Tennant Co (TNC) 2014 Q3 法說會逐字稿

Good morning. My name is Kimberly, and I will be your conference operator today. (Operator Instructions). At this time, I would like to welcome everyone to Tennant Company's third-quarter earnings conference call. This call is being recorded. There will be time for Q&A at the end of the call. (Operator Instructions).

Thank you for participating in Tennant Company's third-quarter earnings conference call. Beginning today's meeting is Mr. Tom Paulson, Senior Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

Thanks, Kimberly. Good morning, everyone, and welcome to Tennant Company's third-quarter 2014 earnings conference call. I am Tom Paulson, Senior Vice President and Chief Financial Officer at Tennant Company.

With me on the call today are Chris Killingstad, Tennant's President and CEO; Tom Stueve recently promoted to Treasurer; and Karen Durant, our VP and Controller.

Our agenda today is to review Tennant's performance during the 2014 third 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 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 filed 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 no special non-GAAP items in the first nine months of 2014, but there were special non-GAAP items in the first and fourth quarters of 2013. The 2014 third-quarter earnings release includes reconciliation of these non-GAAP measures to our GAAP results for the 2013 first nine months and full year.

Our earnings release was issued this morning via Business Wire and has also been 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. Let me begin by saying that Tennant again executed very well on our growth strategies in the third quarter. Our platform to accelerate organic sales is clearly working as we strive to attain $1 million in revenues by 2017 with an operating profit margin of 12% or above.

Taking a look at the third-quarter results, we posted our second highest quarterly sales in Tennant's history, driven by strong growth in the Americas and EMEA regions.

In addition, Tennant set a sales record for a third quarter with sales gains in all of our major categories: equipment, parts and consumables, service, and coatings.

Our consolidated net sales in the quarter were $202.6 million, up 7.5% compared to the prior year quarter. Diluted earnings per share rose 12.5% to $0.63. Contributing to our performance were increased sales to strategic accounts and through distribution and continue demand for new products such as the compact T12 and midsize T17 rider scrubbers and walk behind burnishers.

The gross margin in the quarter, however, was below our expectations. It was constrained by supply chain challenges that we experienced with increased costs related to hiring and training additional manufacturing employees and temporary workers to support high production levels, including the continued ramp-up to meet the growing demand for new products. These are short-term growing pains, they are fixable, and we are taking the necessary steps for improvement.

Tom will cover results in our geographies in more detail, but I'd like to share a few highlights. We saw continued strong growth in Tennant's largest region, the Americas. Sales here increased 9.8% organically in the quarter, driven primarily by sales in North America. Latin America is an important region for us, and it has continued to grow, although at a slower rate due to macroeconomic conditions there, especially in Brazil.

In EMEA, we had a nice improvement from the second quarter. The third-quarter sales rose approximately 6.5% organically. Growth in EMEA was broad-based, and we anticipate continued organic growth in this region in the 2014 fourth quarter. We are pleased with our overall performance in EMEA, and our strategies here are on track.

Sales in the Asia-Pacific or APAC region were down about 5.1% organically in the quarter, stemming from economic uncertainties in the key markets. APAC was very solid in 2014 first half, and we anticipate sales in that region will return to growth in the 2014 fourth quarter and for the full year.

Taking a look at our new products. Tennant continues to execute against one of the most robust new product and technology pipelines in the company's History. We are on plant launch more than 63 new products and technologies between 2014 and 2016, and that is on top of 37 new products from 2012 to 2013.

Innovative products and technologies are a significant driver of the Company's revenue. Sales of new products introduced since the 2012 fourth quarter have risen steadily from 2% of total equipment sales in the 2013 first quarter to 13% in the 2014 third quarter. This demonstrates the growing momentum of new product sales as we complete our launches and demand accelerates.

Year-to-date in 2014, we have introduced 10 new products with six additional products expected to be introduced by year-end. During the 2014 third quarter, Tennant launched the S30 mid-sized rider sweeper. This product provides indoor and outdoor sweeping with optimized dust control in both light and heavy duty applications.

Initial sales are going well. The S30 is attracting customers who have very demanding environments to clean. With the S30, we now have a complete line of sweepers from subcompact to industrial-sized riders.

Other major 2014 launches that have already occurred and continue to be strong sales contributors include the T17 midsize battery-powered rider scrubber that offers the largest available battery capacity in its class, making it highly productive. The T17 will clean for up to eight hours on a single charge.

We expanded on our award-winning furniture line, introducing walk behind battery-operated models that are emissions free and deliver propane-like floss results.

In addition, the Orbio Technologies Group and Tennant Company launched the Orbio os3, which delivers on-site generation of an antimicrobial solution, as well as an effective multi-surface cleaner for use in a wide variety of customer segments. It is small, simple to use and affordable. It meets US EPA regulatory guidelines for disinfection and sanitization.

The positive response across a broad range of industries is encouraging. Key leading indicators such as the pipeline of active prospects, customer trials and trial conversion to sales continued to grow. On top of the sales momentum of our new offerings -- our new offerings have generated to date, we look forward to announcing several more new products at the upcoming ISSA industry tradeshow in early November.

Among them we plan to preview a prototype of our next generation ec-H20 technology, and we anticipate offering it on select scrubbers in the first quarter of 2015. This move is consistent with our strategy to periodically update and significantly improve key products and technologies in our portfolio. We look forward to telling you more about this next generation technology in the near future.

Sales of scrubbers equipped with our first generation ec-H20 technology grew 6% in the first nine months of 2014.

Turning to other corporate developments, I'm very pleased to let you know that we have added a highly skilled individual to our leadership team. David Huml is joining Tennant in early November as Senior Vice President of Global Marketing. David has stellar industrial, marketing and management background that spans 23 years. He most recently was Vice President of a large global business at Pentair. David will be instrumental in advancing our organic growth initiatives, and we're delighted to welcome him to Tennant.

We remain encouraged by our initial performance against our growth agenda through the first nine months and are on track to deliver robust sales and earnings growth in the 2014 fourth quarter. We've made important investments in sales, marketing and distribution. These investments have been front-end loaded, but they are paying off.

Tennant continues to generate strong organic sales gains. Our focus is on executing our growth strategies and working to resolve short-term supply chain challenges in order to achieve our profitability objectives.

Going forward, the main drivers of our growth strategy continue to include strong and sustained new product growth in our core business and in the Orbio Technologies Group, continued significant sales gains in emerging markets, growth in Europe, ongoing focus on strategic accounts and an enhanced go-to-market strategy designed to meaningfully expand Tennant's global market coverage and customer base.

Our plan to achieve $1 billion in revenue by 2017 includes an assumption of approximately 2% global GDP growth. And we anticipate Tennant's targeted 7% compounded annual growth rate to be broken down approximately as follows. Up to 3% from new products including Orbio; up to 3% from our enhanced go-to-market strategy, including Europe and strategic accounts; and up to 2% from emerging markets. We will carefully monitor our performance and seek to accelerate our timeline wherever possible.

Now I'll ask Tom to take you through Tennant's third-quarter financial results. Tom?

Thanks, Chris. In my comments today, I'll reference earnings per share on a fully diluted basis. Also, please note as I go through the results, I'll generally not comment on the year-to-date financials as those were detailed in the earnings release.

For the third quarter ended September 30, 2014 Tennant reported net sales of $202.6 million compared to $188.5 million in the prior-year quarter. Organic sales grew approximately 7.5% with an overall neutral foreign currency exchange impact.

We are encouraged by the (inaudible) level of organic sales growth in the past five quarters. As you may recall, Tennant's organic sales growth was approximately 8.9% in the 2014 second quarter, 10.5% in the 2014 first quarter, 5.1% in the 2013 fourth quarter and 6.8% in the 2013 third quarter.

Third-quarter 2014 net earnings were $11.8 million or $0.63 per share. In the year ago quarter, Tennant reported net earnings of $10.6 million or $0.56 per share.

Turning now to a more detailed review of the 2014 third quarter, our sales are categorized into three geographic regions, which are the Americas, which encompasses all 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, 2014 third-quarter organic sales increased approximately 9.8%, excluding about 0.5% of unfavorable foreign currency impact. Record sales for the third quarter in North America were fueled by strong sales of new products such as the new T12 and T17 rider scrubbers and also the new walk behind burnishers. Latin America sales growth in the 2014 third quarter was lower compared to the 2014 first half, primarily due to economic headwinds in Brazil. This is an important emerging market for us, and we remain confident about the long-term growth prospects in Brazil.

In EMEA our organic growth sales growth in the 2014 third quarter was approximately 6.5%, excluding a foreign currency benefit of about 2%. This compares favorably to the organic sales decline of approximately 1.9% in the 2014 second quarter, excluding a favorable foreign currency impact of about 5.5%.

We had mentioned on our second-quarter conference call that this decline was primarily due to timing of orders. Some of the orders we had expected in June were received in July. Sales growth in the 2014 third quarter was broad based.

We had another good quarter in our city cleaning business with increased year-over-year sales for the fourth consecutive quarter. Sales of strategic accounts resume their momentum, and we had a strong sales to our master distributor in central eastern Europe, Middle East and the Africa markets. EMEA organic sales for the 2014 first nine months grew approximately 3.3%, excluding a favorable foreign currency impact of about 4%.

In Tennant's Asia Pacific region, organic sales declined approximately 5.1%, excluding an unfavorable foreign currency impact of about 0.5%. Economic uncertainties in our key markets of Australia, Japan and China lengthened -- and China lengthened sales cycles, which impacted the timing of orders and shipments. Most of the APAC organic sales from the 2014 first nine months rose approximately 11.7%, excluding an unfavorable foreign currency impact of about 3%. This was led by growth in China of approximately 20%.

As Chris mentioned, we do expect positive sales growth in APAC in the 2014 fourth quarter and the full year.

Attendance gross margin for the 2014 third quarter was 43% compared to 43.4% in the prior year quarter. This was within our target range of 43% to 44%. Gross margin in the 2014 third quarter -- we are getting some background noise there. Again, this is Tom talking, and somebody must think they are on mute. We would appreciate it if we could have some -- not have the background noise, thank you. Gross margin in the 2014 third quarter was 40 basis points lower than the prior-year quarter, primarily due to supply chain challenges with increased costs related to hiring and training additional manufacturing employees and temporary workers to support higher production levels, including the continued ramp-up to meet the growing demands for our new products.

As Chris mentioned, we are proactively addressing these challenges in order to increase manufacturing productivity and improve our gross margin performance. From a timing perspective, these are short-term issues, but will likely take a couple of quarters to remedy.

Research and development expense in the 2014 third quarter totaled $6.8 million or 3.4% of sales compared to $8 million or 4.2% of sales in the prior-year quarter. We continue to invest in both our core business and Orbio, which is focused on advancing the speed of sustainable water-based cleaning technologies.

Selling and administrative expense in the 2014 third quarter totaled $63.2 million or 31.2% of sales. This compares to S&A in the third quarter of last year of $57.7 million or 30.6% of sales. To accelerate future growth, we continued making targeted strategic investments in this area that include additional direct sales, distribution and marketing capabilities. Our 2014 third-quarter operating profit totaled $17.1 million or 8.4% of sales compared to the year earlier operating profit of $16.2 million or 8.6% of sales.

As Chris noted, we remain committed to our goal of 12% or higher operating profit margin by successfully executing our strategic priorities and assuming that the global economy improves. As we work hard at 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 continue to improve the scalability of our business model while minimizing any increases in our operating expenses.

Thus far we have made significant progress in building a scalable business model capable of delivering improved operational efficiency and profitability. We have now placed a renewed focus on accelerating organic revenue growth. While we're very encouraged at the level of organic sales growth achieved in recent quarters, we have experienced some growing pains as we adjust our operations to this higher pace of growth.

We continue to successfully execute our tax strategies. Tennant's overall effective tax rate for the 2014 first nine months was 31%, which is lower than 32.6% for the first 2014 first half. This improvement was due to routine favorable discrete tax items and the estimated full-year taxable earnings by country. The base tax rate of 32.7%, which excludes routine discrete tax items, was within our target range of 31% to 33%.

Note that we are not able to include any benefit in the 2014 first nine months for the federal R&D tax credit as this has not been reenacted for 2014.

Turning now to the balance sheet. Again (inaudible) continues to be very strong. Net receivables at the end of the 2014 third quarter were $141.8 million versus $139.8 million a year earlier. Quarterly average accounts receivable days outstanding were 65 days for the third quarter, the same as in the 2013 third quarter.

Tennant's inventories at the end of the 2014 third quarter were $84 million versus $67.4 million a year earlier. Quarterly average FIFO days inventory on hand were 90 days for the 2014 third quarter compared to 82 days in the year ago quarter. We have increased our inventories to support higher sales levels and many new product launches.

Capital expenditures of $13.5 million in the 2014 first nine months were $2.1 million higher compared to the $11.4 million in the prior-year period with plant investments and tooling-related new product development, manufacturing equipment and process improvement projects.

Tennant's cash from operations was $36.8 million in the 2014 first nine months comparable to the cash from operations of $36.8 million in the 2013 first nine months.

Cash and cash equivalents are strong totaling $79.8 million, up $14.5 million from $65.3 million year ago. The Company's total debt of $28.2 million declined $3.8 million from $32 million year ago. Our debt to capital ratio was 9.3% at the end of the 2014 third quarter versus 11.3% a year ago.

Regarding other aspects of our capital structure, effective with the June 2014 dividend, Tennant raised the payment 11% from $0.18 to $0.20 per share. We paid cash dividends of $10.9 million in the 2014 first nine months compared to $9.9 million in the first nine months of last year. Reflecting our commitment to shareholder return, we are proud to say that Tennant has now increased our annual cash dividend payout for 43 consecutive years.

During the 2014 first nine months, we purchased 217,534 shares of Tennant stock at an average price of $62.56 per share for a total cash outlay of $13.6 million. As of September 30, 2014 we had 413,069 shares remaining under our repurchase program.

Moving now to our outlook for 2014. As Chris said, based on our 2014 year-to-date results and expectations of future performance, we are increasing our sales range and lowering the top end of our earnings range guidance. We now estimate 2014 full-year net sales in the range of $810 million to $820 million, up 8% to 9% over the last year. We anticipate earnings in the range of $2.60 to $2.70 per diluted share, an increase of 15% to 20% compared to the 2013 as adjusted. This anticipates a significant growth in the fourth-quarter 2014 earnings.

Our previous guidance estimated 2014 full-year net sales in the range of $800 million to $815 million and earnings in the range of $2.60 to $2.80 per diluted share. For the full-year 2013, adjusted earnings per share totaled $2.26 on net sales of $752 million.

Our current 2014 annual financial outlook includes the following expectations: modest economic improvement in North America and Europe and growth in emerging markets; foreign currency impact on sales for the full year in the range of neutral to an unfavorable 1%; gross margin performance of approximately 43%; research and development expense of approximately 4% of sales; and capital expenditures in the range of $20 million to $22 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.

Note that our 2014 base tax rates does include the 2014 benefit for the federal R&D tax credit; however, as I mentioned earlier, that has not been reenacted for 2014. Therefore, we are not allowed to include its favorable impact in the 2014 tax rate we record until it is enacted.

Our current sales and earnings guidance reflects the success of our renewed focus on accelerating organic sales growth and the continued investments in direct sales distribution of marketing to drive future growth. It also assumes that it'll take us a couple of quarters to improve the performance of our supply chain as we continue to ramp up to support higher levels of production and launch new products.

And now we would like to open up the call to any questions. Thanks, Kimberly.

And Kimberly, this is Chris Killingstad. Before we go to the questions, I just want to make a comment. I have just been told that the quality of this call has been very, very poor. I just want everybody to know we put in a new global phone system and communication system recently, and clearly it did not work as intended today. We apologize profusely, and we promise that the next time for the fourth-quarter earnings that we will have it fixed. So again, our apologies.

(Operator Instructions). Joe Maxa.

I wanted to ask a little bit more or get a little bit more color on the gross margin impact. Did you hire additional headcount to help with the production and the new products, or is this primarily people you've had before that you're just training? I'm just trying to get a sense of maybe where that is at.

Yes, it's honestly, Joe, a new phenomenon for us. As you remember, we really not only held our overall headcount relatively flat, we've also have not added many permanent employees in our factory. We've really managed our surges through temporary people, and due to the growth that we've seen, we needed to start adding heads. It did have some negative impact on us in the last quarter as we talked about. We thought we had it firmly under control, but we did need to continue to add not only permanent heads as we convert temporaries to permanent, but we also needed to continue to add temporary people to support our growth.

And the place that we are making those major adds are really in our three major facilities in North America, and all those areas have been affected. So it has been disrupted, but I really want to focus on the fact that it's very fixable, it's under control, and we're working our way through it aggressively as we speak. And it will not have any impact on our targeted numbers as we look forward and our ability to deliver growth targets and profit targets.

And I just like to add that as many of you know that finding these days qualified manufacturing talent is not as easy as it once was. And so, we didn't have as much initial success in bringing the temps on board and getting them trained to Tennant's very high standards, and so we've had a lot of turnover on the temporary front. I think we are starting to work our way through that, and as Tom said, by the end of the first quarter, we should be back in a very stable situation, which is what we have always had historically.

Okay, that's helpful. I wanted to ask about the broad-based growth you're seeing in Europe. I mean could you give us a little color? Is it really related to new products? New customers? What's driving that broad-based growth?

Well, when we say it's broad based, we're seeing decent growth in many of our key countries. We're seeing growth in strategic accounts. We put a new emphasis on our distribution business in Europe, and that's paying dividends. Our master distributor for Central Eastern Europe, Middle East and Africa continues to grow very, very nicely.

Yes, new products are adding to the growth, but I think a lot of it has to do with the fact that we've spent the last couple of years really restructuring our sales and marketing efforts in Europe, upgrading our talent in key parts of the business, and that's starting to pay dividends.

I see, okay. And on the new products, you talked about a new technology for ec-H20. Is that something you would expect to expand your market opportunity?

Yes, of course, we hope to expand the opportunity with the next generation. We think it's an exciting technology. I think it's a significant enhancement to our existing generation of ec-H20 technology, and we're hoping to be able to bring more customers in the fold.

As you know, Joe, we have only about what is it 50% adoption rates on current generation technology. So there's, even among our existing customer base, a lot of room for growth, and as we start to expand our efforts in terms of enhancing our market coverage around the world and accessing new customers, we think this new technology will help us drive that effort as well.

Okay. And lastly for me, I wanted to ask your new customer acquisitions strategy. Do you have any stamp that can give us any type of color on know if you can give us like a number or a percent growth of customers that are new customers from your strategy so far?

I would say right now we're in the very early stages. Sure, we've had some isolated wins here, but we're still in the stage of really analyzing where the opportunities are, betting that these are truly new customers, and they are relevant to Tennant, and they fall within the key vertical markets we are competing for. And then some of the sales and marketing resources we're putting in place, we're putting in place to help us go after those new customers. So I would say we are in the early stages.

Most of the growth that you've seen to date organically is not coming from that initiative. That initiative lies ahead of us. But I still believe that over the next three years it may be the biggest opportunity we have to grow. Remember, we have relatively low market share around the world.

Right. Thanks a lot.

Jason Ursaner.

Just first on the revenue, you mentioned the new products, the introduction of the 10 new products is a nice contributor. And Chris, I apologize if you did say it in your prepared remarks and I just missed it. But is there any way to quantify the contribution you're seeing now as a percent of sales, and when you talk about the growth in the context of the 7% compound rate to get to the long-term goal, that is a net number relative to the predecessor product that it's replacing?

Two comments on that. I think the most -- the metric that we did talk about is, if you went to the first quarter of last year, our equipment revenue, 2% of that came from new products we started to introduce in 2012. Last quarter we were at 13%. So we continue to see momentum in our new product activities, and that's really how it works for us. Products that are introduced they grow in their second year of introduction and grow in the third year and sometimes even beyond that. But we don't see our peak growth generally at least until year three. So a wave of new products will continue to see this kind of increase in our new product activity as a percent of our equipment revenue.

And when we talk about the growth in our billion-dollar target that's going to come from new products, that is a net number. So it is not a gross new product number. It's a net number after attrition. And we have to look at our new product introductions that way. I mean it is a critical part of the analysis that we've got to generate enough incremental revenue to justify the investment behind those new product ideas. So we diligently track the true incremental revenue that we're deriving.

Okay. And for the T12, I know you guys have pretty strong expectations for continuing layering in of demand. How are you seeing that product and maybe early stages with the T17 relative to that peak kind of three-year growth, and are they going on track or was some of the manufacturing growing pace kind of centered on the new products?

I would say that T12 and T17 are both doing better than expectations, and therefore, we are thoroughly pleased with what's happening in the market. So I would say sure could we have delivered maybe a couple of more products? It's not having a material impact on the success of those new products. They are are doing really well, and we continue to expect them to ramp up and have higher growth in future years.

Okay. And just following up on the question you had previously about the prototype for the next generation ec-H20, is this going to be available retrospectively as an upgrade on to the previous module that is already on equipment in the field, or is it replaceable, or is it just going to come on new equipment whenever it launches?

No, we will not retrofit old machines. We will only have it on select scrubbers starting in the first quarter and will roll it out over the relevant scrubber portfolio. You know, I'm not going to commit to a timeframe for that, but if you look at what we did with the first generation of ec-H20, it probably took us two and a half years to get there. So I assume about the same timeframe here.

But we will not be putting the first generation ec-H20 module on any of the products where the second generation goes on. So over the next two and a half years, we will switch second generation to first generation. And, as I said, we expect that will help us to grow because it is an enhanced technology that we hope will both clean better and be able to clean in more applications.

Okay. But in the interim, it wouldn't impact the attachment rate or no one would hold off for anything to wait for --

No, no, no. Between the first generation and the second generation, you should see the attach rates remain stable. Hopefully they will help start to grow.

Okay. And you talked previously about the likelihood to grow operating expenses in the short-term in line with sales growth. For the quarter, obviously you mentioned some of these growing pains. Is that target still the right range, and is spending likely to continue outpacing revenue growth for a short period of time until it balances out?

Yes and we'll provide more insight on next year at the traditional time of when we give guidance, which will normally be when we release our year-end numbers later in February. But it would be fair to say that we would expect to see lower operating expenses sequentially in Q4 relative to Q3 modestly, and we would expect to see improved leverage in the fourth quarter relative to prior year. So if you looked at our operating expenses and use Q4 as a percent of our revenue compared to last year, we do believe we will begin to see some improvement.

We've seen very little improvement on a year-to-date basis as we've been making major investments, and I would tell you that in the last quarter our revenue was a little below our expectations. We did not adjust our spending as we continue to invest. So that did have some level of impact on our leverage, but we will begin to see improvement in the fourth quarter.

Clearly, I mean we expect to see leverage improvement in our operating expense as a percent of revenue next year. That is a critical part of the delivery of our 12%, and we've been balancing it we think appropriately so far, but you expect to see leverage going forward.

Okay. Appreciate all the details, thanks.

Daniel Rizzo.

With the new product launches, do you initially like the first year offer them at a discounted price to increase adoption rates and then raise prices in the second year? Is that kind of the strategy?

No, we don't. It's not to say that we don't do some things from a marketing point of view to generate excitement at the front end. So there can be some things that could potentially stimulate demand, but the reality of it is that's just a bad practice in our business. That machine might go out in the market and be there for four or seven years. You can't afford to provide discounting to drive it. It's got to be demand-based, and we don't discount at the front end.

Okay. And then you indicated that Europeans sales are strong. Asia was weak in the quarter because of uncertainty. I'm just wondering why the uncertainty in Europe is -- I mean, I don't know what the numbers would be this morning, but certainly Europe is not playing into that more. So why there's I guess a dichotomy between the two.

Yes, part of it is just really timing related, and I mean I hear you that as you read the paper every day you have mixed points of view about what's going on in Europe. We would just tell you that we grew nicely in the quarter, we are growing on a year-to-date basis, and Chris pointed out the multiple places where growth is coming from.

Our eyes aren't closed, but our business in Europe feels pretty darn solid, and we expect another quarter of organic growth in Q4, and we expect a return to growth in APAC and really do view that even though we saw some economic uncertainties and some deferrals, we believe that's timing related, and we think we will return back to growth, particularly in China that we are still growing at 20% on a year-to-date basis. We expect another really good growth quarter out of China in Q4.

But don't get us wrong, I mean the conditions are still pretty tough in Europe, they are.

Yes.

But remember, we are coming from a place of single-digit market share. So, even in a tough environment with the new sales marketing structure and the new products in Europe and just going to market more effectively, we have the possibility of making some gains, and that is showing up in the numbers.

So that would suggest that even if things do get more relatively worse in Europe, that you could still grow just because there's joint market share from your competitors?

Yes, we don't anticipate in the short-term that Europe is going to improve from a macroeconomic perspective, but we do fully expect that we continue to grow organically.

All right. Thank you, guys.

(Operator Instructions). Scott Graham.

A couple of questions for you guys pretty much around gross margin, and it's really two questions specifically. The gross margin decline and/or related confidence that the issues will be cured, let's say, two or three quarters out. I'm assuming that you you're implying that gross margin will be down again in the fourth quarter?

No. We would actually expect in Q4 to see not only sequential improvement, but we would also anticipate to see better gross margin performance than the prior year in Q4. But we are being straightforward about the fact that we are not going to be back to our stellar performance that we've had for multiple other quarters. It might be until the end of Q1 before we exit there, and we are really back completely on track. But I'd also remind folks that this has been one of our real strengths as our supply chain across the entire corporation.

And yes, we haven't done as well absorbing the growth and the sheer level of new product activity. But it's a very fixable issue, and we're going to work our way through it. But we'll start to see that improvement as we believe in Q4, and that's what is built into our guidance. It's not dramatic improvement, but we will see, we believe, improvement in our gross margin sequentially and versus the prior year.

Understood. If, however, we are going to be launching on a quarter by quarter basis more new products in the fourth quarter than we have in any of the previous three quarters, are you saying, Tom, that your production and your people are attuned for another ramp in new products that's scheduled for this quarter?

I would say a couple of things there. One is that the magnitude of the launches in Q4 are smaller than we've seen in the front part of the year and some of the things we did last year. We're back at the next two years to see bigger more meaningful launches. But we have to be careful in the Q4 of the level of new product activity because of the fact that it is -- it's not our biggest quarter. It's our second-biggest quarter of the year, and we need to be cautious as we manage our way through that.

So we think we've got call it an easier balance in Q4 of growth and less new new product activity.

So more new products in the fourth quarter versus previous quarters, but lower impacting lower dynamics. Got it.

Yes, yes.

Okay. Is there a reason why because you guys are talking about this issue, production issue as impacting the gross margin and as to why it was holding down for that reason. Yet you had a real good sales number, and we didn't get it looks like any operating leverage off of that. Could you tell us some of the other puts and takes on the gross margin in the quarter?

Really the inefficiencies was the biggest piece. And it's -- I realize it's a big number, and it's hard to specifically quantify. But there are tentacles that reach out as you are adding people and training people and adding turnover and having more difficulty accessing those people. It has ripple effects in the way that the factories are running.

So it is -- because as we look at other areas, there was not any meaningful mix changes in our business. We did get pricing of a percent, and we are on a year-to-date basis our pricing benefit is around 1% benefit, which is really in line with our expectations. And we saw modest inflation, but nothing to be concerned about. I mean it's not certainly not having any material impact on the margins. So we do feel it's very isolated and very fixable.

Very good. Thank you.

Since there are no further questions at this time, I would like to turn the call over to management for closing remarks.

We are pleased with our progress to date and confident we have laid a strong foundation for future. We will continue to focus on growth, building on a solid year-to-date performance in 2014 with results in the first nine months that included organic sales growth of approximately 9%. Our strong order position going into the 2014 fourth quarter gives us confidence in our outlook for the full year. We will unveil new technologies in November that we believe will further fuel Tennant sales going forward. We are committed to our growth goal of $1 billion in sales by 2017 and a 12% or above operating profit margin.

We look forward to updating you on our 2014 fourth-quarter results in February of 2015. Thank you for your time today and for your questions. Take care, everybody.