tax rate of 32% was within our targeted range of 31% to 33%. Variability in the base tax rate is primarily 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 recognize the benefit of 2012 federal R&D tax credit as a special discrete tax item in the first quarter of 2013, the period in which the legislation, including the restatement, was enacted.

Turning now to the balance sheet, again, we continue to have a very strong balance sheet. Net receivables at the end of the 2013 first quarter were $130.4 million versus $124 million a year earlier. Quarterly average accounts receivable days outstanding were 65 days in the first quarter compared to 61 days in the 2012 first-quarter.

Tennant's inventories at the end of the 2013 first-quarter were $64.1 million versus $68.1 million a year earlier. Quarterly average FIFO days inventory on-hand were 90 days for the 2013 first-quarter, down three days compared to the 93 days in the year-ago quarter.

Capital expenditures of $4 million in the 2013 first-quarter are comparable to the $4.2 million in the prior-year quarter, with planned investments in tooling related to new product development, manufacturing equipment, and process improvement projects. Tennant's cash from operations was a positive $7.3 million in the 2013 first-quarter, an increase of $10.2 million versus negative cash from operations of $2.9 million in the prior-year quarter. Cash and cash equivalents totaled $49.8 million compared to $39.5 million a year ago.

It is worth noting that in 2012, Tennant made cash contributions of $16.7 million to our US pension plan, of which $15 million was discretionary. This is an economic 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 $31.8 million declined $4.2 million from $36 million a year ago. Our debt to capital ratio was 12% at the end of the 2013 first-quarter versus 13.8% 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 $3.3 million in the 2013 first-quarter and $3.2 million in the prior-year quarter. Reflecting our commitment to shareholder value, Tennant has increased our annual cash dividend payout for 41 consecutive years. During the 2013 first-quarter, we purchased 158,720 shares on the open market at an average price of $47.36 per share for a total cash outlay of $7.5 million. As of March 31, 2013, we had approximately 906,000 shares remaining under our repurchase program.

Moving now to our outlook. Based on our 2013 first-quarter results and expectations of future performance, we reaffirmed our previous guidance estimate for 2013 full-year adjusted earnings in the range of $2.20 to $2.50 per diluted share on net sales of $750 million to $770 million. Including the 2013 first-quarter special items of a net loss of $0.02 per share, we expect 2013 full-year diluted earnings per share in the range of $2.18 to $2.48. For the full-year 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 0% 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 sales pattern to be similar to the pre-Recession years, with about 48% of sales in the first half and 52% of sales in the second half. 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 open up the call to any questions. Regina?

(Operator Instructions) Joe Maxa, Dougherty & Company.

I wanted to go back to the shortfall in Q1. You talked about, of course, the older models shipping faster than expected, but I wanted to talk more about the supply chain. Do you see supply chain shortages? Wanted to talk a little bit more about that. Has that been corrected? And does this indicate you will see these orders in Q2? Or was that lost orders?

We don't expect that we lost any business, Joe. It's really just a timing issue. We think that the issues will be totally behind us as we get closer to the end of the second quarter, so we won't -- we'll likely not make it all up in Q2. But we do have things firmly in-hand and believe the issues are, for the most part, behind us now. We still have some catch-up to do on a couple of the products, but we don't think it will impact the full-year. It certainly impacted Q1.

Was the supply chain issue on your new products?

Yes.

Okay. Okay.

It was all -- it was totally new product-related.

Okay. And how much benefit will we see in OpEx due to the restructuring in Europe?

You know, it will be -- on a full-year basis, it will be in the vicinity of $1.3 million to $1.5 million a year. For the full-year this year, it will be somewhere in the vicinity of $1 million or so, roughly.

I see. Okay. And did you have also any type of cost of goods? Or was that just strictly your sales in (multiple speakers) --?

It was all severance and support, so it was not any --- in all placement, in all place of spending; nothing in cost of goods sold.

Okay. So, as we look forward -- I understand and thank you for the help on your expectations on revenue for first-half versus second-half -- why do you see the difference moving back to, let's say, a stronger Q4 versus Q2 that you see in the last two years?

You know, part of that is, we believe, over time, we will move our way back to Q4 being the biggest quarter of the year. That hasn't been the case for a while. But more important than that right now, we are lapping a couple of under -- weaker quarters in Q3 and Q4 last year. And that really does matter. And it is part of the reason why we believe we have our confidence in our ability to grow organically in the back half of the year.

Plus, you know, the new product sales momentum grows over the course of the year. Right? I mean, Q2 will be better than Q1; Q3 better than Q2; and Q4 better than all the first three quarters. That's our expectation.

Right. It makes sense. All right, thanks, I'll jump back.

Welcome, Joe.

Scott Graham, Jefferies.

So, I was just wondering about, you've apparently seen a little bit of an improvement in the orders for the new products, and I assume that your terminology, your phrasing in the press release and here today, is also pointing toward the supply chain issues having been partially, if not more than that, resolved. Are those fair statements so far?

Yes. No, I mean, as Tom said before, all these orders are in-hand. They're just going to ship a little later than we initially anticipated. We're not going to lose any business. And yes, we have resolved the supply chain issues. And it's going to take two, three months to try to get back up to speed and catch up with the unfulfilled demand.

Okay.

But we're not going to lose any business. It's all going to fall in this year.

Okay. Would you say, though, Chris, that -- or -- let me just try to ask this question and maybe you can frame it for me what it means -- that it appears that the older product sales did well enough where you actually had stock-outs in the quarter. Does that mean anything for the way the customers are looking at the new product sales, in your view? The new product?

We don't believe so. I mean, it's always -- I mean, I think we're generally very good at the transition between old products and new products. You have to make your best estimate and have supply on-hand. And if we could go back and do it again, we probably would have had more of the old product on-hand, or we would have produced the new products earlier. That's all in hindsight. On a go-forward basis, we firmly believe that the full year won't be impacted.

Okay, good. Good. With respect to your balance sheet liquidity and -- just wondering what your thoughts were for the rest of the year? Are we going to see a little bit more share repurchasing activity to kind of make sure that we stay in the range of guidance for EPS?

You know, we don't buy back shares to manage our share count. And we buy back shares on the basis of the economics, underlying economics, making sense as we look forward to how we believe the business will perform, and assume that that's justified to buy back our shares. So, we -- the actual levels of shares outstanding, we don't manage to that. It doesn't drive our decisions.

Okay. And I guess the last question is -- and maybe it's kind of two questions -- and one is, they always seem to be from the sell side -- the slowdown in the March quarter, in the March month, you seem to point to a lot of your government business, your municipal business; but, obviously, it was also the new product issue -- I get that. I'm just wondering, A, on a global basis, can you give us a feel for what your global city cleaning business, as a percent of sales, looks like? And then, additionally, was there anything else in March that contributed to a slower-than-planned month?

You know, the -- a couple different pieces there. The municipality side of the business is completely city cleaning. I mean, it's not that we don't have -- we don't sell other products in the municipalities. But the impact versus the prior-year was completely city cleaning and demand was quite weak.

To give you a perspective on size of that business, roughly globally, last year was about 6% of our equipment revenue. We obviously have some aftermarket business too. But it's a relatively small business, but the size of the shortfalls was painful in the quarter. And, as I look at it, I wouldn't say that March was a slowdown. Typically, as Chris commented, Q1 is a tough quarter to predict. But it gives -- you make the quarter in March. And January and February were in line, and March did not meet expectations. But a big part of that was new product-related, that we just weren't able to get the new products out the door and meet the demand that we have.

Had you not had that supply chain issue, could you have made it?

We -- well, there's two -- three big pieces, really. It's -- three big pieces. One, we're down year-on-year in city cleaning; it's worse than we thought. Demand is obviously a tad bit softer than we'd seen, and then the other big piece was the miss of our new products.

Okay. Thanks a lot.

You're welcome.

Jason Ursaner, CJS Securities.

Just have a couple of questions focused on the sales growth in the quarter and the full-year revenue forecast. Just a follow-up on the municipal piece. The difficult comparable period in Q1, this was -- there were specific additional shipments last year? Or just at the current rate of municipal spending, that business is just sort of down year-to-year and you'd expect it to remain challenging as an ongoing (multiple speakers) --?

Yes, it was really both. If you looked at the prior year, we had particularly large pieces of business in Europe and in China, were the two big pieces. And not only did those orders -- none of them repeated themselves, so we didn't have any large pieces of business, but then on top of that, we also saw demand weakening, as there's definitive constraints in the way municipalities are spending their money, particularly on large deferrable items like capital equipment.

Okay. And Europe specifically, excluding the municipal piece you mentioned, strengthening sales in several key countries -- I think you said France and the UK -- I'm just wondering if you could maybe provide any more clarity in terms of the growth rates there and how that compared to the overall growth in the core eurozone, either with or without the municipal piece?

Yes. Well, the thing is, we actually are pretty positive on Europe outside of the city cleaning business right now. I mean, we made a lot of changes. We've strengthened the management team; we've rightsized the sales and service organization; we've reorganized them, so they're now going after the biggest opportunities. We now have a strategic account organization and approach in Europe that's -- that duplicates what we've done in North America very, very successfully. And then, you have the new products coming out too.

So, we think we're really well-positioned in our traditional core business in Western Europe. And France and the UK are our two largest markets and they did grow. I don't think we've specified exactly how much each one of them grew, but they did.

The other piece is, is we formed this master franchise agreement for Central and Eastern Europe, Middle East, and Africa. And you know, over the last six months, they have, quarter-by-quarter, kind of met or exceeded our expectation, and we're extremely bullish about what that management team is going to be able to do in that part of the business going forward. So, you know, the city cleaning business is the one we have to work with. We're fighting an extremely tough business environment. So, short-term, we don't see that that's going to turn around any time soon. But the rest of the business I think is starting to grow off a much firmer foundation than it has for a long time, and profitability is improving.

Okay, great. And in China, the business there showed very strong growth ex-city cleaning. And I think you mentioned that that region should continue to perform strongly throughout the year. Just wondering, can you remind me roughly what percentage China represents of the overall APAC segment?

You know, we haven't -- for competitive reasons, haven't given precise numbers in China. What we can say is, Australia remains our largest revenue geography, and China is roughly the second largest piece of the business within that part of the world.

Okay. Appreciate it. I'll jump back in the queue. Thanks.

(Operator Instructions) Scott Graham, Jefferies.

So I did have two other questions. I just wanted to get back in the queue for fairness. If I look at the Americas' number, organic up 2.6%, and you indicate that Latin America was up broadly and seemingly strongly -- and I know it's not a big piece of -- I know North America is larger, but -- where were the weak spots in North America by product line, if you wouldn't mind sharing that with us?

Well, I mean, both go by product line, kind of go by channel, right? Because we look at our business, we have direct distribution and strategic accounts. And what we said is the strategic account business remains robust. And I think most of the growth was in the strategic account business. I think we saw lower growth in both distribution and our kind of down-the-street direct business in the first quarter. (multiple speakers) And that industrial equipment generally, and our strategic accounts business in particular, will continue to be drivers of growth in the North America business going forward.

Okay. On the other -- the rest of the world piece, you had a comparison a year ago of down [5%]. So, whereas in China you had a big load in on sales of -- I think you said city cleaner. That was the problem for this quarter. But next quarter, you have an even easier compare. So I'm wondering if -- and I know it's only 10% of sales, believe me -- but would you be able to say that that business, that segment of your business, should see some pretty good growth in the second quarter?

Are you talking -- I didn't catch all that, Scott. You're talking the APAC specifically?

That's correct.

Yes, we would. I mean, definitely, we still did have a relatively large piece of business in city cleaning in the first month of the quarter last year, but it was just in the month of April. So our comparables in general in Asia-Pacific are easier in Q2 than they were in Q1. So, yes, we should have the ability to grow on a reported basis more readily than we did in Q1. I would also remind exactly what you said -- it's roughly 10% of our overall business.

Right. Not important enough to have even been spent that much time on, but still. (multiple speakers) --

That's not true. It's very important to us. I mean, (multiple speakers) --

(laughter) Well, I mean, it's long-term strategic. But I mean for the second quarter, it will be a modest contributor but not more than that, I suspect.

Agreed.

Okay. So, in EMEA, I was just curious now, we've had a string of organic declines here. And I guess kind of where I'm going with this is, that's a tough set of markets right now. I think we all understand that. Is there anything sales-wise -- I mean, I know that you've got your -- you're happier with your organization than you have been in a while -- but is there anything sales-wise, new product-wise, that maybe says that we're kind of getting close to a bottom in that market?

Well, as he said, if you, you know, you take out the city cleaning business, our core business in Western Europe is actually doing pretty well and is going to rebound. And you know we've just reorganized our strategic account efforts and they're starting to pay dividends. We had a pretty good first quarter in strategic accounts in Europe and that was really nice to see. The new products are just starting to launch. Remember, in Europe, they kind of launched a little bit later than they do in North America. We start in North America. So we're really just getting -- they're just starting to go into the market. So, we think that we could see organic growth in our key businesses in Western Europe outside of city cleaning in 2013.

Interesting. Okay. Hey, thanks a lot.

Our pleasure.

Kevin Sonnett, RK Capital.

So just to kind of frame expectations in the nearer term, understanding that the focus is much more on the full-year, given the macro weakness or kind of getting away from the issues related to the new product transition, which make a lot of sense, and I think you've articulated well -- is it at least fair to think about, given the pressures we're seeing overall in the end markets, to maybe -- to think about the lower end of the full-year range? And you gave some really good color on the breakdown of the first-half/second-half.

So if we use that 48% and back out Q1 for Q2, in terms of getting a milepost as to how we're tracking through the year, for Q2, we're thinking something like sales may be down a couple percent relative to last year? Or if things go well, maybe flattish with last year?

Yes, I would say flattish would be a more relative way to think about it. It could potentially be slightly down. I mean, no doubt about that. But a part of that is, we really want to send a clear message that we are far more comfortable with our ability to grow relative to Q3 and Q4, and for the full year. And we gave a very broad revenue range and a very broad profit range, basically, because that's how broad the range could be. And I mean, we -- I wouldn't place a lot of bets on our ability to overdeliver the revenue side or go towards the higher end, but we believe that the range of outcomes could very well be between the $750 million to $770 million, or we wouldn't -- we would've toned down the range.

Got you. Got you. So, even if we do something in Q2 like [195], certainly, if we get to [200], that would put you nicely on track. But if we had a couple-few-percent revenue decline versus last year, which is a tougher comp in the back half, notwithstanding other factors that could come up, we'd still be on track for getting to that full-year revenue number. And if we hit the bottom end of the range for full-year revenue, we should be able to hit the bottom end of the full-year range for earnings.

Clearly, we've protected ourselves.

Okay. Okay, well, thanks, guys.

Yes, thanks, Kevin.

Zahid Siddique, Gabelli & Co.

A couple of questions. First one on the margins, for 2013, what's your expectation for EBITDA margins? Where do you think you might end? And any time frame as to when you'll achieve the 12% goal?

Yes, a couple of comments, Zahid. We really shy away from giving operating margins for the full year. I would ask you guys to do your own modeling backwards from what we are providing on an EPS standpoint. I mean, we clearly believe we'll see -- have another year of improvement in our operating margins. And that's as much as I'm willing to go.

We would be -- we still believe there is a fighting chance we can get to that 12% by Q4. We're not counting on it, but we'd be awfully disappointed if we don't achieve that by the following year. So we aren't shying away from the 12%. We're just shying away from the timing.

You know, we are really hitting on three of the four cylinders that determine our ability to get to 12%. Right? I mean, we are starting to get a nice S&A leverage. We're spending R&D between 3% and 4% for the year, and we are actually exceeding our gross margin expectations of between 42% and 43%. So it all comes down to revenue. Right? We've got a little bit of economic tailwind, and the revenues start to approach mid-single digits, that's when we will be back on track to get to the 12%. And have high confidence that we can do that.

Okay. And then in your remarks, you commented on some unfilled demand which was related to the new product. So you didn't -- you couldn't fill that demand because of the timing issues that you have discussed. Would you be able to quantify what you mean by the unfilled demand?

No, we're -- for several different reasons, we don't want to be specific about that. I think the key point is we don't believe it's affected our full-year revenue. So we -- it certainly affected Q1 and it will have some impact on Q2, but we believe we'll be completely caught up and be back on track in the back half.

Okay, last question come on ec-H2O. I think you pointed to about 5% growth for those type of products, which is less relative to, I guess, in the past few years, you had a much higher growth rate. What is the reason for that slowdown?

Well, I mean, I think the reason for the slowdown is because of the overall economic situation we are operating in. You know, it's still going to grow faster than the overall equipment portfolio. Our hope is we can beat that. But in this environment, where, again, in the first quarter, we had organic declines. We're being, I think, appropriately cautious.

But the good news is, we know that the adoption rate of ec-H2O over the last year has improved. It remained pretty stable in the first quarter. We saw growth in Europe with ec-H2O for the first time in a while, which I think is a really positive sign. And we have now over half of our scrubber portfolio for which ec-H2O's relevant, now being sold with ec-H2O. So there's still opportunity there for increasing or improving adoption rates.

Thank you.

You're welcome.

Jason Ursaner, CJS Securities. (Operator Instructions)

I think I had tried to withdraw the question. So, thanks.

Okay. You're welcome.

Ladies and gentlemen, this concludes the question-and-answer portion of today's broadcast. I'd like to turn the call back over to management for any closing remarks they'd like to make.

All right, thank you, Regina. We expect 2013 sales to be stronger in the back half of this year, as new product sales momentum accelerates and growth continues in our global strategic accounts business and the Americans.

We are pursuing growth through innovation in our core 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. We remain focused on further enhancing profitability through our ongoing operational excellence, cost controls, and standardized global processes. 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 second-quarter results in July. Take care, everybody.

Now, ladies and gentlemen, we'd like to thank you so much for joining us today. This does conclude the presentation and you may now disconnect. Have a great day.