Tennant Q2 2009 Earnings Transcript

Jul.31.09 | About: Tennant Company (TNC)

Tennant Company (NYSE:TNC)

Q2 2009 Earnings Call

July 30, 2009 11:00 AM ET

Executives

Thomas J. Paulson - Chief Financial Officer, Vice President

H. Chris Killingstad - President and Chief Executive Officer

Analysts

Theodor Kundtz - Needham & Company, LLC

James Bank - Sidoti & Company, LLC

Joseph Maxa - Dougherty & Company, LLC

David Kelly - David P. Taylor and Co.

Zahid Siddique - Gabelli & Company, Inc.

Operator

Good morning. And thank you for participating in Tennant Company's Second Quarter Earnings Conference Call. This call is being recorded. If you do not wish to participate you may disconnect at this time. (Operator Instructions). Beginning today's meeting is Tom Paulson, Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

Thomas J. Paulson

Thanks Christa. And good morning everyone and welcome to Tennant Company's second 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 quarter and our updated outlook for 2009. First Chris will brief you on operations and then I'll cover 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. Earnings release issued today include the reconciliation of those non-GAAP measures to our GAAP results. Our earnings release was issued this morning to via Business Wire and was also posted on the Investor Section of our website tennantco.com.

Now I'll turn over the call to Chris.

H. Chris Killingstad

Thanks Tom, and thanks to all of you for joining us this morning. As are aware the global economic recession continued in the second quarter. And as we anticipated Tennant faced a difficult selling environment which effected net sales in all of our geographies.

Despite these challenges however we are very encouraged by our second quarter earnings, which were driven by our successful effort to lower Tennant's cost structure. As I said last quarter we remained focused on controlling what is within our control in 2009. To that end our efforts this year centered 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 initiative 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 cost and investments and resource and development projects such as ec-H2O to drive sales growth, and third, optimizing cash in an uncertain environment through a conservative planning, increased discipline and capital expenditures and a heightened focus on working capital management.

I am pleased that our execution against these guiding principles again yielded solid benefits in the second quarter. And now to the quarters highlight, Tennant posted a sequential increase in revenues from 2009 first quarter to the second quarter. We succeeded in sequentially improving the company's operating profit margin in the second quarter, and we continued to anticipate delivering profitable results from operations in the second half of the year.

Contributing to these results were strong execution of cost containment strategies and the restructuring program that was announced in the 2008 fourth quarter. We expect the restructuring to deliver at least 15 million in savings in 2009, and at least 20 million in savings starting in 2010.

Our reduced cost structure and focus on working capital management helped Tennant generate $31.4 million in cash from operations during the second quarter, compared to only 1.2 million in the same quarter last year. The company also substantially reduced total debt during the quarter by 44% versus a year ago.

Turning now to an update on our long term growth strategies. As I said before innovative new products are an important competitive advantage and source of value creation for Tennant. As a result, we remain committed to investing in research and development within our historical targeted range of between three and 4% of net sales. New products introduced in the last three years again demonstrated their importance by generating 47% of Tennant's equipment sales in the 2009 second quarter, and 46% of sales in the 2009 first half, easily surpassing our 30% target.

Fuelling these results was the continuing global rollout of our chemical-free cleaning technology called ec-H2O or ec-Water. During the quarter ec-H2O won further international recognition as a breakthrough environmentally friendly product. We are pleased that ec-H2O was named as one of the top 10 green building products of 2009 by Sustainable Industries magazine.

Further ec-H2O also captured the 2009 innovation award at the CleanNZ show in New Zealand, and received the Smart Water approval certification in Australia. These honors are in addition to ec-H2O winning the prestigious 2009 European Business Award for Business Innovation of the Year and being named by R&D Magazine as a top 100 innovation. To date ec-H2O continues to exceed for sales and customer satisfaction. We are converting a growing number of existing and large new customers to ec-H2O.

This cost effective technology is opening new doors to new accounts, such as Clairefore (ph) in Europe which is the worlds second largest retailer and Tesco which is the largest British retailer.

The advantage of ec-H2O is that it is so differentiated from the competition and offers such significant benefits in cost savings, such as greater productivity and worker safety as well as reductions in water, energy and hazardous chemical use. We believe that ec-H2O will lead to additional new business wins, increased market share and accelerated growth going forward.

In the second quarter we announced an exclusive licensing agreement with Activeion Cleaning Solutions. To expand the availability of ec-H2O in a handheld spray devices. Our agreement with Activeion will further broaden the market availability of our ec-H2O technology, adding complementary products to our growing suite of ec-H2O products.

Activeion's first product under license is the Activeion Pro, a portable easy-to-use sprayer that effectively cleans a range of surfaces, from glass and stainless to wood and carpet. The partnership between Tennant and Activeion will expand ec-H2O beyond floor cleaning applications; in education, retail, hospitality and healthcare industries.

This is another example of our strategy to develop eco friendly products and technologies that deliver powerful cleaning results. We will continue to pursue growth to appropriate partnership opportunities like Activeion, that fall outside of our traditional market segments. Tennant's 2009, new product launches are focused on continuing the successful roll out of ec-H2O. We plan to introduce this technology on a total of five rider-scrubbers this year.

Tennant introduced three new rider-scrubbers with ec-H2O in the first six months of 2009. We plan to introduce the other two rider-scrubbers with ec-H2O technology in the second half of this year. These products round out a 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 environment.

Looking ahead our strategic priorities remains 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 innovate new product and service solutions as well as through international market expansion.

Our growth in operational excellence initiatives should position the company to remain competitive, and enhance the long-term value creation of our business.

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

Thomas J. Paulson

Thank you, Chris. In my comments toady all references to earnings per share are on a fully diluted basis. Also please note that as I go through the financials that I'll not comment on year-to-date financial, because those are detailed in the earnings release.

For the second quarter and June 30 2009 Tennant reporting net earnings of 3 million or $0.16 per diluted share and second quarter net sales of 148.6 million. In a year ago quarter called the company reported net earnings of 8.3 million or $0.44 per diluted share and a net sales of 193.6 million.

Importantly as Chris mentioned, we achieved our goals to be profitable on the second quarter even though we experienced a significant sales decline caused by the global recession. Our cost containment strategies are working. Also during the 2009 second quarter we generated 30.2 million more cash on operations than we did in the 2008 second quarter and totaled that drop 56.3 million at quarter end, down substantially from a 100.8 million at the end of the same quarter last year.

Turning now to a review of the 2009 second quarter. Consolidated net sales were negatively affected by both the global recession and unfavorable foreign currency fluctuations. As a result consolidated net sales in the second quarter declined 23.2% with lower net sales across all geographies. Excluding an unfavorable foreign currency exchange impact of approximately 6%, organic sales declined about 17% in the second quarter of 2009. Organic sales declined about 21% in the first quarter of 2009.

We were encouraged to see that the 2009 second quarter consolidated net sales of a 148.6 million were up 16% sequentially compared to the 2009 first quarter consolidated net sales of 128.6 million. For the year-to-date, consolidated net sales were 23.5% lower than in the prior year for year first half, again due to the global economic downturn. Year-to-date organic sales declined about 19% with unfavorable foreign currency exchange that's reducing consolidate net sale by approximately 6%.

The acquisition of Applied Sweepers and Alfa benefited consolidated net sales by approximately 1%. In North America, we continued to see delayed purchases stemming from the economic downturn and the tight credit markets. Second quarter net sales totaled 87.7 million down 19.2% versus the prior year quarter, due to the lower unit volumes across all product lines, more significantly impacted have been the sales of large equipment.

Sales benefit if approximately 1% from price increases taken across most product lines offset by negative 1% impact from foreign currency exchange. Tennant continues to be the market leader in North America and we are well positioned once activity in the industrial and outdoor segments regain strength.

In our EMEA market which encompass Europe, the Middle East and Africa, second quarter net sales were 45.6 million down 28.4% compared to the year ago quarter. Approximately 14% of the decrease stems from a decline in organic sales and another 14% was due to unfavorable foreign currency exchange effects.

In Tennant, other international markets which was composed of China and other Asian markets; Japan, Australia and Latin America 2009 second quarter net sales totaled 15.3 million down 28.2% versus the prior year quarter. Organic sales in this region declined approximately 20%, driven by unit volume decreases. The effects of unfavorable foreign currency exchange also lowered sales in our other international markets by approximately 8%.

Despite a significant line in sales -- decline in sales volume, Tennant's gross margin was 40.4% for the 2009 second quarter compared to 42.5% in the prior year quarter. Our gross profit margin benefited from lower commodity prices, flexible product management and workforce reduction.

These gains were offset by the impact of lower sales volume and an increased sales mix of lower margin smaller commercial equipment. We still expect to be able to maintain our gross margins at around 41% for the year, based on the cost reductions that we have implemented, and anticipated lower commodity prices in 2009.

Research and development expense in the second quarter was flat at 5.5 million versus the prior year quarter. R&D expense as a percent of sales was 3.8% in the second quarter of 2009, due to the low level of sales in the quarter compared to 2.9% in the second quarter last year. R&D expense in the second quarter still remain within our targeted range of 3-4% of net sales. We're pleased that selling and administrative expense in the 2009 second quarter decreased 11.7 million or 19.3% of 49 million versus 60.7 million in the second quarter last year.

The company achieved lower F&A expense that with workforce reduction and strong cost containment. Tennant's 2009 second quarter operating profit of 5.4 million up sequentially from 0.3 million in the 2009 first quarter, excluding the first quarter, 43.4 million pre-tax non-cash goodwill impairment charge and the favorable 1.3 million revision for restructuring charge reserve. By comparison the company reported an operating profit of 16 million in the 2008 second quarter.

Our overall effective tax rate in the 2009 second quarter was 38.9%, compared to an abnormally high 43.7% in the second quarter of 2008. The 2009 second quarter effective tax rate is primarily related to the mix in taxable earnings by country.

Looking out at the balance sheet we have some good news to report. Net receivables at the end of the 2009 second quarter totaled a 108.9 million, down 41 million from a 149 million a year earlier. Accounts receivable, days outstanding was 66 at quarter end, down sequentially from 75 at the end of 2009 first quarter.

The improvement primarily results from higher sales in the second quarter and the collection of outstanding receivables. Due to proactive management our accounts receivable days outstanding is back down to 66 days. The same level where it was that at the end of the 2008 second quarter.

Our inventories that at the 2009 second quarter end total 59.2 million down sequentially from 66.8 million at the end of the 2009 first quarter, and down from 78.1 million in the second quarter last year. FIFO days inventory on hand was 98 days at the end of the quarter, which was up compared to 90 days in the year ago quarter, but significantly lower sequentially from a 121 days at the end of the 2009 first quarter.

The sequential improvement from the 2009 first quarter is primarily due to higher sales in the second quarter and the traction we are seeing with our inventory reduction initiative. Accounts payable was 33.7 million at the end of the second quarter, up from 25.5 million at the end of the 2009 first quarter. With our increased focus on conservative cash management, we have worked closely with our suppliers to extend payments terms while retaining the flexibility to revert back to taking cash discounts when economic conditions improve.

Capital expenditures totaled 6.7 million in the first half of 2009 versus 10.9 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 extremely pleased that during the 2009 second quarter Tennant generated 31.4 million in cash from operations compared to 1.2 million in the year earlier quarter. Cash from operations in the first half of 2009 totaled 42.6 million compared with a negative 4.7 million in the first half of 2008.

The end of the 2009 second quarter the company's total cash was 16.1 million, down slightly from 18.5 million a year ago. Total debt was 56.3 million at the end of 2009 second quarter down significantly from 100.8 million at the same time last year. The reduction indebt was the result of our focus on cash optimization and was primarily due to lower working capital and the 9 million income tax refund we received in April, which we mentioned in our earnings conference call last quarter.

Our debt to capital ratio was 24.5 % at the end of the second quarter, which is down sequentially from 35.7% at the end of the first quarter. Tennant is in compliance with its debt covenants. As you may recall on the first quarter of we proactively obtained an amendment to our credit agreement to exclude non-cash charges and previously announced restructuring charges from the debt covenant calculations.

We believe that our current cash and available debt capacity are more than adequate to cover normal operating cash needs and fund capital spending while remaining in compliance with our debt covenants for the next 12 months. In regard to Tennant's overall long term capital structure strategy we have recently taken a couple of steps provide more flexibility and capacity. We have put a shelf loan agreement in place with Prudential to obtain upto 80 million of fixed rate long-term debt. This agreement was filed with the SEC on a Form 8-K today.

It enables us to have mixable fixed and variable rate debt when economic conditions weren't. Also today we filed a Form S-3 shelf registrant statement with the SEC to facilitate any future issuances of securities up to a 175 million. This will give us the option to offer either separately or together depth securities, preferred stock, depository shares and or common stocks in one or more offerings. This is a standard universal shelf registration to provide maximum flexibility in our capital structure going forward.

No securities may be offered under the shelf registration statement until it is declared effective by the SEC. While we do not have any current plans to use these facilities having them in place will give us greater long term flexibility to raise capital as opportunities arise.

Turning now to our outlook. We continue to expect a very difficult selling environment in 2009. Our December 2008 restructuring program is on track to deliver anticipated savings and we remain committed to conservatively managing the business.

Excluding 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 $2.05 to $1.75 loss per diluted share.

Excluding the goodwill impairment charge and the benefit form the restructuring charge reserve revision our expected net earnings range for 2009 is now $0.20 to $0.50 per diluted share. We have raised a low end of the, low end of the range from $0.05 to $0.20 and increased the high end of the range from 45 to 50. We are maintaining our previously estimated 2009 full year net sales guidance in the range of 550 million to 600 million.

Our full year outlook includes the following assumptions as of today, continuation of the weak global economic environment and lack of visibility into the month ahead, unfavorable foreign currency impact on sales in the range of 4% to 6%. An operating profit margin at a low single digit excluding the 2009 first quarter unusual items and capital expenditures of 15 million or less.

We also anticipate a tax rate in 2009 in the range of 36% to 38%, depending primarily upon the mix of full year tax of earnings by countries.

Finally, it is important to note that, we expect Tennant's revenue to be stronger in the 2009 second half than they were in the first half. We anticipate gross margins to be about 41% and as a company will be favorably profitable.

With that we like to open up the call for any questions.

Question-and-Answer Session

Operator

[Operating Instructions] Your first question comes from the line of Ted Kundtz from Needham & Company. Your line is open.

Theodor Kundtz - Needham & Company, LLC

Hey good morning everyone.

H. Killingstad

Good morning Ted.

Theodor Kundtz - Needham & Company, LLC

Couple of questions for you, what percentage of your business of your parts are you getting out from low class countries, I know that's a continuing program for you guys, I just wanted to how the progress on that is progressing?

Thomas Paulson

You know we don't have an update on that if the current time I should've done it to be honest with you, I know we continue to make progress, we feel good about where we are for first half of the year, we do believe for the full year that we are going to hold on to the $10 million of savings we had through last year. And we'll get somewhere in the vicinity of $4 million or may be a bit more in the current year even our lower revenue base. So, we are on track and we do believe that we'll hit our goal to be 25% at the end of the year, but I'm honestly not quite sure exactly after the first six months.

Theodor Kundtz - Needham & Company, LLC

Okay and the savings you anticipate next year will that require any additional steps or those steps are even taken.

Thomas Paulson

What do you mean exactly by that Ted

Theodor Kundtz - Needham & Company, LLC

Well you mentioned I think you expected another additional savings -- I thought you said 20 million next year

Thomas Paulson

No, when we are fully deployed, I'm sorry we believe that fully deployed savings by the of 2011 will be a $20 million

Theodor Kundtz - Needham & Company, LLC

Right, that was the number?

Thomas Paulson

Yeah, exactly

Theodor Kundtz - Needham & Company, LLC

And that's all -- those steps have already been taken?

Thomas Paulson

Yeah. The thing we had to do we have cross functional teams in place to attack these cost savings projects and they will continue to identify opportunities in the future they're not all identified but we're going to have keep working against those, so but no major capital investment or major changes ands strategies to go after that the 20 million.

Theodor Kundtz - Needham & Company, LLC

Okay.

H. Killingstad

But as every year we established what the priorities are, there's a list of projects we do a lot to go so far we can successful executing against them and delivering the promised results and so what we need to do over next couple of years is get the next stage of the list in the lot of those. And you say that the activities and motions, there's no activity that starts but its very clear what we're focusing on how to go after it.

Theodor Kundtz - Needham & Company, LLC

Okay, great thank you. Another question for you Chris is could you give us any sense on the ec-H2O, I know you don't give the actual dollar amount but could you say what percent of the potential customers they could be buying those products or buying them. I' am trying to get sort of the idea of what is the acceptance rate of that product among your potential customer base, those making purchases and how many are shifting to ec-H2O?

H. Killingstad

No, I know, we are frustrating you and others. The fact that we are not divulging a lot of information, but you have to understand at this stage, we are early in the process and for competitive reasons we have chosen to be very general in our comments and the comments side that we continue to exceed all in internal expectations both in terms of sales and customer satisfaction. What we have said though the ec-H2O is relevant. If you look at it from a scrubber standpoint, its relevant to about 70% of our scrubber business.

Theodor Kundtz - Needham & Company, LLC

Great.

H. Killingstad

Right so, in that we said publicly so we have the best majority of scrubber business ec-H2O is relevant, again we have a relatively small share, especially in the commercial side of the business, so we view that ec-H2O is being a very significant market share play, and as you are seeing with some of the business if we starting to win, we are increasingly being able to talk about some large new business like the Clairfore's (ph) and the Tesco's of the world and the other big business in North America, that we're also winning but we're not as liberty yet to disclose the names of. But we -- again this is a significant market share play for us, that is our belief and so far early indications are that we're on track.

Theodor Kundtz - Needham & Company, LLC

Are you still getting the price premium for the product?

H. Killingstad

Yeah, generally we are getting the price premiums on the product. I mean its actually getting easier to get some of the price premiums as people begin to understand the benefits of the technology. And this way, there was some skepticism in the coming end with technology at higher price but now we are getting less push back, less resistance.

Theodor Kundtz - Needham & Company, LLC

Okay. And one final question Chris for you maybe just a sort of could add some additional color on some of trends you are seeing most recently here. I don't know if July makes much of the difference, but just your thoughts on the various parts of the world that you are servicing. Are you seeing conditions starting to improve a little bit, or it sounds like that the tone your sending out which is if I'm correct, or maybe you could add little more color to that?

H. Killingstad

We said that sequential sales or the sales in the second quarter were down 17% organically they were down 21% organically in the first quarter. Most of that benefit came North America. The rest of the world came in pretty much flat in terms of the performance in the second quarter versus the first quarter. So I would -- we would characterize from situation as stabilization. We are not yet seeing recovery. But I think we are seeing stabilization

Theodor Kundtz - Needham & Company, LLC

Okay.

Thomas Paulson

I'll add one comment on that Ted, we did -- we are pleased with the sequential improvement we saw on Q2. The strongest month was June, I mean April was better than the back half of margin May, was a bit better June is the was the strongest. July and August are typically tougher months due to -- it's summer and Europe tends to close down far (ph). Sequential improvement number we believe it will happen in Q3 but it is toughest of the quarters and we remained very comfortable for the whole back half in Q4. Q3 is the toughest one, because you don't really know for sure until you get to September. But we are seeing a bit of an improvement overall

Theodor Kundtz - Needham & Company, LLC

Terrific. I think you guys are doing very nice job Thank you very much

Thomas Paulson

Thanks Ted.

H. Killingstad

Thanks Ted.

Operator

Your next question comes from the line James Bank from Sidoti & Company. Your line is now open.

James Bank - Sidoti & Company, LLC

Hi good morning

Thomas Paulson

Hi James.

H. Killingstad

Hey James

James Bank - Sidoti & Company, LLC

In regards of the cost leverage and I understand operational excellence is going to be just ongoing is most of the heavy lifting done this year in terms of the benefit that we just saw in the second quarter or is there a further benefit to the 50 million you had mentioned earlier?

H. Killingstad

We'll see a little bit of sequential improvement in the benefit versus Q2. I mean Q2 is a bit better than Q1 as with we've had a little bit of additional savings, then Q3 will be completely fully deployed but it won't that much different in Q2, a bit of improvement.

James Bank - Sidoti & Company, LLC

Okay, and in regard to the commodity cost reduction, how much of that benefit the gross profit the quarter.

H. Killingstad

We haven't given specific information but commodities did, they continue to help as that Q2 is a little bit better than Q1, we don't see a lot of improvement in Q3 and Q4 versus Q2 we see stabilization, but it will give us benefit versus prior year and that's really critical.

James Bank - Sidoti & Company, LLC

Okay, and then switching to a new products, it just seems like the -- I'm sorry, its sounds like the just such a technology of great magnitude, may I ask you something on the horizon that could be, you could be equal magnitude that you guys like to working on right now.

H. Killingstad

Well, on that point, we are in the early stages of rolling ec-H2O out so I think our focus should be on making sure we maximize the potential of this technology before we start to launch and leverage other technologies. But what we do promise you is that, we continue to have a very active exploration focus within our advanced product development team and we are hoping that we will come up with some terrific new ideas in future. But right now ec-H2O we believe as said as a technology platform we have it on our scrubbers, we've now licensed it to a private firm that has brought to market a spray bottle. So this is the early going and the best is yet to come.

James Bank - Sidoti & Company, LLC

Okay great. Thank you, fair enough that's all I have

Thomas Paulson

Thanks James

H. Killingstad

Thanks James

Operator

Your next question comes from the line of Jo Maxa from Dougherty & Company. Your line is now open.

Joseph Maxa - Dougherty & Company, LLC

Thank you. I was wondering if you could talk a little bit more about your long term capital structure, you gave some brief thoughts. Should we be thinking of possible acquisition to the use of your -- may be going with the mixed shelf if you need. Is that maybe the primary use of it?

Thomas Paulson

We have commented about it in the public document, that it's a potential source of I mean right now we are honestly just very focused on the managing the tougher times and focused on continuing to integrate the acquisitions we've made. And we wouldn't venture out in -- and we could not expect any acquisition until he economy fully recovers. We're still talking to them I mean we have a business development area we continues to keep our pipeline growing but we did only as eminent and we -- we did today from our universal shelf registration to really great optimum flexibility into the future but nothing is eminent right now.

Joseph Maxa - Dougherty & Company, LLC

Okay, I just wanted to quick brief around that. The increase sequentially are you seeing it equally between your equipment and your perks and service or one of this areas have a quicker come back.

Thomas Paulson

We're not as we normally don't give precise split in the quarter we do for the full year but that improvement that we saw in the equipment sequentially and parts and consumables and services, pretty much the same, we saw some sequential improvement in both of those areas. So not one them was down and over the other.

Joseph Maxa - Dougherty & Company, LLC

So the mix shift is roughly the same as ...

Thomas Paulson

Yeah it is. We might have been expected a bit more on the P&C and service but the improvement was about even

Joseph Maxa - Dougherty & Company, LLC

So, were was the Clairfore (ph) and Tesco are they existing customers or is that a competitive win?

H. Killingstad

A lot of that business is incremental, especially on the Tesco front. We've had little bit of Clairfore's business but we've won now the majority of it in Europe through this deal.

Joseph Maxa - Dougherty & Company, LLC

Got it, what is your -- what kind of initiatives or how aggressive I should say, are you going out for the competitors customers with ec-H2O and just wondering if that's a major initiative that you are hitting now or are you more focused still on our own customers and then just a few here and there?

H. Killingstad

Well, we said that the big opportunity here is to take market share, so believe me what we've been focusing on the beginning of the year given the slower economy is to figure who are the big national accounts in the United States, Europe and elsewhere that we want to focus, our attention in our North America team and our European team they have a list of the top 10 priorities and they have strategy's against all of them and we are aggressively pursuing wining some of that business.

And we are quite frankly being quite successful. And I think the Tesco and the Clairfore two examples of that. There are others that unfortunately we cannot divulge at this first and hopefully at some point here in the future we will be able to do so. But we are, I think exceeding our own internal expectation in terms of our ability to win new business, significant new business with ec-H2O technology

Joseph Maxa - Dougherty & Company, LLC

Great thanks Chris and Tom

Thomas Paulson

Thanks Joe.

H. Killingstad

Pleasure.

Operator

The next question comes from line of David Kelly from David P. Taylor and Company. Your line in now open.

David Kelly - David P. Taylor and Co.

Thank you. I hesitate to congratulate you for a down quarter year-to-year, well I have tell you as a long-term share -holder I am quite pleased with how you did in the quarter and what you are talking about in terms of you prospects.

Thomas Paulson

Thanks David

David Kelly - David P. Taylor and Co.

Sure, a couple of questions. I know that most of your competitors are really small companies and this is very fragmented industry in which you compete, I would think that in this current very tough environment a lot of these companies have had serious financial difficulties. I mean I know you've leveled through, but you haven't filed with your covenants or anything. I know that some pretty big companies that have. And I would think that small companies will have will really difficulty competing against you. Am I right in terms of assuming this?

Thomas Paulson

No, I think you are right and you know we divide us the industry to this small Mom and Pop type of operations which until relatively recently, actually controlled the majority of our industry, they no longer do so. So they've already lost significant share even before the economic recession, as more and more business become national account and focused with indent (ph) within the geographies just couldn't service.

So I think with the economic the way it is, they are going to fall by the way side in greater numbers and even faster. But most of these companies are small private companies, we really don't know what their financial condition is, we just learn one day that they seem no longer to be in business

David Kelly - David P. Taylor and Co.

Has that happened?

Thomas Paulson

And that's happening because been happening for the last two or three years and essentially is accelerating. They still control in the on the 35 to 40% of the market today. But they controlled probably 60% plus two, three years ago. Then you have our major competitors, the Europeans, we also have got Denmark and Hako (ph) and culture out of Germany.

David Kelly - David P. Taylor and Co.

And do these companies compete in the United States as well?

Thomas Paulson

And they compete in the United States and I think it's been tough for all of us. My sense is we are probably weathering the storm better than any other. Our other senses, and only Milfisk (ph) advanced -- publishes financial results because they are probably public company, the other two are private. What I sense is they are doing okay, and they are going to weather the storm. We think that these one of the German companies maybe in some trouble. And that their future is in question, especially in North America at this time.

So we are monitoring that very carefully. As a matter of fact when we were asked the question of where we are going to market share. We are going after their customers as a priority because you can that's the...

David Kelly - David P. Taylor and Co.

Why did you say that. Okay, another question on ec-H2O and this sort of reflects on the first question. You said that it's been better than your expectations. What came to my mind immediately was expectations as of when can for all only be can't be sort of Tom we sort of fell off a cliff, nine to 12 months ago. And which expectations formed when are we talking about?

H. Killingstad

We don't, obviously we've had to temper our expectations because of the economy. But I think that as you look at the one we show a bright spot in our business that is to say of ec-H2O. But our expectation, we are going to look at this medium through long-term. We have a lot of these machines in the market with very reputable companies and we know that these companies love the technology and its doing what we said it would do both in terms of cleaning performance productivity, cost savings and being environmentally friendly.

So, when the economy recovers, we believe strongly its going to start to take off. The other thing we've talked about is that we are getting access to customers in business, we've never had access before. Because we said, if you are a national account, you have thousands of cleaning machines switching across the high. Why change to somebody else when you've used a certain machines for a long time, you know how to use it, your operators know how.

David Kelly - David P. Taylor and Co.

It cleans.

H. Killingstad

Right? And for the first time its something that's so differentiated that they are actually coming to us and saying listen we want to test this new technology. And we have been pleasantly surprised by the amount of new business we are winning and these are people that have never really talked to us before and I think that also bodes extremely well for the future as we come near the coverage and we built these programs out, and I think that's why we say it exceeds expectations.

David Kelly - David P. Taylor and Co.

Well, let me just tighten the question a smidge. If we were to go back 12 months ago to the time in which your '08 second quarter conference call was going on and whatever expectations you had in your mind I'm not trying to pin you down on numbers. It is -- is business better in ec-H2O than you thought 12 months ago?

H. Killingstad

I think what we're seeing is that ec-H2O is performing consistently with the expectations that we initially established for even before the economy turned down now. But I would also tell you though is that we went into it relatively cautiously.

David Kelly - David P. Taylor and Co.

Okay, but so your initial cautious expectation you are doing better

H. Killingstad

Yes. We are meeting an exceeding those, yes.

David Kelly - David P. Taylor and Co.

Even though that these expectation were formed more than year ago.

H. Killingstad

Yes.

David Kelly - David P. Taylor and Co.

Okay. That's what I wanted to hear. Okay, great keep up the good work guys.

H. Killingstad

Thanks Dave.

Thomas Paulson

Thank you.

David Kelly - David P. Taylor and Co.

Sure.

Operator

Your next question comes in line of Zahid Siddique from Gabelli & Company. Your line is open

Zahid Siddique - Gabelli & Company, Inc.

Hi, good morning

Thomas Paulson

Hi Zahid.

Zahid Siddique - Gabelli & Company, Inc.

Couple of questions, first one on our share buyback, any plans to reinstate that?

Thomas Paulson

Not the current time. We just -- we are -- we just feel that it's continuously important to be very conservative the harder cash, we are lack of visibility. So we don't have any intentions at the current time.

Zahid Siddique - Gabelli & Company, Inc.

Okay, and then I wanted to go back onto the shelf registration question. Why now -- I guess what was thought process, why did you not do it a year ago or two years ago. You mention you not interested in acquisition at least in the near terms. So what's really the rationale of that?

Thomas Paulson

A couple of things, Zahid. The honest answer is that we should have done it previously, its just something that is very common practice for companies like ourselves. It's important to note we couldn't execute anything against that until the SEC approves it and that can be a longer process at times.

So it's just I think good practice to give yourself complete flexibility, file with the SEC, go through the approval process and have that there. Its in place for three years and therefore it creates the optimum flexibility to make your decisions, when you want to. But we're just going through the approval process now.

Zahid Siddique - Gabelli & Company, Inc.

Okay. On the Prudential shelf, what is the interest rate? You said it was a fixed interest rate what is that number?

Thomas Paulson

It would be market based at the time, it's really just a shelf agreement that's in place

Zahid Siddique - Gabelli & Company, Inc.

Okay.

Thomas Paulson

If we want it to go, take termed out debt we could access, them we'll be like the interest rate of that time will be market based. We wanted again that in place if the economic conditions warrants it that it made sense to convert some of our short term debt to long term. We'd like to have a flexibility to execute against that shell, so again it's just really creating flexibility for the future.

Zahid Siddique - Gabelli & Company, Inc.

Sure and just the last question, could you comment on the quotation activity a little bit more and also cancellations and the credit environment if people are canceling because of that or for other reasons?

Thomas Paulson

Our credit environment remains very tough and it is impacting our customer's ability to purchase equipments and it's affecting their thought process. So the credit environment continues to effect what our customers are doing. In our order activity is actually remains fairly -- the activity with customers fairly active throughout the economic downturn, we just aren't converting the typical number of leaves and activity into actual shipments. So activities remain pretty solid throughout.

Zahid Siddique - Gabelli & Company, Inc.

Okay, that's all I have. Thank you, so much.

Thomas Paulson

Yeah, thanks Zahid.

Operator

(Operator Instructions) Your next question comes from the line of Sharad Patel (ph) from Jefferies & Company. Your line is now open.

Unidentified Analyst

Good morning guys.

Thomas Paulson

Hi

Unidentified Analyst

Just that I'd like to try to touch on a little bit on the geographies as you guys are seeing them going forward. Are we still looking at significant double digit kind of different year-over-year, but declines across Europe and the other national segment or should we thinking of a little bit of a relief as we approach to the end of year here?

Thomas Paulson

We anticipate that if you look at it, we haven't commented within the geographies, but if you look at it broad overall consolidated level, we believe we will see growth in the back half of the year, relative to the front half and we think that Q4 will be the first quarter that we'll actually see year-on-year growth.

We are not prepared to comment exactly the break out that we're seeing within that year-on-year growth, but if you look at the three broad geographies that we reported I mean we are seeing significant declines year-on-year. If you get embedded within those areas, there is clearly countries like China for instance that is growing year-on-year, and but it's the economic impact are very broad it's very global.

Unidentified Analyst

Is there one area particularly focused on as far as we're seeing a little bit better of recovery than in anywhere else sequentially or?

Thomas Paulson

In the quarter we actually saw a debt better sequential improvement in North America than we did in Europe for example and as far as focus areas builds our two biggest markets in a downturn like this, we clearly have to be exceedingly focused on our big geographies which is where we're we have to focus on.

Unidentified Analyst

Right. And in North America I take it's still a lot more smaller equipment driven which was where you found the increase a little bit or did you see some larger equipment as a benefit in that particular geography?

Thomas Paulson

Seen improvement in our large equipment business. The benefits sequentially in North America it came out of small equipment part of our business is what we're seeing.

H. Killingstad

Right. And you got to remember that ec-H2O is on our commercial and light industrial equipments. So its very much skewed towards commercial and it's the one real bright spot in our business, so it's not that's not surprising

Unidentified Analyst

And has that taken hold a little bit better in North America than it had in Europe so far, or is there like a particular area that you are looking for? A little more focused I guess for the ec-H2O, is it more focused towards North America currently and then approaching the European and other international market or ?

Thomas Paulson

The focus go ahead Chris.

H. Killingstad

As equal focus -- the two markets that are the biggest opportunities in North America and Europe but I would say we're getting the things the essential attraction in both markets, may be a little bit better in Europe which is also not surprising given they tend to be a little bit ahead. North America in terms of environmental consciousness, so this really in their sweet spot. But you look at markets like Japan, this could be a big idea there as well, but even in markets like China and Brazil we are selling this technology on an in a more niche basis obviously. But you've got to establish the technology and then you grow with those economies. But really when you talk about focus, right now we are the people on the asset in the money is being put its mostly Europe and North America

Unidentified Analyst

Okay, thanks for time guys

Thomas Paulson

Thank you.

H. Killingstad

Pleasure.

Operator

There are no further question at this time

Thomas Paulson

Okay, will let me give some closing remarks. Thank you all for your time today and your questions. Despite the current global downturn, we remained focused on controlling what we can control in 2009. We are pleased with the further progress we've made to achieve a sustainable reduced cost structure during the second quarter. We remain confident in our business model and are firmly committed to the long term strategic direction that we have established. We believe that our strong cost controls, improved operating efficiency and new products will further enhance Tennant's long term value creation potential. Thanks again.

Operator

This concludes today's conference call, you may now disconnect.

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