Tennant Company
Q3 2015 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

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's third quarter earnings conference call. There will be time for Q&A at the end of the call. [Operator Instructions] Thank you for participating in Tennant Company's third quarter earnings conference call. Beginning today's meeting is Mr. Tom Paulson, Senior Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

[Thomas Paulson:]

Thanks, Stephanie. Good morning, everyone, and welcome to Tennant Company's third quarter 2015 earnings conference call. I'm 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 third quarter and our outlook for the full year. First, Chris will brief you on our operations, and then I'll cover the financials. After that we'll open up the call for your questions. 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 three months after this call. Now, before we begin, please be advised, 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 measures, we'll also provide the most directly comparable GAAP measure. There were special non-GAAP items in the third quarter 2015. Our 2015 third quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results for the third quarter and the first nine months of 2015. Our earnings release was issued this morning via Business Wire and is also posted on our Investor Relations website. At this point, I'll turn the call over to Chris.

[Chris Killingstad:]

Thank you, Tom, and thanks to all of you for joining us this morning. We are pleased to report record revenues for the third quarter, as Tennant continued to execute well on our growth strategies. The company posted consolidated net sales of $204.8 million in the 2015 third quarter, up 7.6% organically from a year ago. Our third quarter results were led by robust sales to strategic accounts in our largest market of North America and also broad-based growth in our Asia-Pacific region. In addition to strong sales to strategic accounts in North America, we saw continued gains in global sales of new products, especially the T12 and the T17 Rider Scrubbers for the industrial market and the T300 Walk Behind Scrubber for the commercial market. Notably, sales of scrubbers equipped with the company's ec-water technology grew approximately 8% from a year ago, again surpassing the $40 million mark in the third quarter. Gross margins in the third quarter rose to 43.3% and our net earnings per diluted share, as suggested and on a constant currency basis, grew 33% to $0.84 compared to the prior-year quarter. Overall, the business is performing well. We are focused on investing in the strongest growth opportunities for Tennant, and those are in our core industrial and commercial cleaning solutions, including Orbio Technologies. As you saw in our news release, after careful assessment, we have determined that our Green Machines, outdoor city cleaning line, does not sufficiently complement our core business. Therefore, we are exploring strategic alternatives for the Green Machines brand and related assets, which contribute only about 2% of our total sales. This is a good business with the potential to thrive with a new owner for home Green Machines is a strategic asset. It is our intension to identify potential buyers, who will drive further investment and growth in Green Machines' products and services. This is the right decision for Tennant. As result of this move, the company incurred a non-cash impairment charge and a restructuring charge in the 2015 third quarter. Tom will provide more information regarding these special items. Tom will also provide a detailed picture of our performance by geography, but I'll share a few highlights. We had 8.3% organic sales growth in the Americas, with continued strong gains in North America and another quarter of increased organic sales in Brazil, despite difficult economic conditions there. Organic sales growth in Western Europe was again within our target range, up 5% to 9%. And we saw approximately a 15% organic sales rise in China. Clearly, our platform to accelerate organic sales is working. We remain committed to both our organic growth goal of $1 billion in sales by 2017 as well as to a 12% or above operating profit margin. You may recall that the main drivers of our growth strategy are

[Thomas Paulson:]

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 year-to-date financials as those are detailed on earning release. For the third quarter ended September 30, 2015, Tennant reported net sales of $204.8 million compared to $202.6 million in the prior-year quarter. Excluding an unfavorable foreign currency exchange impact of about 6.5%, organic sales grew approximately 7.6% in the 2015 third quarter. On a reported basis, the 2015 third quarter sales of $204.8 million is a new record for sales in the third quarter, despite the foreign currency exchange headwinds of about $13 million. For the 2015 first nine months, organic sales rose approximately 6%, excluding an unfavorable foreign currency exchange impact of about 6%. 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. As adjusted, our third quarter 2015 net earnings were $12.1 million or $0.68 per share. These as adjusted results exclude two special items that total a charge of $13.1 million after-tax or a loss of $0.73 per share. In the year-ago quarter, Tennant reported net earnings of $11.8 million or $0.63 per share. Foreign currency exchange headwinds unfavorably impacted our 2015 third quarter financial results. I'll 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 third quarter. Our sales are categorized into three geographic regions, which are

[Operator:]

[Operator Instructions] Your first question comes from the line of Bhupender Bohra from Jefferies.

[Bhupender Bohra:]

A good quarter actually, and I just wanted to check on the guidance here. So you lowered sales at the midpoint by like $15 million. Can you talk about the assumptions at the upper-end and the lower-end?

[Chris Killingstad:]

Yes, I mean, we certainly -- first and foremost, I would say that, we hope are being conservative. And given the volatility that we're seeing, we felt that was the prudent thing to do. What we would say is we would certainly hope and anticipate we will be closer to the higher-end of our range and our assumptions are that we will continue to see volatility in some markets. We certainly are not seeing the growth that we would anticipate. And although it's better than many, in Brazil, also China is growing a little bit slower. We do continue to expect some concern in parts of Europe. But I'd also say that we do believe that Western Europe continues to provide some optimism, as we look forward. North America continues to be extremely strong. And the one caveat I would say is that we've really had a particular strength in some large transactions in the first part of the year in North America. We're going to not have that every quarter and our current anticipation is we don't see any big deal coming through in the fourth quarter. We don't feel that's going to have any impact on future periods, but we do feel that it will have somewhat of a negative impact on our ability to grow in North America, although we'll still see substantial growth in that market.

[Bhupender Bohra:]

Just a follow-on on the fourth quarter trends, if you want to just give us a sense of how your fourth quarter month-by-month seasonally goes along, like is it October?

[Chris Killingstad:]

Our business really for the last four months of the year, it tends to get pretty darn strong. And what I would say is that October is shaping up the way it needs to shape up. So there is nothing unusual positive or negative. It's really transpiring how we would expect it to be into deliver against expectation. We do know that the quarters made -- it really matters in what happen to November and December. October gets the quarter started. We do see the year typically ends with momentum and that certainly what we anticipate is going to happen based on our channel checks.

[Bhupender Bohra:]

And the last question on pricing. Can you just talk about pricing, how was it in the third quarter and especially on the strategic account side?

[Chris Killingstad:]

I can't comment specific to strategic accounts, but what I can say is we continue to be pleased with the pricing benefits that we're getting. We have got another percent of pricing benefit in Q3. We'd say that on a year-to-date, we're right around that 1% benefit. And we don't anticipate any change to that in Q4. And we think that's an appropriate level of pricing benefit in a low inflationary environment. And we're happy with that performance.

[Operator:]

Your next question comes from Joe Maxa with Dougherty.

[Joe Maxa:]

I missed the first part, so I apologize, if this has been asked. But regarding the Green Machines, how is that impacting your fourth quarter guidance?

[Thomas Paulson:]

It really has limited impact. We're not adjusting for that. And like we said, it'd be great if we're capable of getting the transaction closed. We're not counting on that happening. We're just going to say that, we expect to bring that transaction ahead as soon as we possibly can, but the impact was really the level of the charge that we took in Q3. We don't anticipate anything of significance in Q4.

[Joe Maxa:]

So you don't expect much for revenue in that line in Q4, where you had about 2% annually beforehand?

[Thomas Paulson:]

We have not made any adjustments to revenue expectations in Q4 based on transaction.

[Joe Maxa:]

And then I was going to ask on the organic growth in EMEA, I think you said you're not expecting growth there this year. But it looks like Asia-Pacific maybe do better than you perhaps were expecting?

[Thomas Paulson:]

I mean, we are disciplined overall in our Asia-Pacific performance in the first half of the year. And in all honesty, other than China, began to gain some momentum in Q2. We're really pleased with the performance across the board in Q3. Our organic growth was probably in excess of 21%. We expect growth for the full year. And we would admit China is growing a little slower than we'd like, but 15% is not bad. EMEA, we would tell you that we're pleased by what we're seeing in Western Europe. And we do anticipate modest organic growth in Q4, but there won't be enough to offset the lack of organic growth in the first part of the year. But as we look forward, we're actually feeling overall better about Europe other than our outdoor businesses just hasn't been solid for us. And with our master distributor, they're struggling in Russia as everybody is. But there are some bright spots in Europe, as we look at the momentum that we're bringing into next year.

[Chris Killingstad:]

We expect that we can continue to grow in Western Europe in our core markets of the U.K., Germany, France, Spain and Netherlands and so forth in the range of 5% to 9%. That's what we've planned so far this year and that should continue. Well, if Eastern Europe and Russia start to pick up in 2016, Europe has potential of having a good year.

[Joe Maxa:]

Two other questions. So last quarter you mentioned there was a large order in Asia that was expected to come-in in Q3 and/or Q4. I'm wondering the status of that order.

[Thomas Paulson:]

It did ship. It was specific to Australia. We're not at liberty to give the name, but it was a large retailer and it shipped as expected on Q3. We'll continue to get some benefits in Q4 from it. And that was why we had particular strength in Australia, even though it's still tough market economically. But that big transaction really helped Australia as well as overall Asia-Pacific.

[Joe Maxa:]

Just lastly on the Green Machines, have you started that process, looking for potential buyers?

[Chris Killingstad:]

Yes. We've been at it for a while. And so we got to the point where we needed to take a restructuring charge. So we needed it to be out in the public domain at the current time, but we've been at it for a while, Joe.

[Joe Maxa:]

Do you think next year in China you'll be able to continue to see some pretty nice organic growth, given slowdown in the economy over there?

[Chris Killingstad:]

That's our expectation. I mean we've kind of defied what other people are seeing. So some of the trends that we're seeing in China, which is labor continues to get scarcer and wage inflation continues to happen, and people tend to move towards changes in the way that they clean, and that all bodes well for the mechanization of cleaning. And we believe that even with slower GDP growth that we can still see solid growth. And we continue to expand. I mean, we're adding more distributors. We're expanding our direct capabilities in China, both on the sales and service side. And that expansion and investment, it needs to drive growth, and that's certainly our expectation that it will continue.

[Operator:]

Since there are no further questions at this time. I would like to turn the call over to management for closing remarks. End of Q&A

[Chris Killingstad:]

All right. Thank you. We are continuing to invest in our growth agenda and remain on track to deliver gains in organic sales and adjusted operating profit margin in 2015. Organic sales through the first nine months of 2015 increased approximately 6%. We anticipate foreign currency headwinds to remain challenging throughout the remainder of the year. We are focused on creating value through new product introductions and expanding our world-wide sales and marketing initiatives to increase Tennant's global market share, while concurrently running a more efficient business to raise productivity. Let me reiterate that we remain committed to our organic growth goal of $1 billion in sales by 2017 and to a 12% or above operating profit margin. We are confident in our ability to execute on our strategies and we believe Tennant is well-positioned to succeed. And that is why I think the best is yet to come. We look forward to updating you on our 2015 fourth quarter and full year results in February of 2016. Thank you for your time today and for your questions. Take care everybody.

[Operator:]

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