Tennant Co (TNC) 2015 Q4 法說會逐字稿

Good morning. My name is Shawn, and I will be your conference operator today. I would like to welcome everyone to Tennant Company's 2015 fourth quarter and full year earnings conference call. This call is being recorded. There will be time for Q&A at the end of the call. (Operator Instructions). Thank you for participating in Tennant Company's fourth quarter conference call. Beginning today's meeting is Tom Paulson, Senior Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

Thanks Shawn. Good morning everyone, and welcome to Tennant Company's fourth 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 Durant, Vice President and Controller, and Tom Stueve, Treasurer. Our agenda today is to review Tennant's performance during the 2015 fourth quarter and full year, and our outlook for the 2016 full 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. 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 the Investor Relations website at Investors.TennantCo.com for approximately three months after the call.

Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the Company's expectations of future performance. Such statements are subject to risks and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement for a description of the risks and uncertainties that may affect our results.

Additionally on this conference call we will discuss non-GAAP measures that include or exclude special or non-recurring items. For each non-GAAP measure, we also provide the most directly comparable to GAAP measure. There were special non-GAAP items in the fourth quarter of 2015. Our 2015 fourth quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results for the 2015 fourth quarter and full year. 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. Like other industrial companies we saw a more sluggish business environment in the 2015 fourth quarter, coupled with continued foreign currency headwinds. Despite adverse macroeconomic conditions and lapping a strong prior year quarter, our growth strategies are working. On a constant currency basis, Tennant would have reported 2015 fourth quarter net sales up 0.2% to $216.7 million, and adjusted net earnings per diluted share on a constant currency basis of $0.93, equal to the prior year quarter. For the 2015 full year, on a constant currency basis, Tennant would have reported organic sales growth of 4.3%, and adjusted earnings per diluted share up 11.1%.

We know that our growth strategies have led, and will continue to lead to market share gains over time. In the current volatile economic environment, one way to validate our performance is to compare results to our only public cleaning industry competitor. On a global basis, our organic sales growth has outpaced them in each of the last eight quarters, through the 2015 third quarter. In our largest region the Americas, our organic sales growth for the 2015 first nine months was 8.8%, compared to their organic sales decline of 4% over the same period. This was on top of our organic sales growth in the Americas of 11.6% for the 2014 full year, compared to their organic sales growth of 3% for the 2014 full year.

This is evidence that our growth strategies are working. Our goal is to continue to perform well, and remain competitively advantaged in our industry. Contributing to our 2015 fourth quarter results, were solid sales to distribution and to strategic accounts, particularly in North America and EMEA. In Tennant's largest region, the Americas, organic sales increased approximately 0.5% on top of the very robust organic sales growth of 16% in the prior year quarter. We also were pleased to see fourth quarter organic sales gains in the EMEA region for the first time in 2015. Where organic sales rose approximately 1.1%. Another bright spot was sales of scrubbers equipped with ec-H2O technology, which increased nearly 4% in the fourth quarter. This set a record quarter for ec-H2O technology sales. For the 2015 full year, sales of scrubbers equipped with ec-H2O technology grew 2.6% to $156.9 million.

Now I would like to comment on our sale of the Green Machines Outdoor City Cleaning line that is noted in our press release. We announced our intent to sell this line in the 2015 third quarter, after determining that it did not sufficiently complement our core business. At the end of January 2016, we sold this business to our master distributor for the central eastern Europe, Middle East, and Africa region. This is the right decision for Tennant. The primary customer for the Green Machine's products is municipal governments, where the selling process is much different than it is with our core target customers. And the Green Machine's products needed further investment to remain competitive. We are pleased with the structure of this sale. The buyer will continue to invest in and manufacture the product in Scotland, and maintain jobs and employment conditions.

Additionally Tennant has an opportunity to generate revenues two ways by continuing to sell Green Machines in certain regions as a distributor, and by serving as the exclusive service provider for Green Machines. The impact of the sale is anticipated to reduce Tennant's annual revenues by approximately $10 million. Related to this sale we appropriately realigned the Company's infrastructure costs. This resulted in a restructuring charge in the 2015 fourth quarter. Tom will provide more details on this. With the Green Machine sale complete, we believe we are well-positioned to operate more efficiently. This is so important in a slower growth environment. We are focused on investing in our strongest growth opportunities for Tennant, and those are in our core industrial and commercial cleaning solutions.

We are confident in our growth strategy. We aim to reach our goal of $1 billion in organic sales through a strong new product and technology pipeline, sales gains in emerging markets, a return to growth in Europe, ongoing focus on strategic accounts, and an enhanced go-to-market strategy designed to significantly expand Tennant's worldwide market coverage and customer base. Let me spend a few moments updating you on our progress and driving the Company's top and bottom line results through innovative products and technologies, and efficiencies. We have a strong innovation engine to fuel our revenue growth. Sales of new products introduced within the past three years rose to 26% of equipment revenue for the 2015 full year.

We continue to execute against the strongest new product pipeline in our history. In 2015, Tennant introduced 36 new products, including product variants. That is on top of 55 new products launched from 2012 to 2014. We are on track to introduce at least 13 new products in 2016, including several significant industrial machine launches. The total number is below recent years, reflecting the considerable investment needed for large industrial product development. We expect introductions in 2017 to return to a number more comparable to 2015. Among our latest new products and technologies are the IRIS Asset Manager and the ec-H2O NanoClean. We are very excited about both of these.

We introduced IRIS in the 2015 fourth quarter, and we recently received a significant order from a large retailer in Europe that specified IRIS, allowing us to displace one of our largest competitors for this important piece of business. The IRIS on-board technology tracks machine productivity and maintenance needs, including machine and ec-H2O usage. It helps customers with large fleets of equipment make informed decisions, and reduce their overall cost to clean, which is a very attractive proposition and a fast emerging trend. The data is available online 24/7 through an easy to use portal. The IRIS Asset Manager is available on many of our commercial and industrial cleaning machines.

Also, the launch of our next generation of sustainable cleaning technology ec-H2O NanoClean has been successful. We introduced the ec-H2O NanoClean technology on the T300 Walk-Behind Scrubber, and T7 Micro Rider Scrubber. It is now also available on all of our other applicable commercial scrubbers. The name NanoClean refers to the creation of nanoscale bubbles that are an important part of the cleaning mechanism. Like the original ec-H2O, the next generation ec-H2O NanoClean technology electrically converts water into an innovative solution, that offers the same benefits as the original, but cleans better, cleans more soils, and is effective in more applications.

In addition the Orbio OS3 continues to gain momentum. The OS3 delivers onsite generation of an effective multisurface cleaner and an antimicrobial solution that meets US EPA regulatory guidelines for disinfection and sanitization. It is easy to operate, affordable and compact. Customer satisfaction is high for those who have already adopted this disruptive technology. We still believe the OS3 has great potential for growth.

Turning to key digital initiatives. We continue the global rollout of our new Customer Relationship Management, or CRM marketing and sales management tool. This system helps us identify new customers, grow our existing business, and improve the overall Tennant customer experience. As I mentioned on our call last quarter, we already had implemented our new CRM solution in North America, EMEA and Australia, and we are benefiting from its improved sales analytical capabilities. We expect to complete the rollout to Japan, China, and other regions early this year.

E-commerce continues to grow as an important sales platform and customer interface for Tennant. We estimate that more than 70% of our customers start their buying journey online, and increasingly they are purchasing parts and consumables this way. Our progress in building a more robust platform is on track, and our secure My Tennant portal is the first step in this effort. It is generating more inquiries and more cost-effective sales for us. E-commerce is a growing trend in other industries, and we expect this evolution to occur in the cleaning industry as well. In a few years we anticipate being able to report E-commerce as another significant revenue channel, along with our existing direct distribution and strategic account channels. These are just a few examples of the work we have done to position us for continued success.

Now I would like to take a moment to welcome our newest Board member, just last week we announced the addition of David Windley to the Tennant Board of Directors. David is President of IQTalent Partners, which is a talent acquisition professional services firm. Before that he was the Chief Human Resource Officer at Yahoo. His prior experience also includes serving in Human Resource leadership roles at Microsoft and Intuit. Over his 30-plus year career, he has helped companies build high performing leadership teams, and acquire the right talent to effectively deliver corporate strategies. We look forward to benefiting from his insights, as we continue to deliver innovative products and solutions that reinvent the way the world cleans. Our platform to accelerate organic sales is working. We have a diverse portfolio of initiatives that are 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. While we are seeing global economic sluggishness and unfavorable foreign currency impact carry forward from the latter part of 2015 into the early part of this year, we are staying the course strategically. But proceeding cautiously. We remain committed to both our organic growth goal of $1 billion in sales, as well as a 12% or above operating profit margin. Now I will 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 will generally not comment on the year-to-date financials, as those were detailed in the earnings release. For the fourth quarter ended December 31, 2015, Tennant reported net sales of $205.9 million, compared to $216.3 million in the prior year quarter. Excluding an unfavorable foreign currency exchange impact of about 5%, organic sales grew approximately 0.2% in the 2015 fourth quarter. On a reported basis the 2015 fourth quarter sales of $205.9 million were 0.5% higher sequential compared to the 2015 third quarter. For the 2015 full year organic sales rose approximately 4.3%, 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%.

As Chris mentioned we believe our growth strategy will allow us to continue to increase our market share. As adjusted, our fourth quarter 2015 net earnings were $14 million, or $0.78 per share. These as adjusted results exclude the restructuring charge of $2 million pretax, or a loss of $0.09 per share, and a $0.04 per share favorable tax true-up related to the 2015 third quarter long-lived asset impairment charge. In the year-ago quarter Tennant reported net earnings of $17.5 million, or $0.93 per share. Foreign currency exchange headwinds unfavorably impacted our 2015 fourth quarter financial results. I will provide more information about the special items and foreign currency exchange impact in just a few minutes.

Turning now to a more detailed review of the 2015 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, 2015 fourth quarter organic sales increased approximately 0.5%, excluding about 3% of unfavorable foreign currency impact. Organic sales in the fourth quarter in North America increased approximately 1.6%, and were fueled by strong sales through distribution into strategic accounts, including sales of new products. In the 2015 fourth quarter, Latin America organic sales declined approximately 11%. However, organic sales growth in Brazil was slightly positive at about 0.3%, despite the continued economic headwinds. For the 2015 full year, Brazil achieved organic sales growth of approximately 3.5%. 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 fourth quarter increased approximately 1.1%, excluding an unfavorable foreign currency impact of 10.5%. Strong sales for the master distributor for the Central Eastern Europe, Middle East and Africa, or CEEMEA region, and organic sales growth in western Europe, were partially offset by lower sales of outdoor equipment. As Chris mentioned at the end of January 2016, we sold the Green Machines outdoor city cleaning line to our master distributor for this CEEMEA region. As of December 31, 2015 our Green Machine assets were still classified as held for sale. In addition to the restructuring charge we recorded in the 2015 third quarter, we also recorded a $2 million pretax restructuring charge in the 2015 fourth quarter. These restructuring actions were designed to reduce our infrastructure costs, and consisted primarily of severance.

In the Asia Pacific region organic sales in the 2015 fourth quarter decreased 3.6%, excluding an unfavorable foreign currency impact of about 8%. Organic sales growth was particular strong in Australia, and was also positive in China and Japan. However, this was more than offset by lower organic sales in the other Asian countries. For the 2015 full year organic sales in China rose approximately 5.5% compared to the prior year. Tennant's gross margin for the 2015 fourth quarter was 42.4%, compared to 43% in the prior year quarter. Unfavorably impacting gross margin was a large percent of sales through distribution, as that channel tends to have lower gross margins. Also these results include foreign currency headwinds that unfavorably impacted gross margin by approximately 90 basis points. Even so, we were still able to achieve a gross margin of 43% for the 2015 full year.

Research and development expense in the 2015 fourth quarter totaled $8.1 million, or 3.9% of sales, compared to $7.5 million, or 3.4% of sales in the prior year quarter. We continued 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 2015 fourth quarter as adjusted to exclude the $2 million pretax restructuring charge totalled $55.9 million, or 28.9% of sales. Although at a slower pace, we continue to invest in our sales growth and efficiency initiatives, which combined with the benefits from our restructuring charges are anticipated to improve S&A leverage in future quarters. S&A in the fourth quarter of 2014 was $63 million, or 29.1% of sales.

Our 2015 fourth quarter operating profit as adjusted to exclude the $2 million restructuring charge totaled $19.7 million, or 9.6% of sales, compared to the year earlier operating profit of $22.6 million, or 10.5% of sales. We have routinely discussed the impact of foreign currency exchange on sales, but with the significant change in foreign exchange rates during 2015, 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 current foreign currency exchange impact on our 2015 fourth quarter financial results. Unfavorable impact to sales of approximately 5%, or about $10.8 million. Unfavorable impact to gross margin of 90 basis points. Using a constant currency, our gross margin would have been about 43.3% compared to 42.4% as reported. Unfavorable impact to operating profit of approximately $3.6 million. Using a constant currency our operating profit margin would have been about 10.8%, compared to 9.6% as adjusted. An unfavorable impact to earnings per share of approximately $0.15, using a constant currency our earnings per share would have been about $0.93, compared to $0.78 as adjusted. The estimated unfavorable impact from foreign currency exchanged during the 2015 fourth quarter was a bit larger than we anticipated, due to the prevailing strength of the US dollar. We continue to actively work on a number of opportunities to help mitigate the foreign currency exchange headwinds that include, increasing selling prices in the effective local markets where possible. Starting to produce and ship some products from the locations with a more favorable foreign currency exchange pairing, and expanding the scope of our hedging strategies to include cash flow hedging, in order to hedge forecasted foreign currency transactions with foreign exchange option contracts or forward contracts.

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 focus 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.

We continue to successfully execute our tax strategies. Tennant's overall effective tax rate for the full 2015 full year, excluding the special items was 29.6%, compared to 30.7% for the first nine months of 2015, and compared to 27.2% for the 2014 full year. The base tax rate for the 2015 full year was 30.7%, which excludes special items and also routine discrete tax items. The federal R&D tax credit was reenacted before year end, so the full year favorable impact was all recorded in the 2015 fourth quarter.

Turning to the balance sheet. Again this continues to be very strong. Net Receivables at the end of the 2015 fourth quarter were $140.4 million versus $152.4 million a year earlier. Quarterly average Accounts Receivable Days Outstanding were 61 days for the fourth quarter, compared to 62 days in the prior year quarter. Tennant's inventories at the end of the 2015 fourth quarter were $77.3 million versus $80.5 million a year earlier. Quarterly average FIFO days inventory on hand were 89 days for the 2015 fourth quarter, compared to 84 days in the year-ago quarter.

Capital expenditures at $24.8 million in the 2015 full year were $5.2 million higher than $19.6 million in the prior year, with planned investments in investment technology process improvement projects, tooling related to new product development, and manufacturing equipment. Tennant's cash from operations was $45.2 million in the 2015 full year, down $14.2 million, compared to $59.4 million in the prior year, primarily due to the timing of tax payments. Cash and cash equivalents totaled $51.3 million versus $93 million a year ago. Total debt of $24.7 million declined $3.4 million from $28.1 million a year ago. Our debt to capital ratio was 8.9% at the end of 2015 compared to 9.1% 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 $14.5 million in the 2015 full year. Reflecting our commitment to shareholder return, we are proud to say that Tennant increased the annual cash dividend payout for 44 consecutive years. During the 2015 full year we purchased 764,000 shares of Tennant stock, for a total cash outlay of $46 million. This was significantly higher than the 2014 full year, when we purchased 225,000 shares, for a total cash outlay of $14.1 million. Our Board of Directors authorized a new share repurchase program of up to an additional 1 million shares of Tennant common stock in June of 2015. This authorization underscores the Board's continued confidence in our business, and the strength of our capital position. As of December 31, 2015 we had approximately 642,000 shares remaining under our repurchase program, which aims to enhance shareholder value by providing the financial flexibility to offset any dilutive effect of stock-based compensation programs, and to consider repurchases that create value based on overall market conditions. Assuming the stock market continues to be volatile, we expect to be active in repurchasing Tennant's shares.

Moving now to our outlook for 2016. We estimate 2016 full year net sales in the range of $795 million to $825 million. Down 2.1% to up 1.6%. Or approximately 0% to up 4% organically, assuming an unfavorable foreign currency impact on sales in the range of 1% to 2%, and a sales decline from the divestiture of approximately 1%. We estimate 2016 full year earnings in the range of $2.25 to $2.55 per share. Foreign currency exchange headwinds in 2016 are estimated to negatively impact operating profit in the range of $3 million to $6 million, or a negative impact of approximately $0.10 to $0.20 per share. On constant currency basis 2016 full year earnings are anticipated to be in the range of $2.35 to $2.75 per share. The estimated slightly higher effective tax rate in 2016 is also anticipated to negatively impact earnings per share by approximately $0.05. For the 2015 full year adjusted earnings per share totaled $2.49 on net sales of $811.8 million.

Our 2016 annual financial outlook includes the following expectations, slower economic growth in North America, modest improvement in Europe, and growth in emerging markets. Continued negative foreign currency impact on sales for the full year in the range of an unfavorable 1% to 2%, with a $3 million to $6 million negative effect on operating profit. Decline in sales of approximately 1% from the sale of the Green Machines outdoor city cleaning line with an immaterial impact on earnings. Gross margin performance of approximately 43%, Research & Development expense of approximately 4% of sales, capital expenditures in the range of $25 million to $30 million, and an effective tax rate of approximately 31%. Tennant operations are performing well, and our objective is to continue to build our business for sustained success. We expect our 2016 financial results will be stronger in the second half of the year. In the first half of the year the first quarter will be most challenging, especially considering the strong growth we achieved in the 2015 first quarter. Now we would like to open up the call to any questions. Thanks Shawn.

(Operator Instructions). There are currently no questions. Mr. Paulson, I turn the conference back to you.

Do you want to check. We will give the queue another 15 seconds to make sure there isn't any questions, and then I will turn it over to Chris to make the closing remarks.

(Operator Instructions).

We will close it with Chris.

All right, I will close. While we anticipate foreign currency and global economic volatility to remain challenging in the coming quarters, we believe that Tennant is competitively advantaged through our innovative products and technologies and our go-to-market strategy, and we are well-positioned to perform efficiently. We remain committed to reaching our goals of $1 billion in organic sales, and a 12% or above operating profit margin. We are very excited about Tennant's future. We look forward to updating you on our 2016 first quarter results in April. Thank you for your time today, and for your questions. Take care everybody.

And this concludes today's conference. You may now disconnect.