Tennant Q4 2008 Earnings Call Transcript

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 |  About: Tennant Company (TNC)
by: SA Transcripts

Tennant Co. (NYSE:TNC)

Q4 2008 Earnings Call

February 24, 2009 11:00 AM ET

Executives

Thomas Paulson - Vice President and Chief Financial Officer

H. Chris Killingstad - President and Chief Executive Officer

Patrick J. O'Neill - Treasurer

Karen Durant - Corporate Controller

Analysts

Seaver Wang - Utendahl Capital Partners, Lp.

Theodor Kundtz - Needham & Company

Joseph Maxwell - Dougherty & Company, LLC

James Bank - Sidoti & Company

Operator

Good morning and thank you for participating in Tennant Company's Fourth Quarter 2008 Earnings Conference Call. This call is being recorded. If you do not wish to participate, you may disconnect at this time. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). We ask that you remain on the line for closing remarks by management after the question and answer session.

Beginning today's meeting is Tom Paulson, Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson you may begin.

Thomas Paulson

Thanks Rachel. Good morning everyone and welcome to Tennant's Company fourth quarter 2008 earnings conference call. I'm Tom Paulson, Vice President and Chief Financial Officer of Tennant Company.

With me on the call today are Chris Killingstad, Tennant's President and CEO, Pat O'Neill, our Treasurer; and Karen Durant, our Corporate Controller. Our agenda this morning is to review Tennant's performance during the quarter and full year and our outlook for 2009. First Chris will update you on our operations and I'll review the financials. After that we will open up the call for your questions.

Before we begin please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations or 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 Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statements for a description of the risks and uncertainties that may affect our results.

Additionally, this conference call includes discussion of non-GAAP measures that include or exclude unusual or non-recurring items. For each non-GAAP measure, we also provide the most directly comparable GAAP measure. And our earnings release issued today includes a schedule of reconciles these non-GAAP measures to our GAAP results. Our earnings release was issued this morning via Business Wire, and is also posted on the investors section of our website at tennantco.com. Now I'll turn over the call to Chris who'll review Tennant's fourth quarter and full year performance and discuss how we are driving to deliver results in 2009. Chris?

H. Chris Killingstad

Thanks Tom and thanks to all of you for joining us this morning. As you know, the global economy declined sharply in the fourth quarter and Tennant certainly felt the impact.

While we are disappointed that recent economic events had such a negative effect on our fourth quarter results, we are proud of our many key accomplishments during the year. These include the three strategic acquisitions in 2008 that expanded our presence in the international markets, the successful launch of ec-H2Otechnology and the continuing growth opportunities that it affords. As well as the $10 million of growth savings from our global low cost sourcing and lean manufacturing initiatives.

Let's step back and take a broad look at Tennant's performance in 2008. If you recall, Tennant entered 2008 in a growth mode. After posting record sales in 2007 with an organic sales increase of approximately 6.5%, we were anticipating further gains in 2008, but had contingency plans in place to reduce costs if the economy faltered. Around mid March we began implementing Phase 1 of our contingency plans, taking actions to lower spending levels as sales softened in North America. At that time, we either cut or delayed discretionary spending and postponed non-revenue generating new hires. Consistent with our lean principles we also reduced work hours in our plants to match demand.

These early 2008 steps lowered our variable costs, prevented unnecessary inventory build up and helped generate solid operating performance through the third quarter of 2008. In fact, our operating margins improved sequentially each quarter through the first nine months of 2008, reaching 8.8% in the

2008 third quarter. We also posted organic sales growth of approximately 4% in the 2008 second and third quarters.

Against this backdrop, economic forecasts continued to deteriorate heading into the fourth quarter. What started out as an uncertain economic environment rapidly turned into an unprecedented decline. In the 2008 fourth quarter, current sales fell 16% year-over-year, largely due to delayed customer purchases, stalled credit markets and unfavorable foreign currency exchange rates. As the magnitude of these issues became clear, we accelerated actions to rescale our business and align estimate market conditions. Reacting quickly to deteriorating markets in the fourth quarter we implemented a restructuring plan that was announced on December 17th.

When completed, this action is estimated to reduce our global workforce by approximately 8% or 240 positions, which we expect will deliver at least $15 million in annualized savings in 2009 and add at least 20 million in savings starting in 2010. We continued to implement previous cost containment strategies and we froze salaries. Further, to preserve cash for operations and growth initiatives, we have temporarily suspended repurchases of Tennant's stock and reduced 2008 capital expenditures to approximately $21 million versus the planned 25 million to 27 million range. Amid the uncertainty that plagued us through most of 2008, we remained focused on our strategic priorities, and our direction has not changed.

We are committed to pursuing growth and operational excellence initiatives that should position the company to remain competitive and should allow us to return to historical levels of profitable growth, when the economy recovers. Because of the expense reductions taken in 2008, we anticipate being profitable for the 2009 full year, as Tom will discuss in more detail shortly. The company's strategic priorities include; employing continuous process improvement, improving operational excellence through lean manufacturing initiatives and a global low cost sourcing platform and growing sales through innovative new products and service solutions as well as through international market expansion.

Our efforts to improve Tennant's operating efficiency have been successful. As I mentioned, we met our 2008 goal by achieving approximately $10 million in gross savings from global low cost sourcing and lean manufacturing. One of the ways we accomplished this was by increasing the level of sourcing from low cost regions from 14% in 2007, to 20% at the end of 2008. We will continue on this path in 2009 and aim to achieve a 25% level of sourcing from low cost regions. Although the global recession, clearly hurt our sales volume and profitability in 2008, we are pleased that our strategic acquisitions contributed to sales and expanded our markets.

In total the Applied and Alfa acquisitions added approximately 3% to consolidated net sales for the fourth quarter, and approximately 5% for the full year. Although the economic conditions have adversely impacted their sales level, the integration of our acquisitions remain on plan. We also continued to see results from our long term strategy to build our international business.

In 2008, revenue outside of North America accounted for 43% of Tennant's sales versus 33% just four years ago, and only 28% of our total sales in 2000. We have the people, the structure and the products to aggressively grow our international business when the worldwide economy improves.

New product introductions that differentiate us from our competition are also an important source of revenue and will remain at the top of our priority list. We are committed to continuing our critical strategic activities in research & development and plan to invest at our historical level of between 3 and 4% of net sales. In 2008, sales of new products introduced in the last three years generated 44% of equipment sales, exceeding our 30% target. Tennant introduced six new products during 2008, in addition to the global introduction of our award winning electrically converted water technology called ec-H2O.

Despite the recession, ec-H2O exceeded our 2008 expectations both for sales and customer satisfaction. This cost effective and environmentally friendly technology has either been adopted or is currently being tested actively by key accounts around the world, which we believe will lead to new business wins and accelerated growth going forward.

In 2008, we initially offered ec-H2O on six walk-behind scrubbers. In 2009, it will be introduced on five rider scrubbers. This will round out Tennant's portfolio of offerings to our commercial and light industrial customer base, with specific applications in aviation education, food and beverage, health care, hospitality, logistics and retail environment. We view ec-H2O as a game changing technology platform; that can spawn new applications and overtime take Tennant into new markets. We are aggressively exploring both options.

We also continue to seek opportunities to bring Tennant's technology into new markets. An example of this is our licensing agreement with BISSELL that we announced this past November. Under the agreement, Bissell has licensed Tennant's ready space carpet cleaning technology to be marketed as BISSELL's PROdry home carpet cleaner.

For the first time, this has placed a Tennant developed solution in the consumer market. We are excited about this opportunity and are seeking other licensing avenues. Our product pipeline going forward will remain robust. As the innovation leader in our industry, we believe it is important to continue to invest in R&D for the benefit of our employees, shareholders and customers. We are confident that the actions that we have taken are the right ones to protect and grow our business over the long term. Whether an economic recovery occurs in 2009 or 2010, it is our job to manage the business through this difficult business cycle. We know what we can control and that's our focus in 2009.

With that in mind, the three guiding principles that we will follow this year center around first, adjusting to the low growth economy without sacrificing the company's long term potential. Second, prudently allocating scarce resources to initiatives that position the company to deliver against controllable objectives; such as increased savings from global low cost sourcing and lean manufacturing initiatives, reduced selling and administrative costs and investments in research and development projects such as ec-H2O, to drive sales growth. And third, optimizing cash in an uncertain environment through conservative planning, increased discipline in capital expenditures and a heightened focus on working capital management.

By moving forward with our key growth in operational excellent strategies, we are committed to having the right products in the right geographies with an improved cost structure for when the economic recovery takes hold. Now I'll turn the call over to Tom for a review of the company's financial results and our outlook. Tom?

Thomas Paulson

Thank you, 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 financials that I'll generally not be commenting specifically on the full year financials, results are detailed at links in the earnings release.

For the fourth quarter ended December 31, 2008 Tennant reported a net loss of 16.9 million or a $0.92 loss per diluted share on net sales of 153.3 million. Fourth quarter net earnings were reduced by 19.8 million pre-tax or $0.88 per diluted share, for the previously disclosed restructuring of which 14.6 million was related to our workforce reduction. The workforce reduction is estimated to achieve annualized savings of at least 15 million in 2009 and 20 million in 2010, as Chris noted.

In the fourth quarter, the company also recorded a $5.2 million charge for other unusual items, including 3.4 million for increased accounts receivable reserves due to the global credit crisis and a $1.8 million write-off related to technology investments that are being replaced by new solutions.

In North America, we continue to see a longer sales cycle with customers delaying their purchases due to the economy. Our 2008 fourth quarter net sales in North America totaled 88.2 million, down nearly 19% versus the prior year quarter, on lower unit equipment volume. The company's applied acquisition contribute approximately 1% to North America's fourth quarter net sales which was offset by an unfavorable foreign currency exchange effect of approximately 1%.

We believe, Tennant will be well positioned as a market leader in North America when activity in the industrial and outdoor segment regains strength; and as commercial customers migrate to smaller cleaning machines because of the maneuverability and attractive price points we anticipate capturing this business with the compact products that we've launched in the past two to three years.

In our EMEA markets, which encompass Europe, the Middle-East and Africa; fourth quarter net sales declined approximately 16%, to 45.9 million compared with the year ago quarter on lower unit volume and an unfavorable foreign currency exchange rate that reduced net sales by approximately 9% for the quarter. Our acquisition of Applied added approximately 6% to EMEA net sales in the fourth quarter.

In Tennant's other international markets which is compromised of China and other Asian markets, Japan, Australia and Latin America; 2008 fourth quarter net sales rose 1.5% to 19.2 million versus the strong prior year quarter. Here, we benefited from the expanded market coverage in our Asia Pacific and Latin American regions and our acquisitions; primarily, Alpha in Brazil.

Acquisitions contributed approximately 8% to other international 2008 fourth quarter net sales. This performance reflects the investments we made in these emerging markets. A unfavorable foreign currency exchange effect impacted net sales by approximately 6% in the quarter. Tennant's gross margin was 36.5% for the 2008 fourth quarter compared with 42.4% in the prior year quarter; again due to the significantly lower unit volume. Although we took cost cutting actions as quickly as possible in the fourth quarter, the economic tsunami hit faster than we could react. As a result, Tennant's fourth quarter gross margins contracted by 590 basis points.

Research and development expense in the fourth quarter was 6.5 million, up from 6.1 million in the prior year quarter. R&D expense as a percent of sales rose to 4.2% in the fourth quarter of 2008 due to appliance -- due to a decline in sales in the quarter compared to 3.3% in the comparable quarter last year.

For the year, R&D expense was 3.5% of net sales within our targeted range of 3 to 4%. For the fourth quarter, selling and administrative expenses totaled 71.8 million, versus 56.8 million in the 2007 fourth quarter. The increase in S&A expenses were chiefly due to the fourth quarter restructuring activities. Excluding restructuring costs and other unusual items S&A expenses were $52 million in the 2008 fourth quarter compared to 56 million in 2007 fourth quarter.

Although Tennant's S&A expenses, excluding the restructuring charge of $19.8 million, were lower than in the 2007 fourth quarter on a dollar basis, the rapid decline in sales still resulted in higher S&A expenses as a percent of net sales during the 2008 fourth quarter. We remain committed to controlling cost and lowering our operating expenses as a percent of sales over the next few years.

So that end we have engaged a external consulting firm that specializes in standardization and process improvement. They will help us develop a two to three year plan for attaining meaningful reductions in F&A expenses as a percent of sales.

Our fourth quarter operating loss is $22.4 million compared to an operating profit of $28.6 million in the 2007 fourth quarter. Fourth quarter 2008 operating margin was a negative 14.6% versus a positive 11.3% in the prior year quarter. The lower operating margin in the 2008 fourth quarter is primarily attributable to restructuring cost and significantly lower sales volumes as previously discussed. In addition, the 2007 fourth quarter operating margin benefited from the $6 million gain on the Maple Grove, Minnesota facility sale.

Our overall tax rate in the 2008 fourth quarter and full year was 28.2% and 39.6% respectively. The full year rate was higher than our anticipated 36.5% to 38.5% range, chiefly due to the final mix of pre-tax earnings and losses by country.

Now turning into the balance sheet. Net receivables at quarter end totaled 123.8 million compared with 127.5 million a year earlier. Accounts receivable days outstanding was 77 at quarter end, up seven days versus 70 at the end of the 2008 third quarter, and compared to 61 at the end of the prior year period. The increase stems from a sharp drop in sales volumes in late 2008, a higher mix of international sales which carry longer payment terms in North America and our recent slowing in payments due to the credit crisis.

Our inventories at quarter end totaled 66.8 million, up slightly from 64 million at the end of the 2007 fourth quarter. The inventory increase primarily results from our 2008 acquisitions, and from higher inventory levels due to stocking parts from low cost countries and new product introductions. FIFO days inventory in hand was a 101 days at the end of the quarter, versus 83 days in the comparable period last year. Capital expenditures were 20.8 million in 2008 which, as Chris noted was much lower than our planned range of 25 to 27 million at the start of 2008, and down nearly 8 million from capital expenditures of 28.7 million in 2007.

As global market conditions deteriorated, we deliberately lowered our capital expenditures as part of our cash preservation efforts. Yet, during 2008 we were able to complete a number of high priority capital projects, including our very successful SAP upgrade in the fourth quarter. As of September 2008, we have temporarily suspended repurchases of Tennant's stock, as previously announced, in order to conserve cash. We expect to reevaluate this decision when economic conditions improve. We, currently have no plans however, to reduce Tennant's quarterly dividend.

Tennant's cash and cash equivalence totaled 29.3 million at the end of the 2008 fourth quarter compared to 33.1 million in the prior year quarter. Total debt was 95.4 million compared to $4.6 million in the 2007 fourth quarter. We had a debt-to-capital ratio of 31.2% at the end of the 2008 fourth quarter versus 1.8% at the end of the same period last year. The increased debt in 2008 primarily stem from funding the company's 2008 international acquisitions, which reflect Tennant's strategy of expanding operations outside of North America.

Now turning to our outlook; we are expecting a very difficult selling environment in 2009, as are most companies. This requires us to conservatively manage the business. To that end, the restructuring that we announced in December 2008 is on track to deliver anticipated savings and we have additional contingency plans in place that we will implement if needed.

Our 2008 full year outlook includes the following assumptions as of today; the continuation of the weak global economic environment with sales decline anticipated in most geographies. Unfavorable foreign currency impact on sales in the range of 4 to 6% and an operating profit margin in the low single digits. Additionally, while we do not provide quarterly guidance, I want to remind you that Tennant's first quarter is historically, our weakest. Coupled with the current tough economic situation, we believe first quarter revenues will come in lower than the 153.3 million we reported for the 2008 fourth quarter and we do not expect our first quarter to be profitable.

At this point, though, we do anticipate seeing sequentially, quarterly improvement in the company's performance during 2009 and we expect to be profitable in the remaining course of 2009 and for the full year. We also anticipate a base tax rate in 2009 of approximately 37%, depending primarily upon the mix of taxable earnings by country, and we expect significantly lower capital expenditures of 15 million or less.

Given these assumptions, Tennant currently estimates full year 2009 sales in the range of 590 million to 625 million and earnings of between $0.05 and $0.45 per diluted share. We recognized that this is a wider range than we typically provide, but feel its prudent to give this range at this early point in the year. I know you're hearing this from many other companies but I can't emphasize enough that the lack of -- the level of economic uncertainty, continuing problems in the credit markets and a general lack of visibility into when the economy and Tennant's business will improve make providing an outlook very difficult. We will reevaluate our assumptions as the year progresses and events unfold.

We believe that current cash and available debt capacity are more than adequate to cover the company's normal operating cash needs and fund capital spending during 2009. Tennant is currently in compliance with debt covenants, but we are in a process of negotiating an amendment to the company's credit agreement to exclude restructuring charges in order to ensure compliance with covenants throughout 2009. We anticipate executing the amendment prior to filing our 2008 10-K.

As we discussed our 2008 fourth quarter results provide a glimpse into the challenges that lie ahead. So we are taking appropriate actions to scale our operations and conservatively manage the business during this volatile period. In addition, as Chris noted although we are disappointed that the end of 2008 had such a negative impact on our earnings, we are proud of our many key accomplishments in 2008 including our three strategic acquisitions, our successful introduction and continuing roll out of ec-H2Oas well as our expanded presence in international markets. We expect that these positive achievements and our lower cost structure will continue to benefit Tennant going forward.

With that we'd like up the call to any question. Rachael?

Question-and-Answer Session

Operator

Thank you, Sir.(Operator Instructions). Our first question comes from the line of Seaver Wang, your line is open.

Seaver Wang - Utendahl Capital Partners, Lp.

Hi, quick question on on-going cost savings, you reached your $10 million mark, can you give us a range for cost savings for '09?

Thomas Paulson

Yeah, I'll give you a sense of that Seaver, we don't anticipate -- we anticipate holding onto the savings that we've done, are to date. And we don't anticipate being able to expect to repeat that $10 million level in '09. We believe our sourcing benefit should be in an additional $5 million of additional sourcing savings. Obviously somewhat effected by the lower revenue base that we're anticipating. And we do believe we will get some lean benefits over and above that, I'm just not ready to give you a number on that at the current time, given that -- the wide range of our revenue. But we do anticipate to continue savings. We believe we'll continue to be successful but don't anticipate to be able to repeat the $10 million level in '09.

Seaver Wang - Utendahl Capital Partners, Lp.

Okay and then assuming that the consulting firm you hired can reduce SG&A at least a little bit in '09 then there is -- say maybe a little bit of upside possibly?

Thomas Paulson

We would anticipate -- we'll get some quick wins in '09 from the work we're doing. The front end of the work we're doing is really an in-depth assessment of our processes globally, and then we're going to pick the projects out of that that will begin to implement.

So we do believe we'll get some incremental benefit this year but the big wins are going to be as we go out over the next few years I mean this isn't going to be a quick project. This is going to be a long term change in the way we do business to become best in class in many areas and really ensure that as revenue starts growing we are not adding people back and that we can really leverage our people costs as we go forward, which is as you know has not been a real strength for Tennant in the past.

Seaver Wang - Utendahl Capital Partners, Lp.

And then the R&D, do you expect it to remain at that 3 to 4% sales, but probably close to the 3%?

Thomas Paulson

We will remain within range. And I would call it at the lower end to the middle at the current time, but we firmly intend to remain within the 3 to 4% range with our R&D spend.

Seaver Wang - Utendahl Capital Partners, Lp.

Okay.

H. Chris Killingstad

But more importantly there we intend to maintain a robust new product pipeline through this period and to ensure that the key initiatives and strategies that will provide the biggest benefit, are preserved so we can leverage them when the economy recovers and that's the important message.

Seaver Wang - Utendahl Capital Partners, Lp.

Okay and the product portfolios, pretty robust at this point given the last two years of product rollout. I mean are you fairly satisfied at this point but -- with the product portfolio with no real big, I guess, deficiencies?

H. Chris Killingstad

We anticipate achieving or exceeding our goal of 30% of equipment sales coming from new products launched in the last three years in 2009.

Seaver Wang - Utendahl Capital Partners, Lp.

And then last question just what can we expect that the tax rate for...?

Thomas Paulson

I would use a 37% rate Seaver, the current time. It's we'd like to think that's conservative, but I just believe that's the best rate to use right now.

Seaver Wang - Utendahl Capital Partners, Lp.

Okay. Thank you.

H. Chris Killingstad

Your welcome.

Operator

Thank you very much. Our next question comes from the line of Theodor Kundtz. Your line is open.

Theodor Kundtz - Needham & Company

Yes. Hello, everyone.

H. Chris Killingstad

Hi, Ted.

Thomas Paulson

Hey Ted.

Seaver Wang - Utendahl Capital Partners, Lp.

Could you guys -- maybe Chris, maybe just talk a little bit more about the different geographies that you are serving and kind of the business conditions you are seeing in each and how they might be different in the U.S. versus Europe versus the rest of the world? Maybe just a little more color on that will be helpful.

H. Chris Killingstad

Well my experience usually recessions are rolling and they don't hit all geographies equally at the same time. What we are sensing right now is that all geographies are being hit very hard by the recession and if you look at our sales in the fourth quarter, I think that is a pretty accurate reflection of what we are going to continue to see through 2009 with North America, and Europe being hardest hit. Followed by Asia Pacific; maybe some bright spots in Asia Pacific, but Japan, as we saw that their fourth quarter GDP decline is going to face a very tough year.

We anticipate a little bit more robust market in China just because of the stage of development and then Latin America, where our sales were pretty much flat in the fourth quarter. I think given the acquisition of Alpha in Brazil and given that we are starting off with such a low base that's probably the one bright spot in 2009. Unfortunately it's also the smallest part of our business. So it's we're not going to make or break the business based on our performance in Latin America.

Theodor Kundtz - Needham & Company

Do you see conditions getting worst currently than they were in the fourth quarter or just sort of a continuation of what you saw in the fourth quarter when things really kind of slowed down dramatically for you?

Thomas Paulson

You know -- just to kind of go back on that a little bit Ted, I mean -- we -- the fourth quarter had three pretty different months and these are broad numbers but October was down about 5%, organically; December was over 20% down and November, December was around 20%. Which brought the overall quarter down about 16 and what I would say is we're looking at our trends right now into the first quarter. Things are moderating, its not getting worse. But we -- I would say to use a broad number best case it will be a similar year-on-year decline to what we saw on the fourth quarter. So conditions have moderated. They are not getting worse, but we're not seeing any significant improvement.

Theodor Kundtz - Needham & Company

You're just concerned about the commercial space and that -- what's happening in the commercial market and is that impacting you guys much differently, or...?

Thomas Paulson

We're being negatively affected across all segments of our business to be straightforward about it. Actually the industrial side is where, and our larger equipment sales is where the biggest year-on-year declines are. But we're being adversely affected across all parts of our portfolio.

Theodor Kundtz - Needham & Company

Okay. And the additional agreement, the license agreement with them is -- what -- is there any sense of quantifying that at all, or do you have any sense of what that outlook would be for the year?

Thomas Paulson

We're not really at liberty to give you a number on that, Ted. I mean we have -- it's not going to be a real big number. But it's relevant to our financials. But we're not prepared to give you a number on that.

H. Chris Killingstad

And I think the more interesting thing Ted, is that we are now actively investigating licensing opportunities in markets we don't serve. With this being the first one and we think there are over time we will generate more and more business through licensing that is one of those strategies.

Theodor Kundtz - Needham & Company

Yeah. That'd be great because that's all profit.

H. Chris Killingstad

We love that.

Theodor Kundtz - Needham & Company

Great. Okay, and then just maybe a little more color on the roll out of ec-H2O. How is that being accepted out there, any kind of push back to it at all or your just kind of your view of the rapidity of the acceptance of that?

H. Chris Killingstad

Well, we haven't said much about what our sales levels are or exactly which customers we've managed to penetrate and we do that more for competitive reasons at this point. But I did say that sales exceeded our internal plant projections, despite the recession in 2008 and I think that customer excitement has quite frankly feed our expectations as well. I mean we went in thinking that the chemical cost savings would be the big deal but customer is coming back and saying yeah, that's important but boy you know it's improves our productivity, streamlines the cleaning process and lowers our training expenses and we think its going to reduce our medical liability cost as well because our people no longer have to breath or handle these chemicals, and it leaves behind no environmental footprint.

So, it's a win on every important front for a customer. So, it's a much more broad-based win for customers than we had anticipated going in which is real positive, which is why we think customer satisfaction has been better than we anticipated. Like with any new technology there is an adoption curve. You have the innovators and the early adopters and they turn to be the opinion leaders in the industry and eventually you get to the mass market. We are still very much of beginning of that curve. But we are as I said testing ec-H2Oacross most of the big key and global accounts (ph) around world currently.

Theodor Kundtz - Needham & Company

Okay.

H. Chris Killingstad

We have some great early wins, we haven't disclosed who they are. But based on that we believe that we will be able to accelerate growth through winning more than our peer's share of that business going forward.

Theodor Kundtz - Needham & Company

And when does the schedule go out on the rider's scrubbers? You mentioned five being in '09. Is that early on in the year or throughout the year, or...?

H. Chris Killingstad

Yeah it has just started. First, I think the first letter has been introduced to the market so it's going to be rolled out between now and I think the last one goes out in the early third quarter.

Theodor Kundtz - Needham & Company

Okay.

H. Chris Killingstad

So, it is more front-end or first half loaded.

Theodor Kundtz - Needham & Company

Loaded, okay, terrific. Okay, thank you.

H. Chris Killingstad

Your welcome.

Operator

Thank you. Our next question comes from the line of Joe Maxwell. Your line is open sir.

Joseph Maxwell - Dougherty & Company, LLC

Thank you. Can you give us a sense, I know you said all parts of your business were down but where the parts in service line came in and what you are seeing to that line here in Q1?

Thomas Paulson

Yeah clearly that business is holding up better than our equipment sales and we are not ready to give any specific numbers on what we are seeing in those exact trends as we are into January and February. But that part of our business is holding up better and -- but we have seen -- that has been affected more than we would have anticipated and but we do believe that will return to normalcy. People need to maintain their equipment and we believe that part of our business will hold up and be -- continue to be somewhat of an annuity stream for us. But it has been more negatively affected in the back-end of the year than we would have -- back in the last year than we would have anticipated.

Joseph Maxwell - Dougherty & Company, LLC

And then Tom how do you get to your guidance, can you kind of walk us through how you peg that revenue?

Thomas Paulson

We actually we've really built it up by geography Joe and I mean in -- it is really anticipating that we see -- we built it up by geography but it really does assume that we see very similar first quarter to what we saw in the fourth quarter and very modest sequential improvement in our business. So, as you just look at it, as we go into the second quarter we anticipate to see modest improvement but we expect to continue to see revenues below prior year and we do believe that by the time we get to the fourth quarter and we're lapping obviously an extremely low quarter that we do expect to see some upside versus the prior year. But for now we are just looking towards modest sequential improvement quarter-to-quarter and no real big improvement in the overall economy.

Joseph Maxwell - Dougherty & Company, LLC

So service and the parts has been a little better than your equipment. Have you also, I mean as part of this -- what kind of discussions have you had with your customers or your larger customers and what they are saying about what they are looking at for '09?

Thomas Paulson

We have obviously factored in feedback from our sales folks and their conversations with our customers. But they tend to be more optimistic than the reality of what's going on in the market place, so we're really not relying heavily on what the field is saying.

Joseph Maxwell - Dougherty & Company, LLC

Okay, that's very helpful. My -- I got cut out a couple of times. When you were talking about the OpEx and the consulting firm that you're hiring did you give a goal of what you're trying to get to?

Thomas Paulson

We did not. We just said its really about a two to three year project that we're just at the front-end of it. We are going to do about a 12 week assessment of our processes really around the whole globe and then we will pick the key projects and begin implementation to drive our process improvement, over the next period of time. And we expect obviously to get a quick wins, but we're taking a long term point of view with this, really change our operating expense structure.

Joseph Maxwell - Dougherty & Company, LLC

Okay and then I also missed out when you were talking about your debt covenants, you thought you'd be able to restructure...?

Thomas Paulson

Yes, we are in compliance at the end of December and we are having conversations with our banks and we anticipate to have this situation rectified so we won't have any potential issues as we go into the next as we go into this fiscal year. So we anticipate having that all signed before we file our 10-K. So we will not be facing any potential issues as we go into the year-end right now.

Joseph Maxwell - Dougherty & Company, LLC

And the main driver was just to exclude the restructuring out of those numbers?

Thomas Paulson

Yes.

Joseph Maxwell - Dougherty & Company, LLC

Okay. Alright, thank you.

Thomas Paulson

You're welcome.

H. Chris Killingstad

Your welcome Joe.

Operator

Thank you. Our next question comes from the line of James Bank. Your line is open sir.

James Bank - Sidoti & Company

Good morning.

Thomas Paulson

Hey, James.

H. Chris Killingstad

Good morning, James.

James Bank - Sidoti & Company

Hi. Quickly Tom, what were the existing covenants on that senior debt?

Thomas Paulson

The two main covenants are debt-to-EBITDA ratio of less than 3.5 or lower and also on EBITDA to interest ratio of 3.5 or higher. So those are the two primary covenants and I want to emphasize we did not have any issues with that at the end of December and its really about excluding the restructuring charges as we go forward to not potentially have an issue on a go forward basis. So, we do believe we're out in front of this and anticipating, having things signed before we file our 10-K.

James Bank - Sidoti & Company

Okay and what is the remaining borrow capacity, the actual borrow amount?

Thomas Paulson

Do you have that handy, Pat?

Patrick O'Neill

It is about that $35 million.

Thomas Paulson

Yeah, about $35 million available on the credit lines and we also ended the year with...

Patrick O'Neill

29 million.

Thomas Paulson

$29 million of cash. So we think we have more than adequate cash to satisfy any kind of operating needs we have on a go forward basis.

James Bank - Sidoti & Company

Okay. Now the lower-end of your guidance, excuse me, your guidance in general the bottom-line guidance setting into '09, does that include any charges you are assuming?

Thomas Paulson

It assumes no additional charges.

James Bank - Sidoti & Company

Okay. So I -- so, Tom, just a quick eyeball, is that $0.05 -- that nickel on the lower-end with an assumed EBITDA of maybe 80, 90 million is that more or less in breach I guess of what would let's just consider it a prior covenant before you do restructure it?

Thomas Paulson

It potentially could be.

James Bank - Sidoti & Company

Okay.

Thomas Paulson

Which is the reason why we're trying to get down in front of the issue, as -- if you look at your forecast you look at the state of the economy, our point of view is it make sense to be very straightforward with your lenders and look out to where things are going and get those situations behind you; particularly with the uncertainties out in the front of us. And we have had good conversations to date and we believe we will get an agreement signed with our bank group prior to filing.

James Bank - Sidoti & Company

Okay what date do you anticipate filing the Q?

Thomas Paulson

Anticipated date is March 5th, roughly; somewhere around that date.

James Bank - Sidoti & Company

Okay great, I'll look forward to that then. And then quickly jumping to ec-H2O now -- you keep switching on me. What is the premium again on that? On percentage terms like if you took a standard walk behind the scrubber machine, and then you took one with the eco techno -- or, excuse me, the ec-H2O technology, what would the premium be again?

Thomas Paulson

You know it such a wide range, James, just given the diversity of the pricing on that piece of equipment, that the device is very similar on each of the pieces of equipment, so the percentage up charge are quite dramatic. So, we'd prefer not to get into that.

James Bank - Sidoti & Company

Okay, fair enough. And that's all I have, thank you.

Thomas Paulson

You are welcome.

Operator

Thank you. Our next question comes from the line of Mathew Leverson (ph). Your line is open, sir.

Unidentified Analyst

Thank you, most of my questions have been answered, but I do have a couple remaining. I understand of course that you've applied for patents on ec-H2O and I wondered that you had some idea of the time frame in which they might be conferred?

H. Chris Killingstad

We've applied for in excess of 20 patents on ec-H2O and I don't know -- we don't have clarity yet on when they're going to be conferred. Its -- it is a much slower process than we would like.

Unidentified Analyst

Understood.

H. Chris Killingstad

But we are highly confident that they will be allowed at this point.

Unidentified Analyst

Okay, well that's certainly reassuring. One thing I noticed is that your warranty expenses tend to be fairly high. They seem to run in the area of 2% of sales with some transacting even more than that. And it would seem that if the management were able to address this in some way without -- naturally without angering your customers that it could do some very things to margins. Have you looked at this? Is there something that could be done in terms of say either strengthening some parts or some re-engineering that might significantly impact this expense (ph)?

Thomas Paulson

Well, I think what we are focusing on is more is to improve the reliability of our products. So I think one of the things that we have been faced with here over the last two three years is that we have launched so many new products off new platforms. Right whereas historically Tennant had a very stable product portfolio where we had anywhere between 10 and 12 years to get it right and to workout all the bugs and so warranty was at a lower rate. And I think it has increased little bit now that we have launched so many new products, but we do have believe me in place in 2009 and going forward, very specific actions for insuring that we design for reliability and that our manufacturing processes also ensure that we are building the machines to the very high quality standards that we have. And I anticipate us making progress on this front starting in 2009.

Unidentified Analyst

That would be very good. One last question if I might. There were references to the company being impacted by higher material costs and now with the recession, are you perhaps benefiting from lower material costs?

Thomas Paulson

We do. At the current time, we think that as you look at where costs are to date, from the kind of the commodity oriented things that we buy, are part of our costs of goods sold. We do view it as an opportunity as we look forward into the year and we are seeing the trends go in the right direction for us and we view it as, the year is certainly shaping up to be more positive in that regard than the prior year was.

Unidentified Analyst

Okay well thank you very much.

Thomas Paulson

You are welcome.

H. Chris Killingstad

You are welcome.

Operator

Thank you, our next question comes from the line of Zaheer Siddique (ph) your line is open sir.

Unidentified Analyst

Hi good morning.

Thomas Paulson

Hi.

H. Chris Killingstad

Hi.

Unidentified Analyst

Just a couple of question, one on the BISSELL deal. Just in general philosophically is -- doesn't that the licensing doesn't that use the Tennant brand?

Thomas Paulson

It's not, they do not use the Tennant brand on their products.

Unidentified Analyst

Correct but if you start licensing your products in that way, would that not that you would -- your product rent (ph) in anyway?

Thomas Paulson

Yeah we don't believe so Zaheer (ph). I mean what we are looking at it is we want to license if we do it into areas that we are not intending to compete. And we are selling our products into the industrial and commercial markets. We don't have any intention of competing in the consumer arena. So if we can take our technologies and they can be adapted into that area and we can earn a licensing fee, we view it as being a positive for us financially and in many instances it should be positive for the brand also.

H. Chris Killingstad

And my belief is that the broader your technology base as long as you maintain the integrity of that technology and where you deliver it to the end-user whether it be a consumer or a commercial customer. It builds credibility, acceptance and of that techno -- I think its benefits us in the core markets that we will continue to go direct in.

And I also just think it puts us in the forefront of being a technology leader, so that when we launch the next generation of technologies, people will say look Tennant; they have done -- they did the ReadySpace Technology and the ec-H2O Technology and look they do it both in hospitality and healthcare and retail, and they've been successful in consumer applications as well. I just think that helps us get off to a much faster start and get broader reach for our technologies as we go forward.

Unidentified Analyst

Okay and my next question is on CapEx for '09. What should we expect?

Thomas Paulson

$15 million or lower.

Unidentified Analyst

15 or lower.

Thomas Paulson

And, that's obviously depended upon the state of the economy but we're prepared to ensure that current plans are to spend at the $15 million level which is substantially below where we've been in the last four or five years and also its actually below our D&A. But we are prepared as the economy gets tougher to go below that level.

Unidentified Analyst

Okay great and just one last question, what was the rationale behind changing the name of ECHO to ec-H2O?

Karen Durant

It's the ability to trade market.

H. Chris Killingstad

Well I mean it's really the ability to trade market and making sure we had something that was protectable as we went forward. And actually now its become ec-H2O, I mean it's a much easier name to remember and it's a much easier concept to explain, so I think its been a net positive for us.

Unidentified Analyst

Okay and but in terms of customer recognition it does that doesn't change, you are kind of early on in the process.

H. Chris Killingstad

No. We were so early on in the process that this was kind of like inside baseball. We knew about the brand and what it meant but our customers were just beginning to learn about it.

Unidentified Analyst

Okay.

H. Chris Killingstad

And if you look at the logo, I mean its still -- its very similar to what it was before. We just talk about it differently.

Unidentified Analyst

Okay, thank you so much.

H. Chris Killingstad

You are welcome

Operator

Thank you. Our next question comes from Chirag Patel (ph), your line is open.

Unidentified Analyst

As we talked about raw material prices coming in, how do you anticipate pricing to hold up going into 2009?

Thomas Paulson

We have taken price increases and we do anticipate to be able to get some modest pricing benefits but it will be, not anywhere near what we have achieved over the last few years and we are not prepared to give you an exact number but it will be positive but not nearly the magnitude that we've had over the last two to three years.

Unidentified Analyst

Okay and then moving over to just the revenues in general, I was kind of looking for a break out between the equipment and the parts. I know, I think that's something you guys include in the 10-K but do you have a general feel for how that percentage was for the full year here?

H. Chris Killingstad

It's about in 60-40.

Thomas Paulson

Yeah.

H. Chris Killingstad

Its about 60-40. 60% equipment, 40 % service parts and consumables.

Unidentified Analyst

Okay, you kind of hold -- expect that to hold up for 2009?

H. Chris Killingstad

Well, it is held up for the last four or five years. So could it shift a little bit in favor of service parts and consumables, absolutely.

Unidentified Analyst

Okay.

H. Chris Killingstad

But we do not anticipate a big change.

Unidentified Analyst

Okay. And then on the 15 million in CapEx for 2009, what's maintenance CapEx?

Thomas Paulson

It's something below the $15 million level. So it's -- and we've never given a precise number in that and so its obviously somewhere below 15 million because we are continuing to fund our cost reduction efforts and our new product introduction, that's included in the 15. So our bare minimum maintenance is clearly somewhere below that level.

Unidentified Analyst

Okay thanks.

Thomas Paulson

Welcome.

H. Chris Killingstad

You're welcome.

Operator

Thank you. Our next question comes from the line of Kevin Casey (ph). Your line is open sir.

Unidentified Analyst

Couple of questions I might have missed some of these. Did you break down how much ec-H2O sales were in the quarter?

Thomas Paulson

We have not Kevin. We haven't given any breakout for that and for the time being for competitive reasons we don't anticipate doing that any in the near future.

Unidentified Analyst

Okay.

H. Chris Killingstad

All we are saying was that it exceeded our internal plans.

Unidentified Analyst

Okay and then have you guys received, when you have these royalty arrangements for both that product and some of the other technology, do you guys receive any upfront payments or is it all based on future sales?

Thomas Paulson

Tends to be based on future sales?

Unidentified Analyst

And then the renegotiating of the debt, is there going to be a cost associated with that?

Thomas Paulson

There will be some fees associated with that.

Unidentified Analyst

And is that in the guidance or is that going to be a one time?

Thomas Paulson

Its included in our numbers, on a go forward basis. So, there will be some fees associated and it will dictate that we have more market based interest rates on a go forward basis. At the current time our loan is far below market and so we would anticipate there will be some higher interest costs associated with that.

Unidentified Analyst

And then...

Thomas Paulson

And that is based in our -- that is built into our guidance.

Unidentified Analyst

Okay and then is there a rate which you walk and take the chance on the covenants?

Thomas Paulson

We would not anticipate doing that, no.

Unidentified Analyst

Alright thanks.

Thomas Paulson

You are welcome.

Operator

Thank you and our next question comes from the line of Theodor Kundtz your line is open.

Theodor Kundtz - Needham & Company

Just a quick follow up, Tom you were just taking about looking at the cap reserve, kind of foreseeable reserve you took. What's your view going forward on that, are you -- is there a concern that with the environment out here you are going to see some more have to take some more of that capital (ph)?

Thomas Paulson

Yeah, we think we've obviously adequately reserved ourselves as of the end of December, that's why we took the actions. And there's an awful lot of literature out there that you need to think about it differently given the credit crisis that's going on. We have also built-in a higher level of ads to our reserves, into our guidance as we go forward. So not only do we believe we adequately reserved our self, we're also expecting that we are going to need to continue to add reserves at a higher level than we would historically have done.

Theodor Kundtz - Needham & Company

Okay. And that is in the guidance.

Thomas Paulson

That is in our guidance, yeah. We feel we're adequately recovered ourselves.

Theodor Kundtz - Needham & Company

Okay. Great thanks.

Thomas Paulson

Bet.

Operator

Thank you. There are no further questions at this time. Do you have any closing remarks.

H. Chris Killingstad

Yes I do. So thank you all for your time today and for your questions. Despite the current macroeconomic conditions, we are focused on controlling what we can control in 2009. We remain confident in our business model and are firmly committed to the long term strategic direction that we have established.

Although the year ahead looks very challenging and frankly it maybe a bumpy ride, we believe that our strategies of international market expansion, new products and operating efficiency gains coupled with strong cost controls position us well for a long-term success.

Further we believe these strategies will allow us to have the right products in the right geographies, excuse me -- with an improved cost structure that should allow us to resume our historical track record of profitable growth when the macroeconomic conditions improve. And we look forward to keeping you all posted on our progress. Thank you.

Operator

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

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