Tennant Company Q1 2009 Earnings Call Transcript

May. 7.09 | About: Tennant Company (TNC)

Tennant Company (NYSE:TNC)

Q1 2009 Earnings Call Transcript

May 7, 2009 11:00 am ET

Executives

Tom Paulson – VP and CFO

Chris Killingstad – President and CEO

Analysts

Seaver Wang – Utendahl Capital

Ted Kundtz – Needham & Company

David Taylor – David D. Taylor & Associates

Joe Maxa – Dougherty & Company

Peter Kenner – Tivoli Partners

James Bank – Sidoti & Company

Operator

Good morning, and thank you for participating in Tennant Company’s first quarter earnings conference call. This call is being recorded. If you do not wish to participate, you may discontinue at this time. After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions) We ask that you remain online 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.

Tom Paulson

Thanks, Laurie. Good morning, everyone. And welcome to Tennant Company’s first quarter 2009 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 first quarter and our outlook for 2009. First, Chris will update you on our operations, and then I’ll review the financials. After that, we’ll 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 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, 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. Our earnings release issued today includes a reconciliation of those 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 Web site at tennnantco.com. Now I’ll turn the call over to Chris.

Chris Killingstad

Thanks, Tom, and thanks to all of you for joining us this morning. We anticipated that our first quarter would be weak. Like most industrial companies, we continue to face a difficult selling environment due to the global recession, which affected net sales in all of our geographies. However, we are focused on controlling what is within our control in 2009, as I said last quarter.

To that end, our efforts this year center around three guiding principles. 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 expenses, and investments and 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.

I am pleased that our execution against these guiding principles yielded solid benefits in the first quarter. Tennant’s lower cost structure allowed us to maintain gross margins on reduced sales. Our global ec-H2O rollout continue to gain traction as we continue to convert existing and new customers to our ec-H2O technology. And we generated strong cash flows during the quarter. Furthermore, we expect to deliver profitable results from operations for the three remaining quarters of 2009.

As noted in the press release, we took a non-cash, pre-tax goodwill impairment charge of $43.4 million, as a result of the deterioration in the general economic environment and the resulting decline in Tennant’s stock price during the first quarter. Tom will provide more details. But it’s important for you to know that the impairment charge has no impact on the company’s cash flow, credit agreements, or liquidity.

In the first quarter, we continue to implement the restructuring program that was announced in the 2008 fourth quarter. We have begun to see the benefits of this action, which we expect will deliver at least $15 million in savings in 2009 and at least $20 million in savings starting in 2010. We also continued executing our previous cost containment strategies such as a salary freeze, lower discretionary spending, and reduced capital expenditures.

At the same time, we can never forget that innovative new products differentiate us from our competition and provide an important source of value creation for Tennant. As a result, we are committed to continuing in our investment in research and development within our historical targeted range of between 3% and 4% of net sales.

In the 2009 first quarter, new products introduced in the last three years demonstrated their importance by generating 44% of Tennant’s equipment sales, which once again exceeded our 30% target. In 2009, our new product focus is on expanding the successful roll out of our chemical-free cleaning technology called ec-H2O. We have numerous patents pending on ec-H2O, and we are the first to market in our industry with this technology which converts plain tap water into a powerful cleaning agent without any added chemicals.

Let me give you an update on our marketing and sales success with this eco-innovation. During the quarter, ec-H2O continued to win international recognition as a breakthrough product. We’re pleased that it received the prestigious 2009 European Business Award for Business Innovation of the Year. This follows the R & D Magazine Award naming ec-H2O as a top-100 innovation in 2008.

ec-H2O is exceeding our expectations for sales and customer satisfaction. This cost-effective technology has either already been adopted or is currently being tested by an increasing number of existing and potential new customers around the world, which we believe will lead to new business wins and accelerated growth going forward.

We have initially focused our selling effort on large customers and have been successful in converting a number of both existing and new customers to our ec-H2O technology. For example, two large customers have called out ec-H2O as a company-wide best practice for use in their stores, Neiman Marcus and Costco. In addition, ec-H2O technology is currently in use at several other major retailers including Nordstrom’s, Dick’s Sporting Goods, PetMart stores, Target stores, Whole Foods, and throughout the Bed Bath & Beyond Corporation. ec-H2O is also receiving strong accolades and is being used by large BSC cleaning professionals such as Aeromart, Sodexho, ADM, and Unico [ph].

Traditionally, it has been difficult for a large national account customer with large fleets of cleaning equipment to convert to a new equipment supplier because of the high costs associated with switching. Today, ec-H2O is opening doors to entirely new accounts for Tennant because it is so differentiated from the competition and offers such significant benefits including cost savings, greater productivity, and workers’ safety as well as reductions in water, energy, and hazardous chemical use. As a result, we believe we are gaining market share from our competitors.

In addition, with ec-H2O technology, Tennant is well positioned to capitalize on increasing regulatory and environmental concerns. As you may be aware, there is a growing public health concern over the use of hazardous chemical cleaning agents. A total of 16 States have state policies designed to reduce the use of chemicals in the cleaning process used in public schools and other public buildings. 13 other States have legislation pending that would impose similar restrictions to public and private K through 12 education buildings, and some would extend this to all State-owned buildings.

At this time, compliance to these measures is voluntary. However, Tennant is at the leading edge and is able to satisfy these growing demands as policies and regulations continue to grow, as we expect them to.

Initially, Tennant offered ec-H2O on six walk-behind scrubbers in 2008. During the 2009 first quarter, we expanded the availability of ec-H2O to three battery-powered rider scrubbers including the Tennant T7 Micro-rider, T15 mid-sized scrubber and the Nobles Speed Scrub Rider. We plan to introduce this technology on a total of five rider scrubbers this year. These products will round out Tennant’s portfolio of scrubber offerings to our commercial and light-industrial customer base with specific applications in aviation, education, food and beverage, healthcare, hospitality, logistics, and retail environments.

Based on the growing market acceptance of ec-H2O, we continue to look for opportunities to extend this gain-changing technology to additional products in our portfolio as well as to entirely new applications and markets. We are very excited about the potential for ec-H2O.

Also during the first quarter, we announced a strategic sales and service arrangement with Kaivac, Inc. The agreement allows us to provide our national account customers with Kaivac’s industry-leading, no-touch cleaning, restroom solutions. Restrooms are our customers’ number one cleaning problem. And to date, Tennant has under-penetrated this market segment. The Kaivac alliance leverages our strong national account sales force and enables us to extend into a new segment of the cleaning market.

Looking ahead, our strategic priorities remain unchanged. They 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 growth in operational excellence initiatives should position the company to remain competitive, enhance the long term value creation of our business, and allow us to return to historical levels of profitable growth when the economy recovers. We remain keenly focused on delivering profitable results from operations for 2009.

Now I’ll turn the call over to Tom for a review of the company’s financial results and our outlook. Tom?

Tom Paulson

Thanks, Chris. In my comments today, all references to earnings per share are on a fully diluted basis. For the first quarter ended March 31st 2009, Tennant reported a net loss of $41.7 million or a $2.29 loss for diluted share on net sales of $128.6 million. As Chris mentioned, Tennant’s 2009 first quarter results include non-cash, pre-tax goodwill impairment charge of $43.4 million or a $2.32 loss per diluted share.

The company’s first quarter results also include a $1.3 million pre-tax benefit from the revisions of the reserve for workforce reduction severance and related cost associated with the restructuring program announced in the 2008 fourth quarter. The favorable revisions to the restructuring reserve was primarily due to lower severance cost than anticipated in Europe, both on an employee settlement basis and also the opportunity to eliminate open positions due to company turnover, thereby in-voiding some severance payments. As Chris said, we still expect to achieve savings of at least $15 million this year and $20 million in 2010 from the restructuring.

Excluding the goodwill impairment charge and a benefit from the restructuring charge reserve revision, net earnings would have been a loss of $0.6 million or a loss of $0.04 per diluted share. And Tennant would have had an operating profit of $0.3 million in the 2009 first quarter compared to operating profit of $8.5 million in the 2008 first quarter. The lower operating profit this year is primarily attributable to lower sales.

Tennant reported net earnings in the 2008 first quarter of $5.2 million or $0.28 per diluted share on net sales of $168.6 million. Tennant’s consolidated net sales for 2009 first quarter declined 23.7% compared to a strong 2008 first quarter. Recessionary conditions, including the ongoing difficulty that our customers have had obtaining credit, led to weak net sales across all geographies. Unfavorable foreign currency exchange effects reduced consolidated net sales by approximately 6%.

In North America, we continued to see delayed purchases resulting from economic weakness. First quarter net sales totaled $73.3 million down 25.4% versus the prior year quarter, due to lower unit volumes across all product lines. Foreign currency exchange effects on North America net sales had a negative effect of approximately 1%.

Tennant remains well positioned as a market leader in North America when activity in the industrial and outdoor segments regained strength. Also, as commercial customers migrate to smaller cleaning machine because of their maneuverability and attractive price points, we anticipate capturing this business with the compact products we’ve launched in the past two to three years.

In our EMEA markets which encompasses Europe, the Middle East and Africa, first quarter net sales were $41.1 million, down 22% compared with the year ago quarter to the lower unit equipment volume. Unfavorable foreign currency exchange effects reduced net sales by approximately 14%.

In Tennant’s other international markets, which is comprised of China and other Asian markets, Japan, Australia, and Latin America, 2009 first quarter net sales were $14.2 million, down 19.3% versus the prior year quarter. Unfavorable direct foreign currency translation exchange effect lowered sales in other international markets by approximately 8%.

Australia had a good quarter, but unit volume decreased in Tennant’s Latin American markets. In 2008, Tennant made three strategic acquisitions, Alfa in Brazil, Applied Sweepers in the UK, and Shen Tan in China. The integration of these acquisitions is on plan.

We are pleased that Tennant’s gross margin essentially held steady at 41% for the 2009 first quarter compared with 41.3% in the prior year quarter, despite a significant decline in sales volume during the first quarter of 2009. The company’s gross profit margins benefited from lower commodity prices, flexible production management, the workforce reduction, and pricing actions. We anticipate being able to maintain our gross margins at around 41% throughout this year based on the cost reductions we’ve implemented and expected lower commodity prices in 2009.

Research and development expense in the first quarter was $5.7 million, down from $6 million in the prior year quarter. R&D as a percent of sales rose to 4.4 % in the first quarter of 2009 due to the low level of sales in the quarter, compared to 3.6% in the comparable quarter last year.

Selling and administrative expense in the 2009 first quarter decreased $9.7 million or 17.6% to $45.4 million versus $55.1 million in the first quarter last year. The lower S&A expense during the 2009 first quarter was primarily due to savings from the workforce reduction along with cost controls and cuts in discretionary spending to better align expenses with sales.

The goodwill impairment charge was related to the decline in Tennant’s stock price during the 2009 first quarter, resulting in a market capitalization below book value for a number of weeks up to and including March 31st, 2009, which triggered the goodwill impairment evaluation in accordance with statement of financial accounting standards No. 142. Most of the charge is non-taxable. However it is non-cash and does not affect our cash flow, credit agreements, or liquidity.

Our overall tax rate in the 2009 first quarter was a negative 1.6% compared to 36.9% in the first quarter of 2008. The tax expense for the first quarter includes a $1.1 million tax benefits associated with the $43.4 million impairment of goodwill, which is materially impacting the overall effect of rate. Excluding the impact of the goodwill impairment, the first quarter effective tax rate would have been 41.9%. The increase in the 2009 first quarter effective tax rate is primarily related to the mix in taxable earnings by country.

Now, turning to the balance sheet. Net receivables at quarter end totaled $102.1 million compared with the $132.7 million a year earlier. Account receivables days outstanding was 75 at quarter end, down sequentially from 77 at the end of the 2008 fourth quarter and versus 67 at the end of the prior year quarter. The decrease in days from the 2008 fourth quarter is primarily due to lower level of sales and the collection of outstanding receivables. Our inventory to quarter end totaled $66.8 million, down from $77.3 million at the end of the 2008 first quarter.

FIFO days inventory at hand was 121 days at the end of the quarter versus 95 days in the comparable period last year, and 101 days at the end of 2008. The increase in days from the 2008 fourth quarter stems chiefly from lower sales volume since inventory levels essentially remain flat at $67 million.

Capital expenditures total $3.8 million in the first quarter of 2009 versus $7.4 million in the same period last year. We have deliberately lowered our 2009 full year capital spending plans by nearly 50% compared to 2008 levels in order to preserve cash. We expect capital expenditures of $15 million or less this year.

We are pleased that during the 2009 first quarter, Tennant generated $11.2 million in cash from operations, compared to the negative 5.9 million in the year earlier quarter. At the end of the 2009 first quarter, the company totaled cash of $26.7 million up from $25.3 million a year ago. Total debt was $91.9 million at the end of the 2009 first quarter, down from $97.3 million at the same time last year.

After the 2009 first quarter ended, Tennant received a $9 million income tax refund in April, which was not included in the first quarter results. The refund was used primarily to pay down debts and will benefit operating cash flow in the second quarter. Additionally, Tennant is in compliance with its debt covenants.

During the 2009 first quarter, we have obtained an amendment to our credit agreement to exclude non-cash charges and previously announced restructuring charges from the debt covenant calculations. We anticipate that this amendment will enable the company to remain in compliance with this covenant throughout 2009.

Further Tennant’s Board had just authorized the company’s regular cash dividend of $0.13 per share. Tennant has paid a dividend in each of the past 50 consecutive years. The board and management believe the dividend is an important way for us to demonstrate our long term commitment to enhancing share holder value.

Turning now to our outlook, as we stated last quarter, we continue to expect a very difficult selling environment in 2009. Our December 2008 restructuring program is on tract to deliver anticipated savings. And we remain committed to conservatively managing the business.

Including the 2009 first quarter non-cash goodwill impairment charge of $2.32 loss per diluted share and the benefit from the restructuring charge reserve revision of $0.07 per diluted share, we now estimate a full year net loss in the range of $2.20 to $1.80 loss per diluted share. Excluding the goodwill impairment and the benefit from the restructuring charge reserve revision, our expected net earnings range for 2009 remains the same as our previously issued guidance of a profit of $0.05 to $0.45 per diluted share.

We are lowering our 2009 full year net sales guidance to a range of $560 million to $600 million versus our previously estimated net sale range of $590 million to $625 million, which we provided in February. Our full year outlook includes the following assumptions as of today, continuation of the week global economic environment with sales decline in most anticipated geographies, unfavorable foreign currency impact on sales in the range of 4% to 6%, an operating profit margin in the low single-digit excluding the 2009 first quarter unusual item, and capital expenditures of $15 million of less.

We also anticipate a tax rate in 2009 in the range of 36% to 38%, depending primarily upon the mix of full year taxable earnings by country. We believe that our current cash and available debt capacity are more than adequate to cover normal operating cash needs and fund capital spending during 2009.

We are pleased with our ability to maintain gross margins to the progress we have made in achieving a reduced cost structure. Excluding the non-cash goodwill impairment charge, we expect Tennant to remain profitable from operations in 2009 on lower anticipated sales. With that, we’d like to open up the call to any questions. Laurie?

Question-and-Answer Session

Operator

Thank you very much. I would like to remind our participants to please stay online for closing remarks from management after the Q&A session. (Operator instructions) Our first question today will come from Seaver Wang with Utendahl Capital.

Seaver Wang – Utendahl Capital

Hey. Good morning.

Chris Killingstad

Hey, Seaver.

Tom Paulson

Hey, Seaver.

Seaver Wang – Utendahl Capital

Hey, quick couple of questions. You said you expect to lower commodity prices. So I assume you see it in the market, but it actually haven’t hit the P&L yet.

Tom Paulson

We actually did have commodity benefits coming to the P&L in the first quarter. So it was certainly beneficial versus prior year. And it was fairly beneficial sequentially versus Q4. So while we saw commodity prices going down in Q4, we didn’t see much of a benefit in last year. In this quarter, we’re beginning to see that benefit. And it’s one of the reasons why we look out across the remaining quarters – one of the reasons that we expect us to be able to maintain our gross margins around that 41% level.

Seaver Wang – Utendahl Capital

Okay. So general trend being – Its going to be a lower year-over-year for the rest of the year.

Tom Paulson

Yes. Yes. And we’ve seen it across really all of the key commodities. For us, we’ve seen it going downwards. We’re beginning to see it flatten out, but expectations is going to stay around that level for the rest of the year and be a benefit for us. But it’s anybody’s best guest what’s really going to happen. But we’re anticipating some help versus the prior year.

Seaver Wang – Utendahl Capital

Okay. And then just quickly, the acquisition of business, the $2.3 million that’s – what was that regarding?

Tom Paulson

We had two acquisitions in the quarter. They were both in Australia and they were associated – one, with a long term distributor of Tennant products and also a distributor of Green Machines, and so, both very small transactions that we’re excited about going forward. And we also had a payout related to our alpha business, which was just a part of the earn-out related to that acquisition.

Seaver Wang – Utendahl Capital

Okay. And then I don’t think I fully understand the deal with the Kaivac. Are you offering them certain machines and then you’re – then they’re offering – you’re offering your distribution or–?

Chris Killingstad

No. They’re offering the equipment and we’re offering the distribution.

Seaver Wang – Utendahl Capital

Okay.

Chris Killingstad

They have the industry leaning restroom cleaning solution. Right? But they’re still a small family owned undercapitalized company that has limited penetration and we have a national sales force that is especially strong on the national account side where they don’t have a lot of presence. So we can bring that equipment in to our national accounts. Our research shows that the restrooms are customer’s number one cleaning problem and it’s not something we focus a lot of attention on in the past. But we view it as a big opportunity. So we’re very excited about this partnership.

Seaver Wang – Utendahl Capital

Okay. So your sales force would make money on selling to the new –

Chris Killingstad

Yes. They basically designed and manufactured the products, hand it over to us. And we sell it to distribution channels.

Seaver Wang – Utendahl Capital

And is there potential for an acquisition there too?

Tom Paulson

We shouldn’t comment on that at this time.

Seaver Wang – Utendahl Capital

Of course. All right. I think that’s it. Thanks.

Chris Killingstad

Thank you, Seaver.

Tom Paulson

Thank you, Seaver.

Operator

Our next question comes from Ted Kundtz with Needham & Company.

Ted Kundtz – Needham & Company

Good morning, everyone.

Chris Killingstad

Hi, Ted.

Tom Paulson

Hi, Ted.

Ted Kundtz – Needham & Company

Couple of things. Could you talk a little bit Chris, maybe just sort of address the monthly trends you’re seeing in the business. Do you fell like we’ve bottom here. Or – it sounds like we have from your commentary and your sort of guidance going forward. It sounds like this is the bottom and you sort of see things starting to trend up. But maybe you can just give us a little more color on the monthly date you are saying.

Chris Killingstad

We hope it’s bottomed out, Ted. But we also say we have limited visibility in the future. But we do know the orders trend started to pick up slightly. And I emphasize, very slightly in the back half of March that seems to have continued in April. So right now, given the information we have and the last 30 day trends, it seems to have bottomed out and there has been a very slight update.

Ted Kundtz – Needham & Company

Okay. Well that’s good to hear. Are you seeing cancellations of things or is that – had you seen many cancellations in the past and has that diminished?

Chris Killingstad

There had been some cancellations. Sure. But the bigger issue is that our customers keep pushing back orders. So the orders – they know they eventually have to buy the equipment but they keep pushing it back. So that’s the bigger issue.

Ted Kundtz – Needham & Company

Okay.

Chris Killingstad

So the orders are still in the pipeline they just keep on getting pushed back a month or couple of months on a pretty frequent basis.

Ted Kundtz – Needham & Company

Okay, okay. Terrific. And any pricing pressure on your products. Are you able to maintain prices or what’s the status there?

Tom Paulson

Broadly, what we’re able do in the quarter, Ted and we anticipate to be able to do that to balance the year, is we stopped pricing benefits in the 1.5% range for the quarter. And the again, across the globe and it varies by market. But we’re encouraged by the fact that we’re certainly not get in the kind of price in that we’ve done – we’ve able to generate over the last three or four years. But we did see a modest benefit in the quarter.

Ted Kundtz – Needham & Company

Terrific. And so from a competitive point of view, are your competitors doing the same thing? I don’t know – what your competition that you’re seeing in?

Tom Paulson

There’s exceptions, but broadly we see rational – continued rational behavior in the market.

Ted Kundtz – Needham & Company

Okay. Terrific. Great. Thank you.

Chris Killingstad

Welcome.

Operator

Our next question will come from David Taylor with David D. Taylor & Associates.

David Taylor – David D. Taylor & Associates

I was really impressed that you were able to maintain your gross margin at about 41%

Tom Paulson

Thanks, David.

David Taylor – David D. Taylor & Associates

Given the massive decline in sales. Well, this complement comes with a hook.

Tom Paulson

I’ve figured that.

David Taylor – David D. Taylor & Associates

Obviously, when you did your forward planning last year, you weren’t considering a 23% drop in sales or anything closer, probably an increase in sales I would imagine. Could you speak to the issue of unabsorbed overhead? And what the gross margin might have looked like had business come in closer to your expectations?

Tom Paulson

Let me comment on that David. We actually anticipated our business being substantially down versus prior year in the first quarter. And we expected it to be down sequentially substantially. So we actually went into the quarter expecting our volumes to be a bit better than they were and they came in worst than we anticipated, which is why we’ve taken our guidance down for the year.

The actions that we took in December from a restructuring standpoint and continued to aggressively look at have really helped us mitigate a fair amount of the absorption issue. We can’t mitigate all of it because we don’t anticipate – the only way to really get up that is to in a big way is to close the factory. We don’t anticipate doing that. But where we been able to hold up our margins is we have taken a headcount reduction, which a portion of that, roughly 25% was in our cost of its old line. We have seen commodity benefits. We’ve taken price and we’ve done a much better job than historically of flexing our factory. And without needing to take layoff and people are working a little bit short on work weeks. But we’ve done a real good job of being a lot more flexible around the world, as we needed to be.

David Taylor – David D. Taylor & Associates

Looking forward to a more normal business climate than obviously, we have at the moment, could one expect 4%, 5%, 6% increase in gross margins?

Chris Killingstad

That’d be awfully aggressive. And we certainly – we had historically had gross margins at times in the 42% to 43% range. So we don’t see a reason why we can’t go back to that type of range. And maybe at the higher end of that, and we’re certainly going to aspire to do better but that kind of an increase would be – would not count on that at all.

David Taylor – David D. Taylor & Associates

Well, keep up the good work, guys.

Chris Killingstad

Thanks, David.

David Taylor – David D. Taylor & Associates

Sure.

Operator

Our next question will come from Joe Maxa with Dougherty & Company.

Joe Maxa – Dougherty & Company

Good morning.

Chris Killingstad

Hey, Joe.

Joe Maxa – Dougherty & Company

Chris, can you give us a little update on ec-H2O. I’m just thinking along the lines of the models that offer ec-H2O as an option. What kind of hit radar, what percent of those are being sold with the ec-H2O versus without?

Tom Paulson

If you look at our entire stat board portfolio?

Joe Maxa – Dougherty & Company

Well, I’m looking at the one–Yes. You’re right. As you look at this portfolio.

Chris Killingstad

Yes. Well we talked about historically there, Joe, is roughly if we look at our equipment sales in broad terms, roughly half of our revenue from equipment sales is scrubbers. And we believe that there’s certainly a relatively a high percent of our scrubbers that will benefit from ec-H2O. To date, we put it on several walk-behind scrubbers last year and now we’ve begun to put it on ride-on scrubbers this year. But we haven’t commented specifically on exactly the percentage of our portfolio. But it’s – we think it’ll bounce at a relatively high part.

Tom Paulson

That’s why I hesitated because I think for competitive reasons we don’t want to divulge that. But it's a – we think it will bounce at a relatively high part.

Chris Killingstad

And that's why it has to dated because I think for competitive reasons, we don’t want it to (inaudible), but we said two things about ec-H2O that it will be material to all of our results going forward. And we fully anticipate also we can come up with the next generation of innovation that it will become the new cleaning standard in our industry.

Joe Maxa – Dougherty & Company

Okay.

Chris Killingstad

And we're making good progress in that direction.

Joe Maxa – Dougherty & Company

Great. Can you talk a little bit about the competitive landscape and maybe what changes you've seen given the economy?

Chris Killingstad

It's hard to get a lot of information about some of our competitors. As you know, three – the two of them are private German companies. The other is a division of a Danish company that's property traded. But our sense is that we are, whether in the economic storm as well in most cases, better than our competitors.

And we know that because we are winning more than our pair share of business against them in the market place, especially here in North America. And so we view this crisis a real opportunity for us to leverage our products and innovation and our strong national sales force and win new business. And so far, we're doing that more effectively than we have historically.

Joe Maxa – Dougherty & Company

Okay. Tom, on the selling and administrative expenses, are we able to maintain the levels from Q1 or should we start looking at those to take-up?

Tom Paulson

We'll see a bit of an uptake as we go out through the year, but our expectations as we look at the quarters that – what we'll view is we'll be able to manage our operating expenses as a percent of revenue to go down a bit as we go through the quarter. So we're going to be monitoring that and managing it based on the revenue level. But you should anticipate – just like we expect to see sequential, meaning quarter-to-quarter increases in revenue, we should see a modest increase in our operating expenses along with that and our percentage go down a bit. Nothing substantial but they should go down a bit over the quarter.

Joe Maxa – Dougherty & Company

So I'm just asking because if you looked at even the midpoint of your revenue and you keep your margins on 41%, the slight increase in OpEx still gives you earnings that could easily be above the high end of your guidance. And so, I was wondering if you're a little more aggressive that I should modeling on the OpEx side of things.

Tom Paulson

What I would say is maybe you're being a bit aggressive on looking on operating expense line but the other pieces we're – in this environment, we're being conservative.

Joe Maxa – Dougherty & Company

Right.

Tom Paulson

Which is just prudent management given the number of variables we're trying to manage right now.

Joe Maxa – Dougherty & Company

Okay. Very good. That's it for me. Thank you.

Tom Paulson

Okay. Thanks, Joe.

Operator

Our next question today will come from Peter Kenner with Tivoli Partners.

Peter Kenner – Tivoli Partners

Just like to know with the cash flow, will you be paying down debt or buying stock?

Tom Paulson

We will, for the time being, be paying down debt, Peter. We think that's the prudent thing in this environment and we honestly also have some restrictions with our banks at the current time. We do not have the ability right now to buy back that shares even that means that we think the right things for us right now is to preserve cash and that we will continue to do that during the year.

Peter Kenner – Tivoli Partners

Good. And I didn’t hear the answer to whether you thought this was the bottom in terms – are you seeing things you think both things have bottomed out or what?

Chris Killingstad

What we said Peter, is that we still have limited visibility to the future. But if you look at the last 30 days, what we've seen is a very, very slight uptake that has been sustained in April. So should that continue, then I think in a month or two, we'd be much more comfortable saying that it's actually bottomed out and it' starting to improve. But we just don't have that kind of visibility because it has been pretty volatile over the last three to five months.

Tom Paulson

And I'd remind everybody that along those lines, we typically don’t talk about our business sequentially. We generally talk about revenue year-on-year. And second quarter is generally a big increase versus Q1. Year-on-year, we're going to still see a very significant decline in the second quarter, but we'll see their absolute level of revenue in Q2, we believe will be up versus Q1. And we expect to see that to the remainder of the year.

Peter Kenner – Tivoli Partners

And do you see foreign sales increasing, staying the same, or what?

Tom Paulson

What we're seeing is that if you look outside in North America, in general, the levels of decline are a bit lower. So we're still seeing, in virtually all markets we're seeing organic declines year-on-year but they tend to not be as high as we're seeing in North America.

Peter Kenner – Tivoli Partners

Got you.

Chris Killingstad

And the brightest spot in the portfolio is Asia Pacific.

Tom Paulson

Yes.

Peter Kenner – Tivoli Partners

Okay. All right. Thanks very much, and good going.

Tom Paulson

Yes. Thanks, Peter.

Peter Kenner – Tivoli Partners

Right.

Operator

Our next question today will come from James Bank with Sidoti & Company.

James Bank – Sidoti & Company

Morning.

Tom Paulson

Morning, James.

James Bank – Sidoti & Company

I heard a couple of questions on debt. I was just wondering if you'll be able to help us in terms of how much debt would we expect you to have at the end of this year?

Tom Paulson

We're not prepared to comment specifically on that, James, other than we did comment that we do have more than adequate cash flow to fund all our business needs and cover our capital spending. So we will – we firmly believe we'll have free cash flow. We do anticipate during the year to continue pay down debt and we just haven’t given a number on that regard. But we're very comfortable that we will have enough excess cash as we go forward to continue that debt pay down.

The best example already in the month of April, we received $9 million in the refund. If we overpay our taxes during last year, we filed a quick return and we took that $9 million and paid down debt in the month of April. So, we already got a nice start on that after the rest of the year.

James Bank – Sidoti & Company

Okay. Okay. The restroom market, is there a number you could put on the size of that market?

Chris Killingstad

No, because it's not something that the big players have focused a lot of attention on. I mean, you have this small niche player, Kaivac that does a terrific job and has wonderful technology, but they have very limited penetration. I’m not sure that the – they understand the size of the prize, but it's substantial. If they figured that every facility around the world has multiple restrooms and if you believe the research that it is our customer's number one problem and you can come up with a solution that makes it both easy and effective, and healthy, and safe to clean the bathroom. It could be a substantial win.

James Bank – Sidoti & Company

Okay.

Chris Killingstad

And what we prepared at this point to quantify the opportunity that obviously, we have chosen to go into this market because we think it is very interesting.

Tom Paulson

The way we think about on this, James, we actually think we could create and automated cleaning market in the bathroom. The market doesn’t really exist today. People don’t do a very good job of cleaning their bathroom and Kaivac, we believe has the best automated product in the industry. So we think it's a real opportunity for us to work together.

James Bank – Sidoti & Company

So this should be more or less a pre-fabricated restroom that then would be put inside of either previous buildings infrastructure or one that's going up. And the janitor just closes the door, flips the switch, and it cleans itself? Is that how this works?

Tom Paulson

That's the holy grail. Maybe in five to ten years, we'll be talking about that.

James Bank – Sidoti & Company

Okay.

Tom Paulson

But right now, these are mobile units.

James Bank – Sidoti & Company

Okay.

Tom Paulson

That are brought in and can be used in multiple bathroom.

James Bank – Sidoti & Company

Okay. When I heard automated, I just thought the other. Okay.

Tom Paulson

Automated versus mop and bucket.

James Bank – Sidoti & Company

Okay. Fair enough. You didn’t need to go on that Jetsons. But the – it's not easy to tell really for my position where these credit markets are kind of going. It seems to be easing us. I just wonder if you might be able give me a little bit more elaboration on the financing that your customers might have at this point.

Tom Paulson

We're – it appears to be getting a bit better, but not substantially and we're still seeing as our customers are buying equipment and are lining to buy equipment and looking at – on taking out leases. More people are being turned down at historically have been. So while it's getting a bit better, it's not anywhere near what need to get to for our business return to normal.

James Bank – Sidoti & Company

Okay. All right. And last, I believe in the last conference call, you brought up that the third party had come in, in an effort to help find more cost cutting measures. Is that – are they still there?

Tom Paulson

They are. We are very enthused. We've taken our first – they’ve finished our first days of the work we've identified numerous quick hit so we can go after and save money this year and numerous things that will be a bit longer term. We think leveraging our SAP system and getting global consistent processes are going to have both short and long term effects on being able to dramatically improve our operating expenses as a percent of revenue. So we're enthused and we're still in the early days and that we're feeling good about where we're heading.

James Bank – Sidoti & Company

Okay. And this is above and beyond the operational excellence.

Tom Paulson

Yes. This is really a much more – far more consorted effort against standardization of profits and really leveraging our existing system and maintenance that we have taken on in the past. And we're going at it aggressively, but there's also has to be a long-term orientation to it also.

James Bank – Sidoti & Company

Okay. All right. Terrific. Thank you very much.

Tom Paulson

Thanks, James.

Chris Killingstad

Thanks. Take care.

Operator

(Operator instructions) We'll take a follow-up question from David Taylor with David D. Taylor & Company.

David Taylor – David D. Taylor & Associates

Thank you. Actually I have a pair. One is Kaivac, you described it as being, and I quote in stream cleaning restroom cleaning solution. What's so great about it?

Chris Killingstad

What's so great about it?

David Taylor – David D. Taylor & Associates

Yes. What's so great about Kaivac? I mean, I don’t know. It is something more than a mop, right?

Chris Killingstad

Yes. It is a mobile unit that uses a pressure hose to spray water and chemicals today across the entire restroom. And then also the ability to suck it up or vacuum it up very effectively to leave the restroom dry.

David Taylor – David D. Taylor & Associates

So it's like a wet-dry vac?

Chris Killingstad

It's a little more sophisticated than that.

David Taylor – David D. Taylor & Associates

Okay. Well, how so? Color it then.

Chris Killingstad

Well, it's a – I don’t know. I don’t know how to describe it versus the wet-dry vac. Anybody have any ideas what the–

Tom Paulson

It's just that’s specifically design for being mobilized and for going into bathroom. Bathroom place is quite different than normal places that you're going to be going into a wet bathroom.

Chris Killingstad

Especially at commercial bathroom

Tom Paulson

Yes, exactly. So it's very – they been at this for over 10 years now. It's very sophisticated in design and its approach. The big benefit in it is obviously, as most bathrooms are clean with mops and bucket and you effectively just move the dirt around where as this actually cleans and sucks it up. So it's a big step in the right direction and we think we can work with it and improve it.

Chris Killingstad

And if I'm not mistaken, a wet-dry vac basically just sucks things up. It doesn’t have the ability to apply high pressure water and chemical with multiple attachments so you can do it across a broad wall, you can do it on the sinks, you can do it in the toilets, on the floor, et cetera. So it's fairly very versatile machine. Now if you look at it, would you say this was a high tech state of the art? No. But within the context of our industry, it’s the best that’s out there. And it’s the solution that's trusted by most customers who take clean restrooms seriously.

David Taylor – David D. Taylor & Associates

Do they have any big named customers that you can talk about.

Chris Killingstad

Yes. We're not at liberty to comment on that, but the answer is yes.

David Taylor – David D. Taylor & Associates

Okay. Second question, completely different. The goodwill right now, I realized everyone is doing it these days. I was not aware until I heard your – this call that it was a function of stock dropping below book value but – okay, two questions. First of, which assets were written down? You want to talk about that?

Chris Killingstad

Why don’t you give me the second question and I'll do them both in one time.

David Taylor – David D. Taylor & Associates

The second question is if the stock goes back up to $50, well stocks over book value now as we talk, but if it goes back up to its high, you just stop get put back up from balance it?

Chris Killingstad

Yes. Let me comment on both of that, David. It's one of those unusual places where I’ll take the second question first. Once it's written down, you don’t ever write it back up again. It's just that the way it's done from an accounting perspective and–

David Taylor – David D. Taylor & Associates

I never liked goodwill from the get go. So I just leave – have it off the books, myself.

Chris Killingstad

And the reality of it is, we didn’t like doing it, but it's doesn’t matter on our overall results. What drove – just get a little more specific about it, we obviously, at the end of every year, you have to touch your goodwill to ensure that it's not impaired and then it's accurately stated on your balance sheet. Never write it up higher, but you have to prove that it's an appropriate value.

And we did that obviously at the end of December. And as we went into the first quarter then, our stock price traded below book value. That triggers the need to re-evaluate your level of goodwill. Typically, you wouldn't look at it again until the end of year based on where our stock price is. That as we looked at it, we had to – we didn't change our financial–

David Taylor – David D. Taylor & Associates

And the stock price set at the end of the quarter was what? I mean–

Chris Killingstad

We'll look for the exact number. I want to – $9.37 at the end of March.

David Taylor – David D. Taylor & Associates

Oh okay.

Chris Killingstad

So what we did is we looked at our forward-looking financials, and our forecasts didn't change at all. What we were forced to do, though, as we have valuated our goodwill, was we had to change our discount rate that we valued at cash flow to make it higher because of what the markets were saying. There's a lot more risk in the market.

David Taylor – David D. Taylor & Associates

Can you say what that discount value is?

Chris Killingstad

We are not at liberty to comment on that.

David Taylor – David D. Taylor & Associates

Okay.

Chris Killingstad

With the assets that were written off from the goodwill standpoint was in our EMEA business entirely. And we don't–

David Taylor – David D. Taylor & Associates

It was which business?

Chris Killingstad

In the EMEA, Europe, basically.

David Taylor – David D. Taylor & Associates

Europe, okay. Okay.

Chris Killingstad

Great. Thank you, David.

David Taylor – David D. Taylor & Associates

Thank you. Bye, bye.

Operator

We'll take today's final question from Ted Kundtz with Needham & Company.

Ted Kundtz – Needham & Company

Just a quick follow-up for you guys. On the ec-H2O product line, are those margins higher than the corporate average?

Chris Killingstad

What I would say on that is that when we sell ec-H2O auto machine, it's meeting our objectives that we have equal to a higher gross margin on that product versus one without. And so, I wouldn't comment on it relative to all of our other products, but scrubbers tend to be higher margin products than the first place. And it is beneficial in our overall margins.

Ted Kundtz – Needham & Company

Okay. So that with the mix change, that could help – help your margin's picture going forward as well, I would think.

Chris Killingstad

We would like to think so.

Ted Kundtz – Needham & Company

Yes. Okay. And the other question was just related to ec-H2O, is there an application to use that technology on the Kaivac product line?

Chris Killingstad

We can't comment on that at this time.

Ted Kundtz – Needham & Company

Okay, okay. Either–

Chris Killingstad

What I will say to you is – look at what ec-H2O does.

Ted Kundtz – Needham & Company

Right. It sounds like a perfect solution for–

Chris Killingstad

Use your judgment, and use that same judgment and imagine all the other applications that it could be used in as well. Just know that we are exploring very broadly.

Ted Kundtz – Needham & Company

Okay, because I know you said in the past that they – it's applicable to about 70% of the scrubbing jobs that you've come in contact – you're faced with. Is that correct?

Chris Killingstad

In terms of scrubbing the floors.

Ted Kundtz – Needham & Company

Scrubbing the floors, right.

Chris Killingstad

Exactly. As we said, we are actively exploring other applications beyond our existing floor scrubbing business.

Ted Kundtz – Needham & Company

Terrific. Okay. Thank you.

Operator

We invite you to please stay online for final comments from the management team. At this time, I would like to turn the conference back over to Chris Killingstad for closing comments.

Chris Killingstad

Thanks, Laurie. And thank you all for your time today and your questions. Despite the current macroeconomic conditions, we remain 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've established. Despite the challenging we faced, we believe that our strong cost controls and strategies with international market expansion, new products, and operating efficiency gains position us very well for long term success. Thank you all.

Operator

Thank you very much, ladies and gentlemen, for joining today's Tennant Company conference call. This concludes your conference. You may now disconnect.

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