Tennant Co (TNC) 2013 Q3 法說會逐字稿

Good morning. My name is Jasmine and I will be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's third-quarter earnings conference call. This call is being recorded. (Operator Instructions). There will be time for Q&A at the end of the call and after the Q&A session, please stay on for closing remarks from management. Thank you for participating in Tennant Company's third-quarter earnings conference call. Beginning today's meeting is Mr. Paulson, Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

Thanks, Jasmine. Good morning, everyone and welcome to Tennant Company's third-quarter 2013 earnings conference call. I'm Tom Paulson, Vice President and Chief Financial Officer of Tennant Company. With the 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 third quarter and our outlook for the year. 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 quarter and the 2013 first quarter, and no such items in the 2013 second and third quarters. Our 2013 third-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 will turn the call over to Chris.

Thank you, Tom, and thanks to all of you for joining us this morning. We are very pleased to report record third-quarter sales and increased earnings. We continue to see positive trends in our business. As a reminder, last quarter, we achieved the second strongest sales quarter in Tennant's history. We are delighted to follow that up with another outstanding quarter.

Tennant's 2013 third-quarter sales were led by record third-quarter sales in our largest geography, the Americas. Like last quarter, sales rose due to continued high demand for new products and strong sales of industrial equipment.

Notably, in the 2013 third quarter, the Company's organic sales growth, up nearly 7%, marked the highest level that we have achieved in two years. Additionally, our ongoing focus on operational excellence initiatives generated further leverage of our cost structure. Gross margins were within our target range of 43% to 44% and sales and administrative expense as a percent of revenue declined 110 basis points year-over-year through companywide cost controls and process improvement initiatives.

Taking a look at our sales by geography, sales in the Americas benefited from a record third quarter in North America and continued strong results in Latin America. We experienced continued high demand for our new products. To build on our momentum, we are duplicating our successful North American strategic accounts strategy in Brazil, which is an attractive market for Tennant that is performing well.

In the region of Europe, Middle East and Africa, or EMEA, sales declined with city cleaning equipment sales continuing to be constrained by tight municipal spending in Europe. Our new strategic account structure continues to gain traction with sales up 10% year-to-date in EMEA.

In addition, we are pleased with the performance of our master distributor in our Central Eastern Europe, Middle East, and Africa markets. As we anticipated, this new go-to-market approach has enabled us to grow more aggressively in these important markets.

Along with a steady stream of new products that we are introducing, we believe we are well-positioned to take advantage of growth opportunities once the macro environment improves in EMEA. In the Asia-Pacific region, organic sales increased due to strong performance in China, which had about 30% organic sales growth. During the quarter, we made progress on our initiatives in this key geography. These include expanding into the western part of the country where we expect to open a sales office within the next nine months and extending our manufacturing capabilities in order to locally manufacture our first industrial product in China in the 2013 fourth quarter, which will be the T12 rider scrubber.

Further, we plan to roll out our successful North American strategic account structure and strategy in China next year. We are confident about our continued growth prospects and expect double-digit sales growth in China for the 2013 full year and for 2014.

Turning to our new products. We continue to execute against one of the most robust new product and technology pipelines in the Company's history. As you know, innovative products and technologies are a significant driver of Tennant's sales. Among the new products that were strong contributors to our third-quarter sales were the T12 rider scrubber, which is the first new product in our redesigned modular, large equipment portfolio; the B10, Tennant's first rider burnisher, which enables rapid cleaning and polishing of large areas; and the T3 orbital scrubber, which provides a chemical-free way to clean and strip floors.

Sales of the 17 new products introduced in late 2012 and 10 in early 2013 rose from 2% of total equipment sales in the 2013 first quarter to 6% in the second quarter, to 7% of total equipment sales in the third quarter. This illustrates the growing momentum of new product sales as we complete our launches and demand accelerates.

In the 2013 fourth quarter, we plan to introduce 16 new products, including a line of walk-behind burnishers, as well as canister carpet extractors and grout cleaners with high heat functionality. Additionally, we expect to unveil a steady stream of industrial and commercial products each year through 2016 with the majority manufactured on modular equipment platforms. Modularity allows us to offer a wide range of possible machine features more efficiently and cost-effectively. These new core equipment offerings are engineered to improve cleaning performance and operator safety, lower operating costs and reduce environmental impact.

Regarding our sustainable water-based cleaning technologies. Led by gains in North America, sales of scrubbers equipped with Tennant's ec-H2O electrically-activated technology grew approximately 3% in the 2013 third quarter to $38.2 million. We anticipate further growth of ec-H2O equipped scrubbers in the fourth quarter. Our 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. This technology is based on the established science of electrolysis.

In September, we announced our decision to channel our resources into new product innovations and we withdrew our appeal of the German court decision regarding advertising language for ec-H2O. We continue to fully stand behind ec-H2O and strongly disagree with the German court's decision.

Our focus remains on innovation rather than litigation to grow the business and our portfolio of water-based cleaning solutions. At the end of 2012, Tennant had a strong installed base of more than 4000 ec-H2O customers worldwide, 40,000 ec-H2O scrubbers in the marketplace, and $444 million in cumulative ec-H2O sales.

In addition, 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 multisurface cleaner for use in a wide variety of customer segments. We plan to introduce this new Orbio product in the first half of 2014. While Orbio is not yet material to Tennant's results, it is a very important piece of our future.

I'd also like to touch on another strategic growth area where we've had success. One of our priorities is to increase our share in new or underserved market segments. Our recent focus on healthcare has led to some encouraging wins. During the 2013 third quarter, we worked with one of our building service contractors to secure new business with a senior facilities healthcare company that operates more than 300 locations in North America.

Moreover, we partnered with a national distributor who will now supply Tennant's cleaning equipment to a leading chain of about 135 US hospitals. Additionally, we are pursuing opportunities to increase our penetration with hospital cleaning management companies and group purchasing organizations.

Now let's take a look at our progress in gaining operating leverage. Since late 2010, we have worked to standardize and simplify our global business processes. We call this initiative Campaign to Cash. It is a platform to enhance Tennant's sales growth and profitability. As I've previously discussed, one of the areas we tackled first was pricing. The goal is to bring consistency to our global pricing and discounting policies resulting in greater efficiency and profitability. Our completed pricing project goes live in November.

Another initiative centered on invoicing. Here, again, we will achieve a critical milestone in November when we release improvements that will provide customers with a more consistent experience worldwide. This is a win-win for Tennant and our customers as we will be able to provide consolidated invoicing for different products. This will improve invoicing accuracy, minimize disputes, accelerate payments to Tennant and enhance our profitability.

To wrap up, our strategies are working. We are focused on growing Tennant's revenue 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-H2O, 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.

We are encouraged that our organic sales growth returned to the mid-single digits in the 2013 third quarter. We expect good fourth-quarter performance as new product sales accelerate and growth continues in both our global strategic accounts and overall Americas business. We also anticipate further improvement in our operating profit margin as we strive to attain our goal of 12%. Now, I will ask Tom to take you through Tennant's third-quarter financial results. Tom.

Thanks, Chris. In my comments today, all references to earnings per share are on a fully diluted basis. For the third quarter ended September 30, 2013, Tennant reported net sales of $188.5 million compared to $178.3 million in the prior-year quarter. Organic sales grew approximately 6.8% excluding an unfavorable foreign currency exchange impact of approximately 1%. As you may recall, Tennant's organic sales grew approximately 0.9% in the 2013 second quarter excluding an unfavorable foreign currency exchange impact of approximately 0.5%. We are encouraged by the higher level of organic sales growth we achieved in the 2013 third quarter. Third-quarter 2013 net earnings were $10.6 million or $0.56 per share. In the year-ago quarter, Tennant reported adjusted net earnings of $8.9 million or $0.47 per share.

Turning now to a more detailed review of the 2013 third 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, third-quarter organic sales increased approximately 10.6% excluding about 1% of unfavorable foreign currency impact. Record sales for third quarter in North America were due to strong sales of industrial sweepers, continued high demand for new products, and sales of scrubbers equipped with ec-H2O technology.

Sales in the emerging market of Latin America remained robust with organic sales growth of approximately 20%. In EMEA, organic sales were down about 5.9% excluding a favorable foreign currency impact of approximately 3.5%. EMEA sales in the 2013 third quarter continued to be adversely affected by the macroeconomic conditions in Europe, as Chris noted. Sales of city cleaning equipment declined as the majority of these sales are to municipalities that are still purchasing less equipment due to fiscal constraints.

Most notable was strong sales growth through our master distributor business in the Central Eastern Europe, Middle East and Africa markets. We transitioned to a master distributor arrangement in the third quarter of 2012 and as intended, it has resulted in more attractive offerings for customers and reduced Tennant's selling and backoffice infrastructure costs.

As you may recall, we recorded 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 7.5% excluding an unfavorable foreign currency impact of about 8.5%. Organic sales grew for the second consecutive quarter in this region. Growth in the 2013 third quarter was due primarily to strong sales performance in China. China is a key market for us. While the organic sales in China were essentially flat for the first nine months of 2013, this was primarily due to unusually large sales of city cleaning equipment in the first half of 2012. Excluding those deals, sales in China grew about 15% in the first nine months of 2013. As Chris said, we remain very positive about the future growth potential in China and expect approximately 10% growth in 2013 and double-digit growth in 2014.

Tennant's gross margin for the 2013 third quarter was 43.4% compared to 43.5% in the prior-year quarter. This was within our target range of 43% to 44%. Gross margin in the 2013 third quarter was adversely impacted by the selling channel mix with strong sales through distribution in EMEA and sales to strategic accounts. Sales through distribution and to strategic accounts tend to have slightly lower gross margins, which are typically more than offset by the lower cost of a more efficient selling process.

Research and development expense in the 2013 third quarter totaled $8 million or 4.2% of sales compared to $7.4 million or 4.1% of sales in the prior-year quarter. We continue to invest in both our core business and Orbio, which is focused on advancing a platform of chemical-free and other sustainable water-based cleaning technologies.

Selling and administrative expense in the 2013 third quarter totaled $57.7 million or 30.6% of sales. This compares to as-adjusted results in the third quarter of last year of $56.4 million or 31.7% of sales. Estimated expense was down 110 basis points as a percent of sales due to continued operating leverage efficiencies. With strong organic sales growth of nearly 7%, we did increase our spending on important business process improvement projects.

Our 2013 third-quarter operating profit totaled $16.2 million or 8.6% of sales. This was an improvement of 90 basis points compared to the 2012 third quarter. Improved estimated leverage was somewhat offset by the slightly lower gross margin due to selling channel mix and higher R&D spending in the 2013 third 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 towards this target, we are keenly focused on driving organic revenue growth in the mid to high single digits, holding the 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 improve the scalability of our business model while minimizing any increases in operating expenses.

We did achieve our targeted organic revenue growth in range of mid to high single digits in the 2013 third quarter. This was the first time in two years. Therefore, as we've previously mentioned, reaching our 12% operating margin will likely take a bit longer than our original target of fourth quarter 2013, but we are committed to this target.

We continue to successfully execute our tax strategies. Tennant's overall effective tax rate for the 2013 first nine months was 29.5%. This includes the $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 2013 first-quarter European restructuring charge. Excluding these benefits, the 2013 first nine months overall effective tax rate would have been 30.8%. The base tax rate of approximately 32.2%, which excludes the European restructuring charge and discreet tax items, was within our target 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 third quarter were $139.8 million versus $124.1 million a year earlier. Quarterly average accounts receivable days outstanding were 65 days for the third quarter compared to 63 days in the 2012 third quarter. Tennant's inventories at the end of the 2013 third quarter were $67.4 million versus $61 million a year earlier. Quarterly average FIFO days inventory on hand were 82 days for the [2013] third quarter, down four days compared to 86 days in the year-ago quarter.

Capital expenditures of $11.4 million in the 2013 first nine months are comparable to the $11.1 million in the prior-year period with planned investments in tooling-related new product development, manufacturing equipment and process improvement projects.

Tennant's cash from operations was $36.8 million in the first nine months, a decrease of $6.5 million versus cash from operations of $43.3 million in the prior-year period. This is primarily due to a moderate increase in working capital to support the growth in sales. Cash and cash equivalents totaled $65.3 million, up from $62.7 million. 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 as we had previously not made a cash contribution to that pension plan since 1987. We do not expect any additional cash contributions to this plan will be necessary. Not that this pension plan was closed to new participants back in 2000. The Company's total debt of $32 million declined $1.6 million from $33.6 million a year ago. Our debt to capital ratio was 11.3% at the end of the 2013 first nine months versus 12.8% 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 $9.9 million in the 2013 first months and $9.5 million in the prior-year period. Reflecting our commitment to shareholder value, Tennant has increased our cash annual dividend payout for 41 consecutive years.

During the first nine months, we purchased 342,584 shares of Tennant's stock on the open market at an average price of $48.54 per share for a total cash outlay of $16.6 million. As of September 30, 2013, we had approximately 722,000 shares remaining under our repurchase program.

Moving now to our outlook. Based on the 2013 first nine month results and expectations of performance for the remainder of the year, we have narrowed our guidance estimate for the 2013 full-year adjusted earnings to the range of $2.25 to $2.40 per diluted share on net sales of $750 million to $760 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 $2.23 to $2.38.

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 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 $14 million to $16 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. Based on our full-year guidance, we are expecting a solid finish to 2013. And now we would like to open up the call to any questions. Jasmine.

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

Thank you and good morning. Couple of questions, I wanted to talk a little bit about the new products, 10 new products this fourth quarter. I'm wondering if you see these as being incremental to your business as much as the T10 -- I'm sorry -- the T12 and the B10 have been.

What I would say is they are incremental to our business because we have had a limited offering in this range historically. So most of the sales derived from these new products will be incremental, but remember they are smaller commercial products at much lower price points than a T12, for example, so the overall impact on our revenues will not be of the same magnitude of the T12.

Right, okay. And then regarding the Orbio, how should we be thinking about the rollout next year? Is this going to be more of a -- maybe like the original Orbio, kind of a slow deliberate region by region, or given learnings, would you expect to roll that out more broadly sooner?

I think that we are still doing the planning on that. We've obviously learned a lot from the initial rollout. I think one of the things that we have determined is that we are better off if we focus on probably fewer, early adopter, bigger customers with whom we can go deep because then we can develop this more intimate relationship that I think is necessary to ensure that the technology takes hold and that we address all their issues in the early going and get them comfortable with the technology going forward. So I'm willing to say that at this point. Other plans have not yet been divulged.

But since you talk about Orbio, I think one of the things also to note is that the rollout of the 5000 continues. What we know is this. It has been slower than what we anticipated, but we also know that customers who have adopted the technology love it and it works. As a matter of fact, they are excited to change their entire cleaning protocol over to Orbio Technologies and they're going to be able to do that when we have the new product we launch in 2014 that provides the antimicrobial output because right now they can only use Orbio for the cleaning processes; they can't use it for sanitizing and disinfecting. They'd like to standardize their entire protocol.

What we've also learned is that a lot of customers who are very interested in the technology are saying we are going to take a wait-and-see position because the 5000, in some cases, is too big for our needs, but more importantly, it only solves a part of our cleaning process. So we changed half of our cleaning protocol and have to maintain the other half with the old process using chemicals to sanitize and disinfect. So they are very interested in the launch of the new product with the antimicrobial capability in the first half of 2014 as well.

So we are excited about this new product and we think that it will have a fairly dramatic impact on the Orbio business going forward. And what I will tell you is that, by the end of 2014, we should have a pretty clear indication of where we are with this technology and its huge potential.

Okay. Very good. One more from me, on the gross margin side, we haven't seen that 44% number in a few quarters now. Is that something you expect you can get back to in 2014 or perhaps even the fourth quarter?

It's certainly a possibility next year, Joe, but we'd like to -- it's just one of the areas that we continue to be conservative on, and I wouldn't expect the fourth quarter to be much different. Maybe we see some modest improvement and there's a possibility we could see ourselves getting back to 44% next year. It's going to be very dependent upon our pricing capabilities and what happens with inflation and our ability to price quickly. We certainly would anticipate given what we are beginning to see a typical kind of a pricing scheme within the first quarter of the year, but there's still more data that needs to come in on that one. We are satisfied with our gross margin performance. We are within range and we do think we have the ability for it to have some upward movement.

Thanks, guys.

You bet.

Jason Ursaner, CJS Securities.

Good morning. Sort of a follow-up to the last question, I have a couple on the new T12, the modularization strategy, I want to make sure I understand the long-term margin potential. So now that you've ramped the T12, are you already seeing a margin benefit relative to the 7100?

Yes. We're very firm in the way we approach new product introductions that in a worst-case scenario we will, in some instances, accept flat margins, but our general approach is we have better margins as we introduce new products. The T12 is particularly interesting because of the modularity side of it.

What I would say is that it is just one product and so for modularity to have a big movement in our gross margins on a global level, we need to get far more new introductions into the market, but it's going very successfully. It's more than meeting expectations and modularity in and of itself is alive and well within our supply chain.

And as we said, we are launching both new commercial and industrial modularly built products every year through 2016, at least.

And have you guys ever previously tried to quantify what the margin expense would be for each incremental new large equipment product that's part of the redesign?

We obviously do some things internally from a modeling point of view and we have very robust financial planners running the new product introduction, but we are going to -- we will take instances where to be more competitive in given parts of the world, we might actually take pricing down, so we are not prepared to quantify anything externally around that, but it is important from a revenue growth point of view and it will be important over the long haul from a margin improvement point of view, but we are not prepared to quantify that.

Okay. And can you just update real quick on the share repurchase program? I didn't hear you mention if the Company was active during the quarter?

Yes, sure, we were purchasing shares in the quarter. We did bring our total reshare purchases up to 343,000 shares on a year-to-date basis. The purchasing profile was similar in Q3 and Q2. Our total repurchases now are at $16.6 million, which is a couple million dollars below where we were at through nine months last year, but we can't comment on that further today, but through the end of the quarter, we were at 343,000 and just under $17 million of share repurchases.

Okay. And last question, at a higher level, investors can make the argument the Company is overcapitalized with no significant CapEx investment really needed to support the growth strategy. So just wondering if you can comment on the longer-term capital allocation strategy and in terms of a targeted capital structure, if the plan is to sort of just continue doing share repurchases versus other alternatives like greater investment or maybe acquisitions.

Yes, we will continue to -- our plan over the period of time is we will return money to our shareholders through share repurchases and also through dividends. We will, as we always do, evaluate whether a dividend increase is appropriate at given points of time. It's something that we look at every quarter and we will make those decisions as they are appropriate. We would like to find ways to spend more capital and we are below our D&A level. We'd be pleased to take that number up. As long as we can keep the appropriate mix of profit adding projects and profit sustaining projects, our target is we want 70% of our capital spending to drive value and 30% to be of a maintenance nature.

We will continue to look at transactions. We are unlikely to do a large M&A deal, but we will look at partnerships and outright acquisitions and they will be centered around technology and driving our innovation platform and also expanding sales and service coverage in markets that are important to us. So we would like nothing better than to find a few more deals similar to the type of transaction we did in Brazil with our Alfa acquisition. We will continue to generate cash, we believe that, and we will continue to look for ways to use that cash to create value.

Okay. Great. Appreciate it.

Scott Graham, Jefferies.

Hey, good morning. So really just two questions, just kind of wondering how the sales trends were as the quarter progressed, particularly in North America and Europe.

In Q3?

Yes.

Yes, I would say -- I'll first comment on Europe -- on some level of improvement, but we still seeing organic declines, so we are far from pleased, but we are seeing improvement and we have pockets of areas that are performing well like France. We do believe we will continue to see improvement in Europe at the current time in the fourth quarter and we might even have an opportunity to drive some modest organic growth as we go into next year.

But as I comment around the profile of the quarter, in total, it was pretty steady. We had decent order patterns in July and August. They are always slower periods, but they were as expected and September was right in the realm where it needed to be as we saw -- that's always the important part of the quarter because you're coming off the summer months and that negatively affects Europe and North America.

I would remind you that we did enter Q3 with a really healthy open order position and that did help the quarter, but we did see order patterns that were what we expected. We have a more normalized open order position as we enter Q4, but we do continue, based on our guidance, to see healthy organic growth expectations within the quarter.

Understood. Thank you. Now, I guess the only other question was around the operating margin goal of 12%. So I think when we spoke last that that goal was kind of still in place, but for the fourth quarter of 2014 rather than 2013. In your opening comments, Tom, you didn't quite say that again. Maybe it was just that you just didn't (inaudible). Is the Company still thinking fourth quarter of 2014 for this?

Assuming that we have growth in our targeted range in the mid to high single digits, we would certainly expect that we would have the capability to deliver 12% operating margins as we exit the year and have that be sustainable into the following year, but it will be dependent on exceeding that revenue growth. So by the fourth quarter of next year, we would certainly expect that that would then be sustainable as we go into 2015.

Hitting it in a quarter doesn't matter; it's got to be a sustainable level. But we are marching towards that number, we feel very good about the progress we've made, particularly in an environment that has been for many quarters dramatically below the kind of growth expectations we normally have. We think we're extremely well-positioned to deliver that 12% now.

Great. Thank you both.

(Operator Instructions). Rosemarie Morbelli, Gabelli & Co.

Good morning. I am new to the story, so I may ask a question that everyone else knows, but when you introduce a new product, you are looking for higher margin. How long of a leadway do you have on that higher margin? I mean when those new products become one or two years old, isn't competition coming in and then you actually have to lower your price and margin, or am I not looking at this the right way?

Yes, our business is a little unusual in that we really get to our targeted margins quite quickly and we come right out at normalized pricing and we get to our margin targets fast. There isn't a long startup curve that you have in a lot of businesses and we get there quickly and then we will typically see a revenue ramp that won't reach its peak until the second or the third year of the time that a product is in the market. Obviously, every product is a little bit different, but the rollout happens in a stage and it will reach its peak in year two or year three.

The big reason for that is people -- we don't change the cycle of when people buy. They buy new equipment when their old equipment is ready to be replaced, generally. There's always exceptions, there are places where people are buying brand new equipment for the first time, but generally we are in a replacement cycle where they are replacing an existing piece with a new piece.

And what is the life -- if you sell your T12, for example, how long before it needs replacement?

Very dependent upon the level of hours that it runs and the harshness of the environment it is operating in, but our typical piece of equipment is going to be on average five to six years or so. And a T12 operating in a harsh environment might actually last less than five years, but there will be places where it could last for over 10 years. So there's a wide range of timing on virtually all of our products.

Okay. Thanks. And then if I may, Diversey is (inaudible) is bringing their cleaning equipment from Europe into the US for the first time. Have you seen them in the marketplace already, and how is it affecting your own business?

We are aware that they are bringing the products into the US for the first time. The products have been here, but on a limited basis. I think it is the first time they've had a concerted strategy to push cleaning equipment. We are monitoring their progress, but, as of right now, it is not impacting our business in that we are not seeing them come up against us on all the most important deals that we are in on.

Yes, I'd comment further on that and say that Taski tends to be a bit stronger in some vertical markets that we are not as -- don't have as big of a presence in. Like the hotel area, they are particularly strong in that area. That's not a vertical market that's an area of strength, but we are paying close attention.

Because we know that in Europe, for example, they are strong, they have a well-established equipment business in Europe. We do see them in most of the countries that we play in and we respect their position, so we are not being complacent.

Okay. Thank you.

There are no further questions. I will now turn the call back over to management.

As I mentioned earlier, we are encouraged that our organic sales growth returned to mid-single digits in the 2013 third quarter. We anticipate further improvement in our operating margin will enable us to attain our goal of 12%. We were also pleased with our accelerating new product sales and the continued growth in both our global strategic accounts and our overall Americas business. So thank you for your time today and for your questions and we look forward to updating you on our 2013 fourth-quarter and full-year results in February. Take care, everyone.

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