Tennant Co (TNC) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to Tennant Company's second-quarter 2015 earnings conference call. I am Tom Paulson, Senior Vice President and Chief Financial Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO; Karen Durrant, Vice President and Controller, and Tom Stueve, Treasurer.

Our agenda today is to review Tennant's performance during the 2015 second 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.

This is the second time we are using slides to accompany this conference call. We hope this makes it easier for you to review our results. A taped replay of this conference call along with these slides will be available on our investor relations website at investors.tennantco.com for approximately 3 months after this call.

Now 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.

Our earnings release was issued this morning via Business Wire, and is also posted on our investor relations website.

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 pleased to report another solid quarter, as Tennant again executed well on our growth strategies. The Company posted consolidated net sales of $215.4 million in the 2015 second quarter, up nearly 4% organically from a year ago.

The Company's gross margins rose nicely to just above 44%. And our earnings totaled $0.79 per diluted share.

Our second-quarter results were led by robust sales to strategic accounts in our largest market of North America. We also saw continued strong global demand for new products, especially the T12 and the T17, which are our new modular rider scrubbers for the industrial market.

Tom will provide a detailed picture of our performance by geography, but let me share several bright spots. We had 7.5% organic sales growth in the Americas, including a return to organic growth in Brazil. Organic sales growth in Western Europe that was within our target range, and approximately a 15% organic sales rise in China.

Our platform to accelerate organic sales is working. The Company made progress against our organic sales growth objectives during the 2015 second quarter and first half. We remain committed to both our organic growth goal of $1 billion in sales by 2017 as well as a 12% or above operating profit margin, despite ongoing global economic uncertainty and foreign currency headwinds.

You may recall that our growth strategies are based upon three core pillars. One: reaching new markets and new customers. Two: continuing to deliver a strong product and technology pipeline. And three: not losing sight of the discipline we have established around improving margins and controlling expenses.

I would like to briefly touch on the key enablers of growth in these areas that are contributing to our success, starting with reaching new markets and customers. You have heard us talk about making investments ahead of growth.

One of our investments has been in people. In 2013 and 2014 together, we added roughly 270 people, primarily in sales, service, and manufacturing positions. As our financial performance shows, these additions are beginning to generate terrific returns.

While we slowed the pace of hiring in 2015, we have continued to ramp up other growth enablers. For instance, we have a number of technology-based growth initiatives.

We have been focusing on the global rollout of our new customer relationship management, or CRM, marketing and sales management tool. This system helps us better serve our existing customers, find and target new customers, grow our business, and improve the overall Tennant customer experience.

To date, we have implemented our new CRM solution in North America, Europe, Middle East, and Africa, and Australia. And we are already benefiting from the significantly improved sales analytical capabilities of the new system. By year end, we expect to complete the rollout to Japan, China, and other regions. We will continue to enhance its function functionality for both sales and marketing throughout the year.

Additionally, we have enhanced our e-commerce capabilities through a secure My Tennant portal, which makes it easier for our customers to browse and order Tennant parts, consumables, and coatings, and request service. This is the first step in our efforts to build a more robust e-commerce platform that will transform the online experience for our customers by integrating content and commerce. This is an important strategic initiative for us and we are pleased with our progress thus far.

We are also seeking new ways to add value for our customers and to attract new customers. An example is Tennant's IRIS telemetry management system. This onboard technology tracks machine productivity and maintenance needs. It helps customers with large fleets of equipment, make informed decisions, and reduce their overall cost to clean. This is a very attractive proposition.

Taking a look at the second pillar of our growth strategy, which is new product development. We are excited about the steady launch cadence of Tennant's Nucor equipment offerings and the continued progress on sustainable cleaning solutions from our Orbio Technologies Group.

As you know, innovative products and technologies are a significant driver of Tennant's revenue. Sales of new products introduced within the past 3 years totaled 15% of equipment revenue for the 2015 first half.

During the first half, we completed most of our planned new product launches for the year. We launched 33 new products and product variants and we will introduce 3 additional products in the second half. This is on top of 55 new products launched from 2012 to 2014.

In the 2015 second quarter, we introduced the T300 Walk Behind Scrubber, adding to our broad portfolio of commercial floor scrubbers in one of the largest unit categories in the floor cleaning industry. Customers can choose from multiple machine configurations to optimize cleaning performance across virtually any hard surface condition.

The T300 is the first scrubber equipped with our next generation of sustainable cleaning technology, ec-H2O NanoClean. The name NanoClean refers to the creation of nanoscale bubbles that are an important part of the cleaning mechanism.

Like the original ec-H2O, our next-generation ec-H2O NanoClean Technology electrically converts water into an innovative cleaning solution that cleans effectively, saves money, and reduces environmental impact compared to daily floor cleaning chemicals. This converted water is created by an onboard e-cell that generates millions of microscopic bubbles -- nanobubbles -- per milliliter of solution. The new ec-H2O NanoClean technology will soon be available on our full line of commercial scrubbers.

And while we are very excited about the next generation of ec-H2O, I should note that our original ec-H2O technology is still winning awards. Ec-H2O was recently honored with the 2015 Distributor Choice Award by the readers of Sanitary Maintenance Magazine.

We are also very pleased with the early positive customer response to our new Orbio os3 technology. Through the process of water electrolysis, which combines water, electricity, and a small amount of salt, the os3 system delivers on-site generation of an anti-microbial solution as well as an effective multi-surface cleaner that meets US EPA regulatory guidelines for disinfection and sanitization. It is easy to operate, affordable, and compact.

The os3 was chosen as a 2015 money-saving product by Buildings Magazine. We believe the os3 has great potential for growth.

The third pillar of our growth strategy involves being disciplined in controlling expenses and improving margins. Here, we also continue to make strides. In our ongoing efforts to lower costs and increase margins, we have completed a number of process improvement projects, collectively called Campaign to Cash initiative. Standardize and simplify our global processes in the areas of pricing, invoicing, collections, and machine configuration.

In particular, the machine configuration project redefined our global product hierarchy to provide many benefits relating to how we configure and build machines. Consistent product structure and terminology across our entire value chain, from new product setup to material control to customer order entry enables a level of data integrity that gives us far more visibility to the product configurations preferred by our customers and the profitability of product options.

This effort is foundational to many important growth initiatives, including the development of the more robust e-commerce platform I mentioned a moment ago.

These efforts and others across the business are also helping us build a scalable business model, reduce costs, make it easier for our customers worldwide to do business with Tennant, and grow revenue. Those are just a few examples of the work we have done to position us for continued success.

We are encouraged by Tennant's performance against our growth agenda in the 2015 first half, on top of our success in 2014. As I have noted, we have made critical investments in sales, marketing, and distribution to increase our global market share. These investments are paying off and we continue to expect to deliver organic sales gains in the mid- to high-single digit range in 2015.

The main drivers of our growth strategy will continue to include strong and sustained new product growth in our core business and in the Orbio Technologies Group, 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.

While we anticipate that global economic uncertainty and foreign currency volatility will unfavorably impact sales and earnings in 2015, we are committed to controlling what we can control. Our focus remains on creating value through new product introductions 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.

Before I turn it over to Tom to review the financials, I would like to say that we also are delighted Tennant Company was named to the Forbes 2015 list of the 100 Most Trustworthy Mid-Cap Companies in America. This is the second consecutive year that Tennant has made the Forbes list of Most Trustworthy Companies. And we have grown from the small-cap category in 2014 to the mid-cap category in 2015.

I want to congratulate everyone at Tennant for their part in this honor. We take great pride in conducting our business with the highest ethical standards and a philosophy of stewardship. We appreciate this recognition by Forbes.

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

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

For the second quarter ended June 30, 2015, Tennant reported sales of $215.4 million compared to $219.1 million in the prior-year quarter. Excluding an unfavorable foreign currency exchange impact of about 5.5%, organic sales grew approximately 3.8% in the 2015 second quarter.

As you may recall, organic sales in the 2014 second quarter grew approximately 8.9%, excluding a favorable foreign currency exchange impact of about 0.5%, so we were lapping a very robust prior-year quarter.

On a reported basis, the 2014 second quarter is still the all-time record for sales in any quarter. However, it is worth noting that on a constant currency basis, our 2015 second quarter would have been a record sales in any quarter -- for sales in any quarter.

For the 2015 first half, organic sales rose approximately 5%, excluding an unfavorable foreign currency exchange impact of about 5.5%. For the 2014 full year, organic sales rose approximately 10.3%, excluding an unfavorable foreign currency exchange impact of about 1%. We continue to be encouraged by the solid level of organic sales growth.

Second-quarter 2015 net earnings were $14.8 million or $0.79 per share. In the year-ago quarter, Tennant reported net earnings of $15.5 million or $0.83 per share. As anticipated, foreign currency exchange headwinds unfavorably impacted our 2015 second-quarter financial results. I will provide more information about this in just a few minutes.

Turning now to a more detailed review of the 2015 second quarter. Our sales are categorized into three geographic regions, which are the Americas, which encompasses all of North America and Latin America; EMEA, which covers Europe, the Middle East, and Africa; and lastly, Asia-Pacific, which includes China and other Asian markets, Japan, and Australia.

As Chris noted, in the Americas 2015 second quarter, organic sales increased approximately 7.5%, excluding about 2.5% of unfavorable foreign currency impact. Record sales for second quarter North America were once again fueled by strong sales to strategic accounts, including sales in new products.

In the 2015 second quarter, Latin America organic sales declined approximately 3%. However, organic sales growth, specifically in Brazil, was about 8%, despite the continued economic headwinds. This is an important emerging market for us and we remain confident about the long-term growth prospects there.

In EMEA, our organic sales in the 2015 second quarter decreased approximately 1.7%, excluding an unfavorable foreign currency impact of about 16.5%. Organic sales growth in Western Europe was within our target range, but was more than offset by lower sales of outdoor equipment in the city cleaning business as they lapped a very robust prior-year quarter. We also saw lower sales through our master distributor in the Central Eastern Europe, Middle East, and Africa markets due to the timing of some large deals and the challenging environment in Russia.

One of the highlights of the organic sales growth in Western Europe was the improved performance in France, which is one of the largest markets in Europe. Over the past year, we have been implementing strategies in France to adjust our direct versus distribution selling efforts to enhance our go-to-market approach in order to increase sales, improve profitability, and achieve higher customer satisfaction. We have upgraded the talent of our French team, increased our focus on strategic accounts, and we are optimizing and growing our distributor network.

EMEA organic sales for the 2014 full year grew approximately 4.4%, excluding the favorable foreign currency impact of about 1%. We do anticipate EMEA organic sales growth for the 2015 full year will be positive.

In Tennant's Asia-Pacific region, organic sales in the 2015 second quarter, excluding an unfavorable foreign currency impact of about 8%, decreased approximately 8.1% compared to a robust double-digit organic sales growth of nearly 19% in the prior-year quarter. As Chris mentioned, organic sales in China rose approximately 15%, although this was not enough to offset the slower economies, primarily in Australia, compared to the prior-year 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. We are expecting positive organic sales growth in APAC for the 2015 full year.

Tennant's gross margin for the 2015 second quarter was 44.1% compared to 43.5% in the prior-year quarter. Several factors led to the 60 basis point increase in gross margins, including improved operating efficiencies in our direct service organization, in our manufacturing operations, and also a greater mix of higher margin business. In addition, foreign currency headwinds unfavorably impacted gross margin by approximately 80 basis points.

As I've mentioned in the last few quarters, we are proactively addressing our supply chain challenges stemming from higher production volume and new products in order to increase manufacturing productivity and further improve our gross margin performance. We made continued progress during the 2015 first quarter and improved more than we anticipated in the second quarter.

This was due in part to several large orders from strategic account customers that allowed us to optimize production schedules. We still anticipate achieving approximately a 43% gross margin for the 2015 full year.

Research and development expense in the 2015 second quarter totaled $8.4 million or 3.9% of sales compared to $7.7 million or 3.5% of sales in the prior-year quarter. We continue to invest in both our core business and Orbio, which is focused on advancing a suite of sustainable water-based cleaning technologies.

Selling and administrative expense in the 2015 second quarter totaled $64 million or 29.7% of sales, which was in line with our expectations as we continue to invest in our sales growth, although at a slower pace. This compares to S&A in the second quarter of last year -- $64.5 million or 29.4% of sales. Our 2015 second-quarter operating profit totaled $22.6 million or 10.5% of sales compared to the year earlier operating profit of $23.1 million or 10.6% of sales.

We have routinely discussed the impact of foreign currency exchange on our sales, but now with a significant change in foreign currency exchange rates in the last few quarters, we believe it is helpful to provide additional information. As many of you know, in a global company such as Tennant, isolating the impact of foreign currency exchange is complicated.

We have calculated an estimated constant currency income statement, which assumes no change in exchange rates from the prior year. In so doing, we are then able to compare that to our actual financial results to isolate the estimated impact of foreign currency exchange.

Here is a recap of the estimated foreign currency exchange impact on our 2015 second-quarter financial results: unfavorable impact of sales of approximately 5.5% or about $12 million. Unfavorable impact to gross margin of 80 basis points. Using a constant currency, our gross margin would have been about 44.9% compared to 44.1% as reported.

Unfavorable impact to operating profit of approximately $3.4 million. Using a constant currency, our operating margin would have been about 11.4% compared to 10.5% as reported. And unfavorable impact to earnings per share of approximately $0.13. Using a constant currency, our earnings per share would have been about $0.92 compared to $0.79 as reported.

This unfavorable impact coming primarily from the strength of the US dollar during the 2015 second quarter was approximately what we had anticipated. Despite external circumstances beyond our control, 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 to our operating expenses.

We continue to successfully execute our tax strategies. Tennant's overall effective tax rate for the 2015 first half was 32.1%. The base tax rate was 31.9%, which excludes routine discrete tax items. Note that we were not able to include any benefit in the 2015 first half for the federal R&D tax credit, as this has not yet been reenacted for 2015.

Turning now to the balance sheet. Again, this continues to be very strong. Net receivables at the end of the 2015 second quarter were $15.1 million versus $158.3 million a year earlier. Quarterly average accounts receivable days outstanding were 62 days for the second quarter compared to 64 days in the prior-year quarter.

Tennant's inventories at the end of the 2015 second quarter were $86.5 million versus 17.9 -- $79 million a year earlier. Quarterly average FIFO days inventory on hand were 89 days for the 2015 second quarter compared to 79 days in the year-ago quarter. We have increased our inventory to support higher sales levels and many new product launches.

Capital expenditures of $7.6 million in the 2015 first half were $0.2 million higher than $7.4 million in the prior year, with planned investments in information technology, process improvement projects, tooling related to new product development, and manufacturing equipment.

Tennant's cash from operations was $6.6 million in the 2015 first half compared to $10.5 million in the 2014 first half. Cash and cash equivalents are strong, totaling $67.6 million, up $5 million from $62.6 million a year ago.

Total debt of $24.6 million declined $3.6 million from $28.2 million a year ago. Our debt to capital ratio was 8.1% at the end of the 2015 first half versus 9.5% a year ago.

Regarding other aspects of our capital structure, Tennant is currently paying a quarterly dividend of $0.20 per share. We paid cash dividends of $7.3 million in the 2015 first half. Reflecting our commitment to shareholder return, we are proud to say that Tennant has increased the annual cash dividend payout for 43 consecutive years.

During the 2015 first half, we purchased 220,120 shares of Tennant's stock at an average price of $64.64 per share, for a total cash outlay of $14.2 million. We recently announced our Board of Directors authorized a new share repurchase program of up to 1 million shares of Tennant common stock.

This new authorization reflects the Board's confidence in our business and the strength of our capital position. As of June 30, 2015, we had approximately 1.2 million shares remaining under our repurchase program.

Moving now to our outlook, based on our year-to-date results and expectations of performance for the remainder of the year, we are reaffirming our earnings guidance for the 2015 full year and lowering the high end of our sales guidance by $10 million. We now estimate 2015 full-year net sales in the range of $825 million to $845 million, up 0.4% to 2.8% or approximately 5% to 9% organically, assuming an unfavorable foreign currency impact on sales in the range of 4% to 6%. Previously, we had anticipated 2015 full-year net sales in the range of $825 million to $855 million.

It is important to note that we lowered the high end of our sales guidance range to reflect the first-half actual results. We are still anticipating a strong second half, with a particularly strong fourth quarter. We continue to estimate 2015 full-year earnings in the range of $2.40 to $2.70 a 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 share. However, we do anticipate organic operating profit growth in 2015.

The estimated higher effective tax rate in 2015 of approximately 31% compared to 27.2% in 2014 is anticipated to negatively impact earnings per 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 share or approximately 19% to 22%. For the 2014 full year, earnings per share totaled $2.70 on net sales of $822 million.

As we anticipated, the foreign currency volatility has disrupted the historical pattern of our quarterly results. We now estimate the foreign currency exchange headwind in the third quarter of 2015 will be similar to the impact we experienced in the second quarter of 2015.

We continue to consider and analyze a number of opportunities to proactively mitigate the foreign currency exchange headwinds that include increasing 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 more favorable foreign currency exchange pairing.

Our 2015 annual financial outlook includes the following expectations: economic strength in North America, modest improvement 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 target does anticipate a 2015 benefit for the federal R&D tax credit. However, that has not yet been reenacted for 2015 and we are not allowed to include its favorable impact in the 2015 tax rate we record until it is enacted.

Tennant's operations are performing well and our objective is to continue to build our business for sustained success.

Now we would like to open up the call to any questions. Thanks, Melissa.

(Operator Instructions) Joe Maxa, Doherty and Company.

Couple of questions that stick out for me is the gross margin target of 43%. It seems like you have -- very strong Q2. Does that appear to be a bit conservative? You have perhaps Q2 FX have an impact, but continue into Q3 a little bit -- not as bad in Q4? Is there more to it why we expecting it to maybe be 43% the rest of the year, roughly?

A couple of things, Joe. One is we would openly acknowledge we hope are being a bit conservative. And I would also say that while we are proud and pleased with the performance in Q2, we are still at 43.2% on a actual basis through the first 6 months. So based on the trend of one quarter, we are choosing to be a bit conservative and we certainly hope that there is some upside in that forecast for the full year.

Okay. That's helpful. I also wanted to mention the particularly strong fourth quarter. Is that based on some visibility you have with these new products? Or maybe just give us a little more color of the particular strength you are looking for.

A couple of things. One is, as history would tell you, Q3 is just always a bit of a tougher quarter. And it is affected by summer vacations in Europe and summer vacations in the US. So it just -- the quarter is really -- the month of September is quite important.

Good news is we're off to a solid start in Q3, so we are in line with our own expectations. But the impact in Q4 is we do have a little bit better visibility. The other thing is that we will see the full effect of our new product efforts really begin to kick in. We have now just finished rolling out virtually all the new products. We won't get as much uptick in Q3, but that uptick should be in full force as we finish out the year in Q4.

Okay. And in the Asia-Pacific region, where you had a 8% decline in growth organically, can you give us a little bit more color on what is happening there. I mean, perhaps it was just an unusually strong Q2 last year, but is there anything else that we should be looking at or why you are expecting to see growth for the full year?

Yes. A couple things. One is we are not pleased with the performance. I will be honest and straightforward about that. I mean, we are always disappointed in our most important growth territory that we need to see consistent organic growth quarter in and quarter out.

What I would say is that one of the biggest effects was the uncertainty in the Australian economy. We also did have a very important order that deferred into the back half of the year. That bodes well for the back half of the year. It is a pretty substantial order that will see shipments in Australia across Q3 and Q4.

The other piece is that China really finished the quarter strong and it just wasn't enough to offset some of the negativity. But the pipeline is really building in China and we are quite bullish on what we are going to see the balance of the year in that key growth territory.

Jason Ursaner, CJS Securities.

Congratulations on a great quarter. Similar to Joe, the thing that really jumped out was the gross margin in the quarter, which was just very strong, especially considering that you had to overcome some headwinds growth in strategic accounts, which usually from a mix perspective doesn't help. And then also, obviously, with the currency.

So I was just wondering maybe you could walk through some of the puts and takes that led to expansion of gross margin in the quarter, the new products, modularization strategy, and the inefficiencies that had hit a couple of quarters ago. Just maybe an update on some of those.

Yes. A couple things. One is, which we have started to see incredibly solid performance out of our service organization from an efficiency standpoint, particularly in North America. And that is really driving some favorability versus the prior year.

And that is continuing. We believe that that continues to be achievable as we look forward. We did have a little bit better performance in our factories, which we have seen improvement in Q1. We continue to see a bit better improvement than we anticipated in Q2.

And what I will also say is that we have seen relatively low inflation, I mean, from a material cost standpoint. And our sourcing efforts on the cost of goods sold side and on the indirect side continue to be very favorable and we continue to see nice, solid benefits. And we are holding onto our benefits from the prior period.

And then we also got a percent of pricing. And so I would say that -- and everything went our way in the quarter. Not to say that we can't do it again, but we don't want to count on that kind of a quarter, quarter in and quarter out.

And really, while we would admit that strategic accounts, it does put pressure on gross margins, we do see efficiencies in the selling efforts. And in the quarter, we had better visibility than normal to some really large orders from several of our big strategic accounts. And that really did drive efficiency and consistency in our flowthrough in the factories. So lots of things went right. Like I commented earlier, hope we are being conservative the balance of the year.

And Jason, there is one other thing and that -- as you know, North America is our biggest business with our highest margins. And it was a big slice of our overall sales, a bigger than normal slice than our overall sales, which influences our gross margin.

And we are hoping to return to a more normal split between North America, EMEA, and APAC in the second and the third and fourth quarter, which is also why we are being a little bit more conservative on our gross margin projections going forward.

Understood. And the My Tennant portal -- how are you thinking about the eventual evolution for that to move maybe beyond parts and service and eventually have more of a full-scale equipment online retail experience? Is that something you see it transforming into over time? Is it something customers would be ready to use at this point? And what are the channel difficulties to doing that?

Right. Well, building a robust e-commerce platform is one of our strategic priorities. So this is really just phase 1: taking what we already have and upgrading it. And today, what we know is that 70%-plus of our customers start their buying journey online.

And increasingly, they are buying parts of their needs online, starting with parts and consumables; some of our coatings products. Eventually, we see moving to our non-configured products, kind of just that we make the stock and they're pretty simple and so they could buy it online.

The machine configuration project that we talked about will give us the opportunity -- not today, but in the future, to also have customers go online, configure their -- configure products that are more complex and buy them that way. But you look at all the trends.

In every other industry, the online portion of sales continues to increase. And there is no reason that that evolution should not occur within the cleaning industry as well. So we are still in the early stages of putting this together; putting a lot of effort, time, and money against it. And our hope is within three years, we will be able to report e-commerce as one of -- as another new significant channel to go along with direct, distributions, and strategic accounts.

Scott Graham, Jefferies.

Nice quarter, you guys. I was just wondering if you could maybe -- a couple questions. The order rates kind of as the quarter progressed in North America, just directionally, how did that work out?

North America has been pretty solid throughout the entire quarter. So it was -- what I would say is we tend to always have a bit of increased strength in the back half, but I would say that one of the marks of the North America business has been consistency across the quarter, which is also helpful.

And so I would say nothing real unusual in the North America side. I mean, we did see improvement in both Asia-Pacific and EMEA as we finish out the quarter and appear to be on track to expectations as we are entering our Q3.

And we do enter the quarter with a meaningful open order position, which is always a great way to start out the quarter. It is not a terrific leading indicator, but we always prefer to enter a quarter with an open order position that is substantial and at least somewhat above the prior year. And that is where we are at as we start out Q3.

All right. All right. The other question I had was that obviously, the balance sheet is just at a point where we are so flush with liquidity that it just kind of makes you wonder: is this -- are you kind of setting up -- and I apologize; I didn't catch the entire call. But I thought I heard you mention something about share repurchases when I did jump on a second time.

Are you looking at anything more on an accelerated basis for share repurchases in the second half?

Yes, we will continue to be aggressive, Scott. I mean, we have had -- we are really in our fourth year of fairly substantial buybacks. We did get the additional authorization of 1 million shares, just like we had done in the past, because we were pretty well depleted and we wanted to be positioned where we can really take advantage of what is going on in the market.

So I can't commit that we are going to see a major acceleration, but we are in the market and we are buying shares. And we think it is the right thing to be doing with our excess cash and we are economically-based as we buy. And we look out to the future and we think where we are at today that that is a good way to be using our money and is a nice way to return value to our shareholders.

Understood. Thank you. The last question I had is just that we continue to hear companies as they report, weigh in, that the North American industrial climate has softened, really, in the last six months.

To that, I guess I would kind of say, duh. But it is a situation where you guys -- I am kind of juxtaposing that versus your expectations for the fourth quarter; your second half being maybe a little bit more fourth-quarter oriented.

And I am just wondering: what are you looking at to get there? And are you contemplating what has obviously been -- you guys have done great with the incremental sales from new products, but outside of new products, we are seeing businesses slow down a little bit. And so I am just wondering how you get to maybe a little bit of a better fourth quarter? Because you said especially the fourth quarter on the sales [walk]. Have you -- what have you contemplated within the North American climate to kind of get there?

What we would say is maybe we have a contrarian viewpoint, but our business and order patterns remain extremely strong in North America. They are very consistent. And clearly, new products matter a lot and the quality of the additional new product introductions matter.

The other piece that I would like to emphasize, though, is we have dramatically increased our market coverage as we have invested not only across the last two years, but continue to make some investments. And we haven't even seen the full benefit of that yet. I mean, it takes awhile for new sales and service people to get at their full levels of optimization.

And the other piece that we would probably say is we are taking share of the market in North America. And that is allowing us to outstrip others. But great news is is we are not seeing a slowdown.

But we are paying attention. We look at the economic indicators. For right now, we are paying more attention to what our sales folks are saying and they keep delivering what they say they are going to. So we are watching that real closely.

All right. I actually did have one other question, and thank you for that.

No problem.

And I won't take 30, 40 seconds to ask it. Very simply: the SG&A rate up 30 basis points year over year on a reported basis, of course. Tom, did you say what that number was on a year-over-year basis, X-currency, on the sales line?

There is a little bit of a pickup, Scott, if you -- but not enough it is worth touting. I mean, if you restate revenue and you restate S&A for currency difference, it is really a modest differential.

What I would tell you is we certainly anticipate, particularly on an organic basis, and as we move towards the higher end of our revenue range, we will begin to see leverage on our S&A spending as we go into the back half of the year. Our spending has slowed down. We think we will see revenue grow.

And we will anticipate beginning to see leverage and beginning to see year-over-year improvement, particularly on an organic basis, in our operating profit margins in the back part of the year.

(Operator Instructions) Rosemarie Morbelli, Gabelli and Company.

I was looking at your balance sheet, which we all agree is extremely strong. Is there a particular reason behind why you are not really leveraged at all? Are you worried about the next recession? Are you keeping powder dry for acquisitions? Or for investment. Can you give us a feel as to what the strategy is behind that high level of cash?

What I would say is that we have continued to be successful in generating cash. And we think we are in the market of appropriately buying back shares and increasing our dividend.

We are looking at acquisitions. Our lens on how we look at transactions hasn't changed. We would love to find the right deal, like the previous acquisition we made in Brazil of Alfa, where we can instantly improve our sales or service coverage in an important growth market.

We also will continue to look at transactions on the technology side that can advance our innovative and sustainability platforms. And we are keeping ourselves in a position where we could move quickly on a deal if we did find it.

And we also say as -- even though our balance sheet is great, if you look at the level of actual cash that we have, it is not out of line at all with other industrial peer groups. So as we compare ourselves, we really -- even though our capital structure tends to be a bit better and conservative, the level of cash isn't concerning at this point. We would love to find ways to spend it and drive value creation, though. And we think we are actively doing that.

That is very helpful. Thank you. And then looking at your e-commerce platform, are you going to need to invest substantially in order to make sure that you know where everything is? In other words, maybe sign up for an RFID-type of program or do you think that you won't need that much of an investment to grow that particular side?

What I would say, Rosemarie, is that we -- our telemetry that we are putting on machines really allows us to -- where customers want to do that to have a portal to keep track of where the machines are at. So I would say we already have that capability. We don't need to have another mechanism to track where machines are and to look at -- keep track of the number of hours being run and where they are located based on technology that we already have that's really device-oriented and just like mobile devices.

And the e-commerce will dictate investment, but it will be metered over time as we see the marketplace change. And what we would tell you is that we firmly believe that our e-commerce investments will be -- will generate very solid returns. And it is not just a capability for the sake of having it. It is a capability that we believe will drive meaningful incremental revenue over time.

And we are partnering with some very sophisticated players in this field right now who are helping us both scope out what is relevant in our space and how we get there cost-effectively. And how we can do it incrementally, kind of testing and proving it out as we then take it to the next step. So we think we can get a big return for a reasonable investment here and we are doing it kind of in a staged approach that allows us to test, prove, and then move forward.

And in addition to generating revenues, do you anticipate the margin for all the revenues you are getting from that platform to be higher than your other platforms?

We would certainly like to think there could be some margin uptick, but I can honestly say that is not the driving force behind it. It is really about making it easier to do business with Tennant and generating new business incrementally. Because the investment wouldn't warrant just driving efficiency. You need to get incremental revenue to make it pay back. So that is our primary reason for the effort.

Okay. Thanks. And if I may ask one last question. You announced a new Senior VP of Global Operations. And I do realize that it is still early in the game, but I was wondering if you could share with us some of his thoughts regarding potential changes on how you address the future growth versus what you are doing now.

Well, Jeff Moorefield joined us from Pentair, where he was a significant player on the operations side there. He ran 19 plants on a global basis. He is extremely sophisticated.

And he has come in here and he is still in the process of evaluating what is possible, but what I will tell you is that Jeff will bring some very exciting new thinking to our global operations. And I think in the months and years ahead, we are going to be able to report some meaningful improvements, both in our plants and in our global supply chain. That should help both our sales and our profitability in a meaningful way. So we are thrilled to have him on board and he is off to a great start.

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

All right. Thanks, Melissa. Our platform to accelerate organic sales is working. The new growth strategies we outlined at the beginning of 2014 are working and spurred organic sales gains in each quarter of 2014.

We are encouraged by Tennant's performance against our growth agenda in the 2015 first half, with organic sales growth of approximately 5%. We remain on track 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 a 12% or above operating profit margin.

We look forward to updating you on our 2015 third-quarter results in October. Thank you for your time today and for your questions and have a continued happy summer.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.