Tennant Co (TNC) 2013 Q2 法說會逐字稿

Good afternoon and welcome to the Tennant Company's Second Quarter Earnings. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like hand the call over to Mr. Tom Paulson, Vice President and Chief Financial Officer with Tennant Company. Mr. Paulson, you may begin.

Thanks, Keyla. Good morning, everyone and welcome to Tennant Company's second quarter 2013 earnings conference call. I am Tom Paulson, Vice President and Chief Financial Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO; 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 second quarter and our outlook for the year. First, Chris will brief you on our operations 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 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 non-recurring items. For each non-GAAP measure, we will also provide the most directly comparable GAAP measure.

There were special non-GAAP items in the 2013 first quarter and no such items in the 2013 second quarter. Our 2013 second quarter earnings release includes a reconciliation of those 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. We are pleased to report very solid sales and earnings in the 2013 second quarter. Just to give you a bit of perspective, this was the second strongest sales quarter in Tennant's history.

Among our second-quarter highlights, our sales gains were led by strong demand for new products and continuing the momentum in our global strategic accounts. We returned to organic sales growth with total organic sales up about 1% following three consecutive quarters of approximately 2% negative organic sales growth.

Gross margins came in at the high end of our target range of 43% to 44%. We reduced sales and administrative expense as a percent of revenue to our lowest level in at least 10 years to an ongoing focus on cost controls and process improvement initiatives. And as a result, we continue to achieve further efficiencies in our cost structure, which we anticipate will lead to a higher profitability in the future.

Tom will provide more details on our sales by geography, but let me make a few comments. Tennant's sales rose in our largest market, the Americas, fueled by record quarterly sales in North America. Contributing to the increase were sales gains to strategic accounts, scrubbers equipped with our ec-water technology and further growth in Latin America.

Our strategic accounts business remains a key revenue driver for us and we expect it will comprise a growing percent of our revenues over time.

Sales in Europe, Middle East and Africa or EMEA region were down with city cleaning equipment sales continuing to be constrained by economic headwinds and tight municipal spending in Europe. However, we are achieving growing momentum with strategic accounts having duplicated our successful North America strategic accounts structure and processes in Europe. This along with a steady stream of new products that we're introducing gives us confidence that we are well positioned to take advantage of growth opportunities once the macro environment improves in EMEA.

Our results in the Asia Pacific region improved due to strong sales in Australia. In the second quarter, we made further progress on our initiatives in China. These include expanding into the western part of the country where we plan to open a sales office within the next 12 months and extending our manufacturing capabilities in order to locally manufacture our first ever industrial product in China. We expect to achieve double-digit sales growth in China for the 2013 full year.

Turning now to our product road map, in the second quarter we continued to execute against one of the most robust new product and technology pipelines in the Company's history.

Innovative products and technologies are a significant driver of Tennant's sales. As I discussed with you on our last call in our transition to manufacturing a significant number of new products, we ran into some supply chain issues that impacted our ability to ship orders in the first quarter. We have resolved those issues, and the sales of new products in the 2013 second quarter met our internal plans. By the end of the 2013 third quarter, we expect that sales of new products will be back on track on a year-to-date basis.

We plan to launch 25 products in 2013 on top of the 17 new products that we introduced in the 2012 fourth quarter. Major product introductions in 2013 to date include; the T12 rider scrubber which is the first new product in our redesigned, 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.

We remain very pleased with customers' response to our new product offerings. Of note, we've experienced a specially high demand for the T12 rider scrubber. And approximately 63% of the T12 sales in the second quarter were equipped with ec-water. That's a strong endorsement of this disruptive technology.

The products introduced in late 2012 and early 2013 constituted approximately 2% of our total equipment sales in the 2013 first quarter and rose to approximately 6% of equipment sales in the 2013 second quarter. This illustrates the growing momentum of new products as we complete our sales and ramp up production.

Looking ahead, we expect to unveil a steady stream of industrial and commercial products each year through 2016 with the majority built on modular equipment platforms. Modulary allows us to offer a wider range of possible machine features in a more efficient and cost-effective manner.

Building on the success of the T12, 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, we were disappointed in the recent German court decision on a competitor's lawsuit that took issue with our advertising language for ec-water. We categorically stand behind ec-water and disagree with the German court's decision which was based on an accurate information.

The two laboratory bench tests performed by the court-appointed adviser were seriously flawed as they had no or too little correlation to cleaning with the scrubber dryer using ec-water. There is no standardized test for cleaning in our industry and that's why real-world testing by our customers is what matters.

We recently filed documents with the German court that preserve our right to appeal. That said, we would much rather innovate than litigate, and we will remain focused on growing the business and our portfolio of water-based cleaning solutions.

Scrubbers equipped with the ec-water technology were essentially flat in the 2013 first half, but we expect ec-water sales to grow in the 2013 second half.

As you know, Tennant's ec-water technology converts water into an innovative cleaning solution that cleans effectively, saves money, improves safety and reduces environmental impact compared to daily cleaning for chemicals.

As of the end of 2012 Tennant had more than 4,000 ec-water customers across the globe, 40,000 ec-water scrubbers in the marketplace and $444 million in cumulative ec-water sales.

On Orbio, we were pleased to receive Green Seal's GS-37 certification for our Orbio multi-surface cleaner. This is the cleaning solution that is generated on-site by our Orbio 5000-Sc machine. The 5000-Sc has an electrically activated water process that uses only tap water, a small amount of salt and electricity to generate the multi-surface cleaner.

Importantly, our Orbio multi-surface cleaner is the first cleaner generated by electrically activated water technology to be recognized by Green Seal. The organization is a leader in certifying products and services that promote sustainability and protect natural resources. This GS-37 certification further validates our Orbio multi-surface cleaner and recognizes our commitment to redefine the future of cleaning through on-site generation of cleaning solutions that offer health and environmental benefits.

A number of US state governments have regulations that give preference to GS-37 certified cleaning chemicals. We are still in the early adoption stage with this new technology and are building a broad cross section of satisfied customers.

In addition, our Orbio Technologies Group continues to execute on their product and technology road map. Orbio is developing an exciting and new product with split stream technology that will deliver an anti-microbial 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.

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 Orbio developed cleaning solutions and scrubbers equipped with ec-water, expanding our strategic account 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.

We are encouraged to be entering the 2013 third quarter with a strong backlog and robust orders to date. Combined with our gross margin strength and reductions in S&A spending, we expect to end the year within our revenue and EPS ranges for 2013.

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. In reviewing our 2013 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. Then in the second half of 2011 we were back to more normal organic sales growth of approximately 6.5%.

Organic sales growth for the 2012 full year was approximately flat with organic growth in the Americas of about 3.1% offset by organic decline in the EMEA and the Asia Pacific region of approximately 6.3% and 4.2% respectively.

EMEA sales in 2012 were again adversely affected by the macro economic conditions in Europe. The matured markets in Asia-Pacific were also impacted in 2012 by the weaker economic environment. China achieved organic sales growth in 2012 of about 5%.

Now for the second quarter ended June 30, 2013, Tennant reported net sales of $200.2 million compared to $199.5 million in the prior-year quarter.

Organic sales grew approximately [0.9%] excluding an unfavorable foreign currency exchange impact of approximately 0.5%. This is an encouraging improvement compared to the prior three consecutive quarters of approximately 2% negative organic sales growth.

Second quarter 2013 net earnings were $14.3 million, or $0.76 per share. In the year-ago quarter Tennant reported net earnings of $13.7 million or $0.71 per share.

Turning now to a more detailed review of the 2013 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 2013 first quarter organic sales increased approximately 3.4% excluding about 0.5% of unfavorable foreign currency impact. As Chris mentioned, broad based growth continued in Latin America and record quarterly sales in North America were due to strength in sales to strategic accounts and sales of scrubbers equipped with ec-water technology.

In EMEA, organic sales were down about 9.2% excluding a favorable foreign currency impact of approximately 1%. EMEA sales in the 2013 second quarter continued to be adversely affected by the macroeconomic conditions in Europe. 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. Sales to strategic accounts continued to gain momentum and sales in France were particularly robust.

As you may recall, we did record a $1.4 million restructuring charge in the 2013 first quarter that was primarily focused on reducing the size of our European sales and service organization.

Going forward, we anticipate the EMEA profit margin will improve as a result of process improvement projects as well as benefits from the restructuring.

In Tennant's Asia-Pacific region, organic sales grew approximately 5.5% excluding an unfavorable foreign currency impact of about 3.5%. Organic sales growth resumed in this region due primarily to strong sales performance in Australia.

China is a key market for us. While 2013's first half organic sales in China declined approximately 15% this was primarily due to unusually large sales of city cleaning equipment in the 2012 first half.

Excluding those deals, sales in China grew about 10% in the 2013 first half. 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 second quarter was 43.8% compared to 44.6% in the prior-year quarter. This was within our target range of 43% to 44%. Gross margin in the 2013 second quarter was impacted by the selling channel mix with strong sales to strategic accounts.

Research and development expense in the 2013 second quarter totaled $7.8 million, or 3.9% of sales compared to $6.9 million or 3.5% of sales in the prior-year quarter. We continue to invest in both our core business and Orbio which is focused on advancing the platform of chemical free and other sustainable water-based cleaning technologies.

Selling and administrative expense in the 2013 second quarter totaled $58.3 million, or 29.1% of sales. This declined from $60.4 million or 30.3% of sales in the second quarter of last year. S&A spending decreased 3.5% on a dollar basis and was down 120 basis points as a percent of sales due to continued operating leverage improvement.

As Chris mentioned, we succeeded in reducing 2013 second quarter S&A expense to under 30% of sales which is the lowest percent achieved in at least 10 years.

Our 2013 second quarter operating profit totaled $21.6 million, or 10.8% of sales. This was equal to the 2012 second quarter because our improved S&A leverage was offset by the slightly lower gross margin due to selling channel mix and higher R&D spending in the 2013 second 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've 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 cost 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 improve the scalability of our business model while minimizing any increases in our operating expenses.

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 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 half was 28.6%. This includes the $0.6 million tax benefit related to 2012 R&D tax credit recorded in the 2013 first quarter and the taxes related to the 2013 first quarter European restructuring charge.

Excluding these benefits the 2013 first half overall effective tax rate would have been 30.6%. The base tax rate of approximately 31.6%, which excludes the European restructuring charge and discrete tax items 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.

Turning now to the balance sheet, again we continue to have a very strong balance sheet. Net receivables at the end of the 2013 second quarter were $146.8 million versus $135.1 million a year earlier.

Quarterly average accounts receivable days outstanding were 61 days in the second quarter compared to 60 days in the 2012 second quarter.

Tennant's inventories at the end of the 2013 second quarter were $62.7 million versus $68.4 million a year earlier. Quarterly average FIFO days inventory in hand were 75 days for the 2013 second quarter, down seven days compared to 82 days in the year-ago quarter.

Capital expenditures of $7.2 million in the 2013 first half are comparable to the $7.5 million in the prior-year period with planned investments in tooling related to new product development, manufacturing equipment and process improvement projects.

Tennant's cash from operations was a positive $15.2 million in the 2013 first half, an increase of $2.7 million versus cash from operations of $12.5 million in the prior-year period. Cash and cash equivalents totaled $48.6 million compared to $38.4 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 was an economically efficient use of cash and we had previously not made a cash contribution to that pension plan since 1987. We do not expect that any additional cash contributions to this plan will be necessary. Note that this pension plan was closed to new participants back in 2000.

The Company's total debt of $32.2 million declined $2.1 million from $34.3 million a year ago. Our debt-to-capital ratio was 11.8% at the end of 2013 first half versus 13.3% a year ago.

Regarding other aspects of our capital structure, Tennant is currently paying a quarterly cash dividend of $0.18 per share. We paid cash dividends of $6.6 million in the 2013 first half and $6.4 million in the prior-year period. Reflecting our commitment to shareholder value, Tennant has increased our annual cash dividend for 41 consecutive years.

During the 2013 first half, we purchased 256,649 shares of Tennant stock in the open market at an average price of $47.31 per share for a total cash outlay of $12.1 million. As of June 30, 2013, we had approximately [808,000] shares remaining under our repurchase program.

Now moving to our outlook, based on our 2013 first-half results and expectations of performance for the remainder of the year, we once again reaffirmed our previous guidance estimate for the 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 in the range of 43% to 44%, 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 up on 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% to 49% of sales in the first half and 52% to 51% 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. We are expecting a strong 2013 second half. Based on our 2013 first half sales performance and the current global economic uncertainty, it is likely our full-year sales may trend towards the low end of our $750 million to $770 million sales range. However, we remain comfortable with our earnings per share range of $2.20 to $2.50.

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

(Operator Instructions)Joe Maxa.

Thank you. Good morning.

Good morning, Joe.

Good morning, Joe.

You've talked about strong backlog for Q3 and if I recall correctly last year you didn't have your typical government orders. So I am just wondering -- I know you are not giving specific guidance, but it sounds like a better Q3 as well, not just Q4 which I know you have been expecting to have a pretty good quarter.

Yes, we expect to see growth versus the prior year on an organic basis in both Q3 and Q4.

Do you expect to see that in Europe as well? It looks like you might be getting close based on some easier comps?

We're not ready to comment specifically on Europe. There is just too much uncertainty. But we would say that there is some positive things happening, particularly in France, and we do feel we're beginning to see some level of stability, but there remains a fair amount of uncertainty in Southern Europe.

And then also want to ask a little bit on Asia-Pacific, nice bounce back sequentially from 2Q, from 1Q. Can you remind us what the weakness was in the first quarter and do you think that's behind you and you'll see improvements in the back half order in Asia-Pacific?

The predominant thing we've been experiencing in China was we have such a strong front half in the prior year in our city Cleaning business and that really just we haven't received any of those orders again. We frankly pushed our focus into other areas, and we've also begun to make some changes in China. We now have our new team firmly in place. They [got in] place for about six months now or a little bit longer than that. We've begun to expand not only geographically but also with bringing on new distributors, and we're starting to see some momentum in our business, particularly in a couple of verticals in retail and also in automotives. So we're more optimistic about the back half.

Okay. That sounds good. Lastly for me, on the 25 new products being introduced this year, can you guys give us a -- maybe when they are expected to be launched? And do you have any what you would consider major products like you have these three you mentioned that were introduced earlier this year?

Joe, this is Chris. The split is probably 10 in the first half, 15 in the second half with the biggest volume-generating products really launched in the first half. But in the second half, we do have some really interesting commercial products, products where we may be really not been advantaged in the past or where we haven't had a presence that we think can do quite well.

But assume that the big volume-generating products were really launched in the second half with some industrial products there, all commercial products in the second half. As I said, the interesting thing is they are either new products or more advantaged products that should serve us well.

All right. That's helpful. Thank you.

All right. Thanks, Joe.

Dan Rizzo.

Hey, guys. I know you're focusing more on new product launches but is there an acquisition pipeline there or I mean, are you guys just more focused on organic growth?

We are more focused on organic growth. That has been and will continue to be our primary focus area. But we also will continue to look at acquisitions. We do look at acquisitions through two lenses predominantly. One would be technology deals that would allow us to advance our innovation platform and secondarily we also are looking at places where we could expand our sales and service coverage in various parts of the world. But we do have a pipeline, we are looking at transactions, but our primary focus is on organic growth.

Okay. And then with the court case that was disappointing, is there a time frame when that can be like fully resolved? Is it like the US where it takes a while for an appeal to be heard or how does that work?

We don't know exactly, and as I said we've filed papers to reserve our right to appeal. We are firmly focused on wanting to innovate. We'd love to put this stuff behind us. Litigating this is a distraction. But at the same time we need to figure out the best way to protect our reputation and our reputation of ec-water.

So we will do what's right for the business and for that technology but we can't tell you how long that's going to take from a process standpoint in the German courts.

And are there other like courts that are waiting news too outside of Germany (multiple speakers)?

Yes, the last one is Belgium and Belgium kind of wanted to wait until the German court ruling. But in Belgium we do have an opportunity to submit some additional information. So it's not a foregone conclusion that they will come to the same decision as the German courts.

But I think what's important to note is that [to have] a logical question is that so what does this decision do to your business. And so far we have not seen any impact on our ec-water sales. As we said on the T12, the new industrial product in North America, 63% of those products went out with ec-water in the second quarter, a pretty strong affirmation that people are still buying into it.

We're seeing attachment rates for the technology and all our European markets remaining pretty steady year-over-year and that's the important thing to note because overall sales are down (inaudible) ec-water sales are down, but the attachment rates remain strong. The place we're going to have to spend most time paying attention to what happens is in Germany because that's [cautious] backyard.

If your customers are ignoring you, I mean, then even if -- if there is an adverse ruling in the appeals court wouldn't that just suggest that you have to either stop the advertisement or change your language and then it's kind of a non-issue at that point? Would that be accurate?

Yes, I think that would be accurate. We actually have changed most of the advertising language already over the course of the product and understanding of the technology and what it means to our customers over the last five years.

Okay.

So we do not see this being in anyway a material issue to our ec-water business going forward.

Okay. All right. Thank you, guys.

Thanks, Dan.

[Bhupinder Fola]

Good morning, guys.

Good morning.

First question, this is kind of the first quarter of like three quarters of decline in core growth. I just wanted to get if you can discuss on a monthly basis how did this core sales actually trend in April, May and June and then what you're seeing in July basically in your commercial and industrial?

Yes, I think I have said we did have three quarters of organic declines that were roughly 2% and we had 1% of growth last quarter. And I would say there is not dramatic differences between the months. I mean, we just generally tend to finish quarters a little bit stronger. I think in this case I would say we did have robustness in our business in the back part of the quarter and we come into Q3 with strength and a nice open order position and also, even more importantly than that, order patterns that are where we would expect them to be to achieve our growth rate. So we're confident with the momentum that we're seeing in the business.

Okay, okay. On the SG&A, now this is the first time you're kind of trending below 30% number here and just wanted to make sure like is that sustainable in the back half and is that built in your EPS guidance like you said you're comfortable, I believe at the lower end of the sales guidance but you are fine with the EPS guidance. So I just wanted to see (multiple speakers).

Yes, what I'd comment there is we just don't get specific around levels of operating expenses. What I would say is we do anticipate improvement in our profitability, the operating profit level relative to the prior-year quarter. So we expect our operating margin to be better in Q3. We expect it to be better in Q4. Therefore it would be likely to see some modest improvement in our expense leverage in each of those respective quarters also.

But I would say to say we're going to repeat the level of performance we saw in Q2 would be aggressive. I mean it was really a terrific quarter from a leverage point of view and to get to those kind of levels would -- might be a bit overly aggressive in the back part of the year. But we'll continue to see improvement.

In the short term, I think that's right but remember our goal remains to get to 27% to 28% SG&A leverage and also as a percent of sales. So we're trending in that direction. It's going to be a little lumpy but we will get there.

Given the revenue levels we've been at, we feel very good about the expense controls that we have in place and we're highly confident that we can get to the 27% to 28% as we restored normalized growth levels over a period of time.

Okay, okay. I mean, did you do something different this quarter like with the 1% core -- top line core sales?

One is we do manage our spending to our revenue level. So that's one thing. I mean, we can -- we continued investing in R&D, something we continue to invest and we are beginning to see some efficiencies. I mean, we have made changes in our processes. We've made system changes and we're beginning to see some benefits from those changes. We'll see a lot more benefit in the future. But we -- in the world of consistency and processes and automation, we're not having to add people at the same pace we historically have had to add. And we're also seeing benefits in leveraging our indirect spending that's flowing through operating expenses. We're doing a better job of working with our suppliers to hold our cost down.

Okay. And the last question on ec-H2O, I believe you're expecting like growth in the second half. Now what makes you so comfortable actually with the growth in the second half? Is it driven by the traction in new products or anything else which -- what is driving that?

Well, I mean, I think if you look at it, the new products the attachment rate on new products is very strong and we think that will continue. And T12 sales will continue to grow. The ec-water sales in North America were pretty robust and we expect that to continue. In the EMEA they are down, but remember the entire business is down. So there we watch attachment rates. But as EMEA may see improvement in the back half versus the first half ec-water should benefit from that as well.

Okay. Thanks a lot, guys.

You're welcome.

Rosemarie Morbelli.

Good afternoon. Since I am new to Tennant, I was wondering if you could help me understand if your new product introductions are actually cannibalizing some of the old product lines and to which degree they do that?

Yes, I will comment on that. I mean, we do -- I can't say that there isn't cannibalization but in general what we do is our products are either in the case of the burnisher rider as a brand new product that we don't have any product in our portfolio. So there is no cannibalization within that product line.

In the case of the T12, it's a replacement for an existing product that we discontinued that product and we replaced it with a new version. So cannibalization in general really is not a big deal. And our objective is as we replace the product we want to hold margins flat or improve them and we also want to change the growth trajectory of that product. So we, in total, firmly believe that new products definitely change the trajectory of our growth patterns and we think we'll even -- we will see improvement on that in the back part of the year as we do -- momentum builds across the introduction of new products.

Okay. Thanks. And I was wondering if there is any specific area in France that is the stronger than other parts of EMEA.

Any specific areas of --

In France.

Of France, in Europe. I mean, why is -- in France, why is France so much stronger than the rest of Europe if I read properly?

Yes, we are seeing some robust growth in France. Also remember France has been a trouble market for us for a while and we are working to restructure our French business to focus on the parts of business that we think we have a competitive advantage and where we can grow and those efforts are starting to pay dividends and that's why we're seeing a robust growth in France.

The interesting thing with the European business or the EMEA business right now really if you were to strip out the city cleaning business, which is very soft because of lack of support spending and you were to adjust for our Central Eastern Europe, Middle East Africa business, which as you know, most of you know. And for your information, we've restructured it, we turned it over to a master distributor last year. If you do an apples to apples comparison on that business from a sales perspective, we're actually seeing fairly robust growth in our core business in most European countries outside of Portugal, Spain and Italy, and as we all know Southern Europe remains a challenge.

Okay. And then lastly, you talked about your strong backlog. Have you seen in the past or recently some previously placed orders being either canceled or delayed as customers decide that the economy is not strong enough to actually take possessions of those new pieces?

Nothing out of the ordinary. I mean, I would say that if you looked across the three quarters where we had some declines in our business, certainly the order patterns were a lot slower to get approval. And so it would take more effort and the time to an order was longer. But no meaningful levels of cancellation and we have honestly saw a better momentum in Q2 and an improved momentum over that as we're entering into Q3. And the open order position certainly helps us and we're feeling great about our back half new products.

Thank you.

(Operator Instructions) [Ron] Rosenberg.

Yes. Hi. Good morning.

Hi, Ron.

John Rosenberg.

Oh, John. I am sorry, John.

How are doing?

Good.

Thanks for taking my question. Your press release spoke about the gross margin declining a bit and citing some of that is being impacted by channel mix and a greater trend towards strategic accounts. Are we to infer from that that strategic accounts -- I mean, I would've thought that given your introduction of new products, gross margins would be up. So are we to infer that there's some kind of -- are strategic accounts more costly than you're selling the municipals or could you give me some more granularity about what's going on there.

Yes, let me just give you a little bit of flavor there. I mean strategic accounts are becoming more and more important to us and if we look at the gross margin line -- and this is -- it's different for every account, but in general our margins to strategic accounts within a given geography versus sales through our more other traditional channels, the margins tend to be a little bit lower, the gross margin line. And by what we would say is it's more efficient below the gross margin line, and we believe it is incrementally higher at the operating margin line. And given the magnitude and the size of those businesses, there is going to be times where they're a growing percent of the total and it's going to have an impact on margins.

We're still within our targeted range. We're at the high end of that range and as we commented a year ago our Q2 margins we were quite open that we didn't feel that the 44.6% margin level of last was sustainable. I mean, we actually were seeing some deflation during that time frame that also had a big impact on margins. So we are honestly not concerned about where gross margins are at and we are right in line with expectations.

And you got to remember we started 2012 forecasting margins in the 41% -- or 42% to 43% range and an increase of that to the 43% to 44% range which is what we're maintaining and the margins in the second quarter were at the high end of the range that we're targeting.

Okay, well thanks. They were indeed. I'm just trying to better understand the dynamic, and I was expecting -- perhaps I was misreading the trend. So thank you very much.

Yes, your comment, John, about new products, I mean they are helping our margins. So you need to remember there is a lot of moving parts to our margin structure and they can vary quarter to quarter. But overall, it's not a concern to us and our strategic account business is very important to us and we think it is additive to our overall margin structure.

Okay, great. Thanks very much.

Thank you.

Welcome.

Thank you. At this time there are no further questions. Are there closing remarks?

Yes, there are some closing remarks. So we continue to expect 2013 sales to be stronger in the second half of this year as new product sales momentum accelerates and growth continues in our global strategic accounts business and in the Americas.

We are pursuing growth through innovation in our core equipment business and a strong new product pipeline which includes the launch of 25 new products in 2013 as well as advancing our water-based technologies and we remain focused on further enhancing profitability through our ongoing operational excellence, cost controls and standardized global processes.

Tennnant is well positioned to drive additional profitable growth as the global economy improves and demand for cleaning equipment regains momentum.

Thank you for your time today and for your questions and we look forward to updating you on our 2013 third quarter results in October. Take care everyone.

Thank you. This does conclude today's conference call. You may now disconnect.