Tennant Co (TNC) 2014 Q4 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company fourth-quarter and full-year earnings conference call. This call is being recorded.

(Operator Instructions)

After the Q&A, please stay on the line for closing remarks from management.

Thank you for participating in Tennant Company's fourth-quarter and full-year 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, Stephanie. Good morning, everyone, and welcome to Tennant Company's fourth-quarter 2014 earnings conference call. I am Tom Paulson, Senior Vice President, Chief Financial Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO; and Karen Durant, Vice President and Controller.

Our agenda today is to review Tennant's performance during the 2014 fourth quarter and full year, and our outlook for 2015. First, Chris will brief you on our operations, and then I'll cover the financials. After that, we'll open up the call for 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 also provide the most directly comparable GAAP measure. There were no special non-GAAP items in 2014, but there were special non-GAAP items in the first and fourth quarters of 2013. Our 2014 fourth-quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results for the 2013 fourth quarter and full year. Our earnings release was issued this morning via business wire, and is also posted on our new investor website at investors.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 very pleased to report another strong quarter. Tennant again executed well on our growth strategies. Our platform to accelerate organic sales is clearly working. We are on track to reach our organic growth goal of $1 billion in sales by 2017, and we remain committed to the goal of a 12% or above operating profit margin.

In the 2014 fourth quarter, Tennant posted double-digit gains in sales and earnings per diluted share. Organic sales rose approximately 14%, and set a record for a fourth quarter. Notably, this marked our highest organic sales growth quarter of the year.

In the fourth quarter, we had increased revenues in all equipment categories, and organic sales gains in all our geographic regions. Contributing to these results were robust sales to strategic accounts and through distribution, as well as continued demand for new products such as our mid-sized T17 Rider Scrubber and Walk Behind burnishers. Also, sales of scrubbers equipped with EC-H2O technology rose nearly 11%.

Now, I'd like to share a few sales highlights by geography. We saw continued strong growth in the 2014 fourth quarter in Tennant's largest region, the Americas. Sales were up 16% organically, driven primarily by performance in North America. We are pleased that two leading US big-box retailers renewed their contracts with us, which contributed to the strong results from strategic accounts.

Latin America is growing at a slower rate due to macroeconomic conditions there. In the important market of Brazil, we continue to have a strong share, and are well positioned for growth when the economy improves.

Sales in EMEA rose approximately 8% organically, chiefly due to contributions from our outdoor city cleaning business. This marked the fifth consecutive quarter of positive growth in outdoor equipment. Further, our industrial and commercial equipment business performed well in the UK and Germany. We are pleased with our results in EMEA, and our strategies here remain on track.

Sales in the Asia-Pacific, or APAC region, increased approximately 15% organically. As you'll recall, Tennant's APAC sales were solid in the 2014 first half, and then softer in the third quarter. But, as anticipated, our sales in this region returned to positive growth in the 2014 fourth quarter, and rose in all countries.

Taking a look at profit margins in the 2014 fourth quarter: We continue to experience the supply chain challenges that I mentioned on our last call -- on our call last quarter. We had 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 growing demand for new products. Despite this, we achieved leverage in Tennant's gross and operating profit margins during the 2014 fourth quarter. That leads into new products.

Tennant continues to execute against one of the strongest new product and technology pipelines in the Company's history. In 2014, Tennant introduced 18 new products, including eight products unveiled in the fourth quarter. In 2015, we plan to introduce 36 new products, on top of 55 launched from 2012 to 2014.

As you know, innovative products and technologies are a significant driver of a 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 16% in the 2014 fourth quarter. This demonstrates the growing momentum of new product sales as we complete our launches, and demand accelerates.

In early November, we were excited to preview several upcoming introductions at ISSA, the cleaning industry tradeshow, including a prototype of our next-generation EC-H2O technology called EC-H2O NANOCLEAN. This next-generation solution offers the same great benefits of the first generation, and will now clean better, and clean more soils in more applications. The name NANOCLEAN refers to the creation of nanoscale bubbles that are an important part of the cleaning mechanism. We anticipate offering it on select scrubbers at the end of the first quarter this year. We look forward to telling you more about this technology in the near future.

Sales of scrubbers equipped with our first-generation EC-H2O technology grew nearly 11% in the fourth quarter, a record sales level in a quarter, and rose 7% in 2014, reaching $153 million in EC-H2O sales for the 2014 full year.

Also in the fourth quarter, Tennant Company's Orbio Technologies group received the ISSA Innovation Award for the Orbio os3 On-Site Generation System. Launched in 2014, the Orbio os3 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; and 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 conversions to sales, continue to grow.

In addition, I'd like to note that our new T17 mid-size Rider Scrubber has been a real homerun this year. This model has the largest available battery capacity in its class, making it highly productive; and it will clean up to eight hours on a single charge. Sales of the T17 exceeded our high expectations in 2014.

Looking at our first-year performance against our growth agenda, our strategies are clearly working. We have made important investments in sales, marketing, and distribution to increase our global market share. These investments have been front-end loaded, but they are paying off; and we anticipate they will continue to generate strong organic sales. Our focus remains on executing our growth strategies, and working to resolve the 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. We are encouraged by our performance in 2014 against our growth agenda, and expect to deliver organic sales gains in the mid- to high-single-digit range in 2015.

While we anticipate that foreign exchange rates will unfavorably impact sales and earnings in 2015, we are focused on controlling what we can control. We will continue to focus on creating value by introducing new products, and expanding our global sales and marketing initiatives to increase our global market share, while concurrently running a more efficient business to raise productivity. We anticipate this will lead to double-digit organic operating profit growth in 2015. We believe that Tennant's future is bright.

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

Thanks, Chris. In my comments today, all references to earnings per share are on a fully diluted basis. Also, please note as I go through the results, I'll generally not comment on the 2014 full-year financials because those were detailed in the earnings release.

For the fourth quarter ended December 31, 2014, Tennant reported net sales of $216.3 million compared to $195.1 million in the prior-year quarter. Organic sales grew approximately 13.8%, excluding an unfavorable foreign currency exchange impact of approximately 3%. For the 2014 full year, Tennant reported net sales of $822 million compared to $752 million for the 2013 full year. Organic sales rose approximately 10.3%, excluding an unfavorable foreign currency exchange impact of about 1%. We are encouraged by the solid level of organic sales growth this past year.

Fourth-quarter 2014 net earnings were $17.5 million, or $0.93 per share. In the year-ago quarter, Tennant reported net earnings of $10.3 million, or $0.55 per share. The 2013 fourth quarter included a $1.6-million pre-tax restructuring charge, or $0.10 per diluted share, to right-size Tennant's cost structure, and enhance our go-to market approach, primarily in Europe. Excluding these special items, adjusted 2014 fourth-quarter net earnings totaled $12.2 million, or $0.65 per diluted share.

Turning now to a more detailed review of the 2014 fourth 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, 2014 fourth-quarter organic sales increased approximately 16%, excluding about 1.5% of unfavorable foreign currency impact. Record sales for a fourth quarter in North America were fueled by strong sales to strategic accounts, and through distribution, including sales of new products.

Latin America organic sales growth in the 2014 fourth quarter was approximately 15%, which was strong, but slower compared to about 20% in the 2013 fourth quarter. This was primarily due to economic headwinds in Brazil. As Chris mentioned, this is an important emerging market for us, and we remain confident about the long-term growth prospects there.

In EMEA, our organic sales growth in the 2014 fourth quarter was approximately 8%, excluding an unfavorable foreign currency impact of about 8%. This compares favorably to the organic sales growth of approximately 6.5% in the 2014 third quarter, excluding a favorable foreign currency impact of about 2%. While the derivation of organic sales growth excludes the impact of foreign currency exchange, it is important to note the significant swing in just one quarter, from an approximate 2% benefit in the 2014 third quarter to an approximate 8% unfavorable impact in the 2014 fourth quarter.

Organic sales in EMEA in the 2014 fourth quarter was broad-based. We had another good quarter in our city cleaning business. Sales of industrial and commercial equipment in the UK and Germany were strong in the 2014 fourth quarter. EMEA organic sales for the 2014 full year grew approximately 4.4%, excluding a favorable foreign currency impact of about 1%.

In Tennant's Asia Pacific region, organic sales increased approximately 14.5%, excluding an unfavorable foreign currency impact of about 5.5%. Despite continuing economic uncertainties in this region, sales growth was positive in all countries in the 2014 fourth quarter. APAC organic sales for the 2014 full year rose approximately 12.8%, excluding an unfavorable foreign currency impact of about 4%; and organic sales in China grew approximately 15% for the 2014 full year.

Tennant's gross margin for the 2014 fourth quarter was 43%, compared to a 42.9% in the prior-year quarter. This was within our target range of 43% to 44%. Gross margin in the 2014 fourth quarter was 10 basis points higher than the prior-year quarter, despite the supply chain challenges, as Chris noted. We continue to proactively address these challenges in order to increase manufacturing productivity and further improve our gross margin performance. From a timing perspective, these are short-term issues, but will likely take another one or two quarters to remedy.

Research and development expense in the 2014 fourth quarter totaled $7.5 million or 3.4% of sales, compared to $7.2 million or 3.7% of sales in the prior-year quarter. We continue to invest in both our core business and Orbio, which is focused on advancing a suite of sustainable water-based cleaning technologies.

Selling and administrative expense in the 2014 fourth quarter totaled $63 million, or 29.1% of sales. This compares to S&A in the fourth quarter of last year of $58.9 million, or 30.2% of sales, and $57.3 million, or 29.4% of sales, as adjusted. To accelerate future growth, we continued making targeted, strategic investments in direct sales coverage, distribution, and marketing capabilities. Absent these investments, we would have achieved even greater operating leverage in the 2014 fourth quarter. We are building for long-term growth.

Our 2014 fourth-quarter operating profit totaled $22.6 million, or 10.5% of sales, compared to the year-earlier operating profit of $17.7 million, or 9.1% of sales, and $19.2 million, or 9.9% of sales, as adjusted. As the US dollar strengthened throughout the 2014 fourth quarter, foreign currency exchange reduced operating profit by approximately $1.3 million. As Chris noted, we remain committed to our goal of a 12% or higher operating profit margin, by successfully executing our strategic priorities, and assuming the global economy improves.

As we work towards this target, we are keenly focused on: driving organic revenue growth in the mid- to high-single digits; holding fixed costs essentially flat in our manufacturing areas as volume rises; striving for zero net inflation 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've made significant progress in building a scalable business model capable of delivering improved operating efficiency and profitability. We now will place a renewed focus on accelerating organic revenue growth. While we're very encouraged with 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 full year was 27.2%, which was lower than the 32.8% for the 2013 full year. This improvement was due to the mix of full-year taxable earnings by country, and routine favorable discrete tax items such as favorable settlements on prior year's tax positions. The base tax rate of 29.3%, which excludes routine discrete tax items, was below our targeted range of 31% to 33%. Note that we were able to include the entire-year benefit in the 2014 fourth quarter for the Federal R&D tax credit, which was re-enacted for 2014 in December of 2014.

Turning now to the balance sheet: Again, this continues to be very strong. Net receivables at the end of the 2014 fourth quarter were $152.4 million versus $140.2 million a year earlier. Quarterly average accounts receivable days outstanding were 62 days for the fourth quarter, compared to 61 days for the 2013 fourth quarter.

Tennant's inventories at the end of the 2014 fourth quarter were $80.5 million versus $66.9 million a year earlier. Quarterly average FIFO days inventory on hand were 84 days for the 2014 fourth quarter, compared to 81 days in the year-ago quarter. We have increased our inventories to support higher sales levels, and many new product launches.

Capital expenditures of $19.6 million in the 2014 full year were $4.8 million higher than $14.8 million in the prior year, with plant investments and tooling related to new product development, and manufacturing and information technology process improvement projects.

Tennant's cash from operations was $59.4 million in the 2014 full year, comparable to the cash from operations of $59.8 million in the 2013 full year. Cash and cash equivalents are strong, totalling $93 million, up $12 million from $81 million a year ago.

The Company's total debt of $28.1 million declined $3.7 million from $31.8 million a year ago. Our debt-to-capital ratio was 9.1% at the end of the 2014 fourth quarter, versus 10.8% 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 $14.5 million in the 2014 full year, compared to $13.2 million in the 2013 full year. Reflecting on our commitment to shareholder return, we're proud to say that Tennant has now increased our annual cash dividend payout for 43 consecutive years.

During the 2014 full year, we purchased 225,034 shares of Tennant stock at an average price of $62.64 per share, for a total cash outlay of $14.1 million. As of December 31, 2014, we had 405,569 shares remaining under our repurchase program.

Moving now to our outlook for 2015: We have routinely discussed the impact of foreign currency exchange on our sales, but now with the significant change in foreign currency exchange rate in the 2014 fourth quarter that we anticipate will also unfavorably affect sales and earnings in 2015, we are providing additional guidance regarding foreign currency exchange. We estimate 2015 full-year net sales in the range of $825 million to $855 million, up 0.4% to 4%, or approximately 5% to 9% organically, assuming an unfavorable foreign currency impact on sales in the range of 4% to 6%.

We estimate the 2015 full-year earnings in the range of $2.40 to $2.70 per diluted share. Foreign currency exchange headwinds in 2015 are estimated to reduce operating profit in the range of $10 million to $12 million, or approximately $0.37 to $0.44 per diluted share. The estimated higher effective tax rate in 2015 of approximately 31%, compared to 27.2% in 2014, is anticipated to negatively impact earnings per diluted share by about $0.14. The foreign currency exchange headwinds, coupled with a higher effective tax rate, is anticipated to negatively impact 2015 earnings in the range of $0.51 to $0.58 per diluted share, or approximately 19% to 22%. For the 2014 full year, diluted earnings per share totaled $2.70 on net sales of $822 million.

Historically, the first quarter is our lowest for sales, operating profit, and operating profit margin. We anticipate the foreign currency exchange headwind will be the strongest in the first quarter of 2015, which will put additional downward pressure on our financial results. However, we do anticipate organic operating profit growth in the second, third, and fourth quarters of 2015.

Our 2015 annual outlook includes the following expectations: economic strength in North America, modest improvements in Europe, and growth in emerging markets; increased foreign currency impact on sales for the full year in the range of an unfavorable 4% to 6%, with a $10 million to $12 million negative effect on operating profit; gross margin performance of approximately 43%; research and development expense of approximately 4% of sales; capital expenditures in the range of $25 million to $28 million; and an effective tax rate of approximately 31%, including the anticipated enactment of the 2015 Federal R&D tax credit.

Note that our 2015 effective tax rate does anticipate a 2015 benefit for the Federal R&D tax rate. However, that has not yet been re-enacted for 2015. Therefore, we're not allowed to include its favorable impact in the 2015 tax rate we record until is enacted.

Our sales and earnings guidance reflects the success of our renewed focus on accelerating organic sales growth, and our continued investments in direct sales, distribution, and marketing to drive additional future growth. It also assumes that it will take us one or two quarters to further improve the performance throughout our supply chain, as we continue to ramp up to support higher levels of production, and launch new products. Finally, it also includes the estimated significant unfavorable impact of sales and earnings from foreign currency exchange rates.

We are looking at a number of opportunities to proactively mitigate the foreign currency exchange headwinds that include: increased selling prices in the affected local markets; evaluating the potential to expand the scope of our hedging strategies; and exploring the feasibility of producing and shipping products from locations with a favorable foreign currency exchange pairing. Tennant's operations are performing well, and our objective is to continue to build our Business for sustained success.

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

(Operator Instructions)

Jason Ursaner with CJS Securities.

First question. On the supply chain challenges, I just didn't hear if you quantified it at all in the quarter and what the impact on the first half of next year would be on the gross margin in guidance?

We didn't specifically quantify it. We did say that it did hurt us obviously in the fourth quarter as we only were able to see modest improvement versus the prior year in our gross margin and the biggest driver of that differential was the supply chain issues that we had, and there were some other pieces, too. What we did comment is that we felt it would be more than likely into Q2 before we have the problems completely behind us, but I think the most important thing to note is it's in our control. We did see improvement throughout Q4. December was the strongest month that we had from a performance point of view, and we're continuing to see improvements as we enter Q1. We're halfway through the quarter at this point and we continue to make the progress as we would expect. So, we will get this behind us. It's in our control.

Okay. And then just maybe staying with the gross margin in the quarter or for the outlook. Besides the impact of the inefficiencies, could you maybe talk about currency from a gross margin perspective? Also then also the channel mix with strategic accounts. Sounded like that was pretty strong and that's had an impact on gross margin where it's positive on operating dollars. Just wondering if that had any impact in the quarter on gross margin?

We didn't precisely talk about it, but you could make a pretty good estimate of it, Jason, by looking at the foreign currency impact in the quarter in revenue and then there was a $1.3 million impact at the operating profit line. So, the biggest dollar effect is going to be at gross margin. So, there is a meaningful impact on gross margin in the quarter, also, but it's $1.3 million at the operating profit line.

Okay. And just more from a high level. The amount flowing through to operating profit improved gross margin is a little more than I modeled. I guess my understanding is you tend to manufacture in the region you're selling, so --.

Let me give you some insight into that. That's a good question. If you look at next year, we're saying that the impact to revenue is 4% to 6%. So, if you pick a round dollar number, that's about a $40 million impact or so, somewhere within that range. Some countries are less affected, even though the currency movements are large. A country like EMEA would be that way because we are producing 75% to 80% of our needs within the country. We're sourcing in euros. We have a great deal of our support staff in euros.

If you go to countries that are completely import countries like Australia or Canada, where we're supplying them from the United States, they're being supplied on a dollar basis. So the impact and flow-through from revenue all the way down to operating profit is a fair amount higher in those countries because they don't have the same natural hedge that we have in EMEA, for example.

So, is not completely intuitive, but EMEA is not a big of a deal to us even as much as the euros move in the levels that no one would have anticipated. We are seeing bigger impacts in countries like Australia and Canada and Japan, and we'll price as aggressively as we can given the market, but it's --. And we realize it's temporary and we all know the dollar will move and weaken at some point, we just don't know when.

In terms of the factor to mitigate the impact, you mentioned increasing price. Given that your competitors are mostly in Europe, it's not really giving you any cost disadvantage on the manufacturing side to try to go after [your competitors there].

We have to be cognizant of that. I mean, there's one of our larger markets, Australia, all of our competitors that matter are European. They do today have a currency advantage with us and we have to be conscious of that as we price. And we commented on that during our script. We're in this for the long haul. We're going to do what's right for our customers and we're not going to make short-term pricing decisions to have a long-term navigate of impact on the business.

Okay. Appreciate it. I will jump back in the queue.

Joe Maxa with Dougherty & Company.

Guidance suggests that operating profits will be flattish to maybe up a little bit depending on how you model it.

Yes. If you look at operating profit dollars, directionally at the low end and the high end, you can work your way backwards from the EPS numbers that we gave you. You would actually see a decline in operating profit on a dollar basis and a margin basis at the low end. At the high end, you'd see some modest growth, without getting specific about it. So, you're correct.

We'd like to say that what we want to be focused on -- we're going to provide this information every quarter as we move through the year. We've given you our best shot at what we think based on currency rate the impact to be; at the operating profit line, it's $10 million to $12 million. We'll comment on that each and every quarter. We like to think about the business, about what we're seeing from an organic operating profit growth as we restate for currency and the range on the high end is we're actually seeing growth about 20% on an organic basis, and we are going to spend most of our energy focus there and we're going to do whatever we can to mitigate the currency side, but we need to run our business on an organic business and stay focused there.

Okay. I missed it. So, the 10% comment on growth was on an organic basis.

Yes.

Understood. Do you think you'll need to see a rebound in various foreign currencies to hit that -- your $1 billion and 12% goals?

That would be the right way to think about it. We just don't know when currency is going to move, but we've been consistent and that $1 billion target was based on 7% compounded organic growth across the four-year time horizon. Today, we're ahead of the curve organically and that's where we'll spend our energy. We could easily come back and by the end of the time horizon be on the other side of this curve and it could be an advantage to us, but the thing we care about is we're going to grow somewhere -- we'd like to keep growing about that 7% range. We have one year under the belt where we beat it by three percentage points and we're focused on the organic side, but you're right in your [peer] assessment on a dollar basis.

Right. The next generation do you see waterless coming out? Do you see that having maybe a negative impact in Q1? Are customers waiting for it or has that not been an issue for you?

No. We don't anticipate that that's going to be an issue for us. We think this new generation, as we said, it has all the benefits of the first generation plus it cleans better, cleans more types of soils, and in more applications. So, our judgment is that we will be as, and hopefully more, successful with this technology than we were with the first generation.

To remind everybody, cumulatively through 2014 -- remember we launched this in 2008, the first generation -- we generated $740 million in sales and sold 65,000 machines. So, that kind of puts what's possible in context over the next four years to six years with the new technology. So, we're really excited.

So, with the new product do you expect your growth in ec-H2O, that platform, to outperform your normal or your planned organic growth or do you think it will be in more in line? How do you see that compared to the rest of the business?

It's hard to tell. Give us a few quarters and then we'll have a better read on what we think it can do but, ideally, yes, it should outperform. And the good news is it's also one of the highest margin products in our portfolio.

Okay. Last question on the tax rate, Tom. Did the guidance include the 31% tax rate?

It did. We were more specific that in our guidance we used a very specific tax rate of 31% even though our target range is 31% to 33%. We use 31% and that does assume the R&D tax credit is re-enacted. We'd like to believe that given our performance that we've had that there might be an opportunity to perform better and be at a lower tax rate. We just think for prudent reasons we're planning at the low end of our range and we wanted to be real specific about that.

So, if it's not re-enacted in Q1 or if it's not until Q4 like it was last year and perhaps in the year before, I don't remember, but what rates would we be thinking about as we model? More of that 32.5% range?

No. It's about a 50 basis point impact in total. So, therefore, if you assume -- if you're going to 31% for each quarter and you wanted to assume that the tax didn't get re-enacted until later in the year, you'd want to have a little bit higher tax rate in the first quarter and then if I was you guys, I'd estimate that it doesn't get -- with our government it probably won't get re-enacted until the fourth quarter. That's kind of the way it's been. Sometimes they don't get it done till the following year, but I wouldn't believe they're going to get it done early.

Okay. All right. Very good. Thank you.

Scott Graham with Jefferies.

Nice quarter.

Thanks, Scott.

And congrats on the sales momentum. I guess I just want to talk about the one item that jumps out off of the page on the FX. I'm just wondering what we can do about that going forward because I don't know where the dollar's going, I think few people do. If we are in this period of dollar deflation, what type of steps do you guys need to make here? Because that's a huge hit to your earnings per share for 2015. I was just wondering how we can mitigate that perhaps even during the year?

The three things that we'll move on are one, price, and that kind of goes without saying. We have an obligation to optimize our pricing whenever we can, but we need to be market-based, but we'll sharpen our pencils there and we'll get as aggressive as we can be. The other pieces, we will look at ways that we can move our capabilities of producing in other factories that will be more favorable for us. That, we can only move at a certain pace there, but we are already taking action and we're moving. So, that will be one mitigation.

And then we are, as everybody is at the current time, using advisors to take another look at our hedging strategies and seeing what we can do in that regard. Those are the three big levers we can pull and we will. Other than that, we're going to remain real focused on the organic growth within our given geographies and staying competitive. Our objective is to profitably grow profitably grow share.

Scott, you mentioned up front our growth momentum. One of the things that we looked at very closely was our S&A spending in 2015, but the vast majority of that spending is against our growth strategies and they're clearly working, as you saw with the 14% organic growth in the fourth quarter. So, our judgment is that we have a window of opportunity here to continue to invest in expanding our market coverage and growing our market share before our competitors start reacting. And so we're staying the course on the growth front.

You will see our investments moderate a bit though. We've added a significant level of head count and made big investments for two whole years now. We will moderate a bit, which we talked about that even before the foreign currency thing came at us. We'll be a bit more measured. You'll see us add a lot less heads in the upcoming year.

Right, and thank you for that. Those are strategies that look forward to you enacting, particularly the hedging which I would have to believe that could help you a little bit this year. Anyway, the other question is about what it's doing to you guys competitively. Now, in EMEA, how much of the sales in EMEA are manufactured in EMEA?

Close to 80%, 75% to 80%. What we would tell you is that from a competitive point of view the currency movement really has no impact on us in EMEA. The same things that affect us in EMEA always do. We don't have the share position that we have a North America, we're a smaller player in that market, but the good news there is we're growing. Our strategies have worked. We simplified our business. We've made it more predictable. We've made it far more profitable. The things that we're doing are continuing to work. So, that really is so far has been a success story and we're forecasting it to have another year of success in the upcoming year.

Right, and that's where I was going with this. I suspect that you manufactured a lot locally there. So, when you say you're sharpening your pencils on pricing, you're talking about pricing up?

Yes. And those would be the markets where you need to pay more attention to that are markets that we're exporting out of the United States and one of them is real close to home, it's Canada, and a big one is Australia. There's multiple places where we exported into. We don't manufacture there. We can export out of the North American plant. We're going to look at ways that we can produce more in China, we can produce more in Europe, and just create more flexibility. Also increase our sourcing levels of componentry outside the United States.

I apologize, Tom. Now you have of me a little bit confused because if we're exporting, why -- increasing prices, that would be damaging.

That's why you've got to be really careful. But the thing is --.

So, when you say -- so do you have to reduce prices on your exports now?

It's not our intention. There's always selected places where you need to do that, but our planning objectives are similar to what we've been in the last couple of years. Net-net on a global basis, we've had a few years in a row where we've had 1% or so pricing benefit. Our assumptions for next year are similar.

And we have some experience with this. This has happened twice before in places like Canada and Australia. So, we know from history how the market reacts to us taking the price increase. We're basing this on experience and feel comfortable that the price increases that we're contemplating will be accepted and allow us to continue to grow in those markets and protect our profitability.

Understood. Okay. Thank you.

(Operator Instructions)

Dana Walker with Kalmar Investments.

Gentlemen, good morning. Good quarter. If we could focus on that currency phenomena once again. If the currency drag is the $33 million to $50 million, you used the mid point of about $40 million, and yet most of your currency drag exposure, I suspect, would be euro-based even that's not where the earnings -- the disproportionate earnings effect is taking place. I think a lot of us are looking at that you're roughly a 10% operating margin business and you're describing a 25% to 30% decremental effect on the profits where you're you losing 10% to 12% on a mid point of 40%. Most companies that are in markets generally have a translational effect on their currency translation that's roughly in line with their profit margin. We're looking at a profit margin effect here that's 2.5 to 3 Xs, it's closer to your gross margin than your operating margin.

Can you advance that conversation a bit more, recognizing that you've talked about Australia and Canada as being the most prominent markets?

If you looked at it, there is -- I mean, if you took the middle of the range of 10% to 12% on a $72 million operating profit last year, that's about a 15% impact roughly. And, we are seeing an impact across our three broad geographies of North America, Latin -- across all four, North America, Latin America, EMEA, and APAC. The larger percentage is in the markets that we're exporting into, so we export into some other North American markets and in Canada being the place we export into. Latin America we have predominantly Brazil having the biggest impact there. APAC you have a few different markets that are export-based. Those are the ones that the pass-through is higher in the North America, Latin America, and APAC. The pass-through is much smaller in EMEA because of the fact that we are locally based.

No it's not. Okay.

Yes. What we're seeing, Dana, is that if you look at companies that are -- you're looking at what are forecasted organic growth is if you take the middle of the range it's about 7% because we're seeing a range of 5% to 9%, and it's not uncommon for many industrials to see the currency impact be even triple of what their growth rates are and ours is about double. So, I think -- we don't like it, we're going to mitigate it. We know it's going to come back, but we do really think we're pretty in line with what the industrial models being they are similar to us.

I don't dispute that. The 4% to 6% seems to be perfectly acceptable. It's the translation towards the margin impacts on that exposure that's somewhat higher for what is at the moderate end of an operating margin business that I think is surprising. If you're a 10% business and if you are in markets with your cost structure, then in theory that 10% ought to apply to the lost revenue currency translation wise and is 2.5% to 3% plus in this instance. And you described how you are not -- you don't have end markets cost of goods in Canada, you don't have end market cost of goods in Australia and in some other places, but I think that's the point of contention.

Yes. I'm happy to take it off-line and talk about it in more detail, Dana. I think we can get you there. I'm happy to talk about it in more detail. We've certainly given you tons of information here. So, we'd be happy to discuss it further with you off line.

This is not easy. Many people are contesting with something they haven't seen in quite some time. Can you --?

As you know, we've never seen movements like this. We typically had a percent movement in a big movement quarter, quarter to quarter, which is why we're trying to be as absolutely as transparent as we can be some we can have more open conversations.

To the degree that it doesn't get in the way of your competitive position, can you talk about some of the technical advances with NANOCLEAN that take this to be a better product than it was before?

Sure, Dana. This is Chris. I'll do that. It's really about the formation of these nanoscale bubbles. Remember, we launched the first generation of ec-H2O in 2008 and there were bubbles in the output of that technology. We didn't understand the impact of those bubbles to the cleaning process. We've done a lot of research on this technology since then and we've actually built relationships with some of the world's leading nano bubble experts. Yes, that as a field of research that is actually growing quite rapidly. We are associated with experts in the Netherlands, in China, and in Australia and we've begun to understand the impact of nanoscale bubbles on the cleaning process.

What we've learned is that nanoscale bubbles of a certain size range have a dramatic impact on cleaning. Outside of that size range, they don't influence the cleaning impact hardly at all. And so that's what we're really coming out with here is an enhanced version of the first-generation technology where we're able to create about the same concentration of the nanoscale bubbles, but within the appropriate size range that leads to superior cleaning performance. It cleans better, cleans more dirt, and cleans in more applications. So, that's really the difference between the first generation and the second generation.

Can you talk about some of the industrial markets that you presently address where it's been arguable whether ec-H2O was a good solution and to the degree that you think you've expanded your relevance in addressing this with NANOCLEAN?

No. It was surprising with us. Initially, we did not think that the first generation of ec-H2O would be appropriate in industrial applications and yet we've had great success in getting attachment rates of ec-H2O on some of our industrial equipment in light industrial applications. So, what this does I think that it's going to clean better in those applications and potentially takes us into more difficult industrial applications. It still doesn't -- its still won't clean petroleum-based soils, but it does clean more difficult soils than the first generation.

So, we think it will help us expand both in some of the commercial applications where a lot of our customers are a little bit skeptical that the first-generation technology worked. We know in side-by-side testing with first-generation that it cleans a lot better. It's visible to our customers. We've done a lot of testing on that, so I think seeing is believing. Our judgment is that with NANOCLEAN we have a potential ahead of us here that's at least as big as the first generation. As I quoted before, we have cumulative sales of $740 million and 65,000 machines out with first generation product.

Is there an after-market opportunity to upgrade some of the existing end market fleet?

We're not planning to do that. We may find that if we have some large fleet customers who are really anxious to adopt the NANOCLEAN technology, we'll figure out a way to switch out their fleet and get them a new technology. We have an after-market business with Tennant certified pre-owned equipment and we'd sell that to other customers, but we do not plan to retrofit any of the new machines at this point.

A couple of commercial questions. On the selling front, as you've added customer-facing people, can you talk about where you think you are in a productivity curve and what your experience thus far has been on retention of these added resources?

I'd say that we're still on the low end of the productivity curve. It can take up to 6 months to 12 months to get somebody up to speed in our business. So, we expect that to continue to improve over the coming years. And retention-wise, our retention rates are at or below industry averages. So, retention with this program has not been an issue. And I have to say that we've been able to attract some very high caliber talent to these new sales positions, also bodes well for the future.

Final question happens to touch on after market. As you are internal growth has picked up, and with a big fleet of ec-H2O products out in the market, have you found that you're after-market business has begun to accelerate along with your core business?

Not nearly at the pace that our equipment grows at and that's typical. What you see is your after-market will lag a bit behind your equipment sales, especially as you take a [spurt] out, the kind of growth we just saw with 10% organic growth across the year. And I would say our after-market is growing just fine, but it will present nice opportunities for us as we go forward, as we significantly increase the size of our install base. So that growth will come in the future. I think the annuity of that is enhanced as we've accelerated our equipment sales.

The other thing we found is increasingly our customers are wanting to buy the cost of consumables online. As we've told you before, we are in the process of building an e-commerce platform with a focus initially on our parts and consumables business and our Tennant certified pre-owned equipment business. And I think that once that's up and running and -- we probably won't see benefits from that until next year. It takes a while to build that platform, but that should also help accelerate our parts and consumables growth.

Chris, maybe one last question. Could you talk about where you believe you are with this updated Orbio technology? You've been working to crack the code for a while on not only what works technically but what can sell and how to sell it. Where are we?

Well, we remain extremely bullish on the long-term potential of the technology and you talk about cracking the code. Any time you bring a disruptive technology into marketplace, it takes time to get adoption. So, the results are not yet material, Tennant's overall results, but what I track personally is the leading indicators. Are we building a prospect pool? Right? Are we getting more of those prospects to actually trial the Orbio products? And once they've trialed, are they adopting? And once they've adopted, especially like a university -- you could sell 20 to 50 units to a university, are they starting to do repeat purchases?

The other thing that we monitor very carefully is our customers who have used the technology for in excess of three months and what do they think? Universally, we get very, very positive feedback. So, there is nothing that we have experienced, so far, that is a structural obstacle to us being extremely successful with this technology. It's just going to take a little bit of time.

If you were to frame, though, what you believe this might account for, pick a number five years down the road, and how material it might be to your total business, how would you are approach that question?

What I would say is it's going to be material to our overall results and if it's at the high end, the most optimistic, it could be a very big and nice business for us.

Is five years the right timeline to think about or is that unknowable?

I think it's unknowable at this time, because if you had asked me when we launched would we have made better progress than we have, I'd say yes. There's something that I've learned with disruptive technology. Sometimes you overestimate what's possible in the short term, and innovators tell you this all the time, and you underestimate what's possible in the longer term. So, I'm hoping that that is the way this plays out and we're actually underestimating what we're going to be seeing here hopefully not in five years. I think this is more of a one- to three-year proposition before we know definitively what the commercial viability and size of this business could be.

Very well. Thank you both for the update.

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

Thanks, Stephanie. The new growth strategies we outlined at the beginning of 2014 are working and spurred broad-based sales gains in each quarter of 2014. Sales grew ahead of plan over the year and ahead of the 7% annual organic growth rate in our road map to reach our organic growth goal of $1 billion in sales by 2017. And, as I noted earlier, we remain committed to the goal of 12% or above operating profit margin. We look forward to updating you on our 2015 first-quarter results in April of 2015. Thank you for your time today and for your questions. Take care of, everybody.

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