Tennant's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.21.14 | About: Tennant Company (TNC)

Tennant Company (NYSE:TNC)

Q1 2014 Earnings Conference Call

April 21, 2014 11:00 ET

Executives

H. Chris Killingstad - President, CEO

Tom Paulson - CFO, Vice President

Analysts

Joe Maxa - Dougherty & Company

Jason Ursaner - CJS Securities

Scott Graham - Jefferies

Dana Walker - Kalmar Investments

Operator

Good morning. My name is Celina, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's First Quarter Earnings Conference Call. This call is being recorded. (Operator Instructions) There will be a time for Q&A at the end of the call. Also please stay online after the Q&A for closing remarks from management. Thank you for participating in Tennant Company's first quarter earnings conference call.

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

Tom Paulson

Thanks, Celina. Good morning, everyone, and welcome to Tennant Company's first quarter 2014 earnings conference call. I am Tom Paulson, Senior Vice President and Chief Financial Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO; Pat O'Neill our Treasurer; and Karen Durant our Vice President and Controller.

Our agenda today is to review Tennant's performance during the 2014 first quarter and our outlook for the year. First, Chris will brief you on our operations, and then I'll cover the financials. After that we'll open up the call for your questions.

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 file with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement for a description of the risks and uncertainties that may affect our results.

Additionally on this conference call, we will discuss non-GAAP measures that include or exclude special or non-recurring items. For each non-GAAP measure, we'll also provide the most directly comparable GAAP measure. There were no special non-GAAP items in the first quarter of 2014, but there were special non-GAAP items in the first and fourth quarters of 2013.

Our 2014 first quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results for the first quarter and the 2013 full year. Our earnings release was issued this morning via Business Wire and is also posted on the Investor Section of our website at tennantco.com.

At this point, I'll turn the call over to Chris.

H. Chris Killingstad

Thank you, Tom, and thanks to all of you for joining us this morning. Let me start today by saying that we are pleased to report double-digit organic growth and record revenue for the first quarter. We also had higher sales across all of our geographies including Europe, Middle East and Africa or EMEA region where we had sales gains for the first time since 2011.

We are encouraged that the implementation of the first phase of our growth strategy is off to a strong start in 2014, as we strive to reach $1 billion in revenue by 2017. All of our key drivers to reach this target performed well in the first quarter and we anticipate continued sales increases and improved profitability as the year progresses.

Now, let's take a closer look at Tennant's first quarter. Our 2014 first quarter consolidated net sales of $184 million rose 9.5% compared to the prior year quarter and we are up 10.5% organically. A significant contributor to sales was continued demand for newly introduced products especially the T12 rider scrubber, which is the first new product in our redesigned modular large equipment portfolio.

Further, we saw robust sales of industrial equipment as well as sales through distribution and through strategic accounts. In addition, building on strong sales in the 2013 fourth quarter sales of scrubbers equipped with ec-water technology grew a 11.7% compared to the first quarter of 2013 driven by repeat purchases of ec-water scrubbers by key strategic accounts.

Turning to a few first quarter highlights across our geographic regions, sales increased 10.1% organically in Tennant's largest region, the Americas. We saw a significant increase in sales through distribution as incremental sales coverage dedicated to this channel has begun to drive revenue growth.

We also experienced ongoing gains with our strategic accounts. As an example of our continued success here, we were pleased to be awarded another 3-year group purchasing contract with Premier, Inc. effective March 1, 2014. Premier is a leading healthcare improvement alliance of approximately 2,900 U.S. hospitals and nearly 100,000 other healthcare providers. Our agreement enables Premier members to have affordable access to our floor cleaning solutions that fit their healthcare facilities needs either directly through Tennant or through our authorized distributor network.

In EMEA, organic sales rose 5.4% and benefited from higher sales through distribution as well as increased sales of Green Machines, outdoor sweepers for the second consecutive quarter. Our master distributor in the Central Eastern Europe, Middle East and Africa region performed well and met expectations. Further, our efforts will right-size our cost structure and improve sales and service capabilities are paying off. And we are now well-positioned to take advantage of growth opportunities in EMEA as the macro environment continues to improve.

In the Asia Pacific or APAC region, organic sales grew 25.8%. Our organic sales gain was broad-based and included continued strong performance in China where organic sales rose approximately 50% in the 2014 first quarter. As you will recall, we began manufacturing our first industrial product in China, the T12 rider scrubber during the 2013 fourth quarter. We made further progress on our initiative to expand into the western part of that country where we expect to open a sales office within the next three months.

Additionally, we will be rolling out our successful North American strategic account structure and strategy in China this year. We are confident about our continued growth prospects and expect double-digit sales increases again in China in 2014.

Now, for a deeper look at our newer products. We continue to execute against one of the most robust new product and technology pipelines in the company's history. As you know, innovative products and technologies are a significant driver of Tennant's revenue. We plan to launch more than 63 new industrial and commercial products between 2014 and 2016 on top of the 37 new products that we have introduced over the past two years.

This year we expect to introduce 16 new products including nine products in our first half, followed by seven in the second half. One of the new product highlights of our 2014 first quarter was the unveiling of a line of walk behind burnishers. These innovative battery-operated burnishers are emissions free and deliver a high performance propane-like gloss results. This is important to our customers because it eliminates the health and safety concerns related to the use of propane.

In 2013, we introduced the B10, Tennant's first rider burnisher, which enables rapid cleaning and polishing of large areas. All of our burnishers provide quite operation for noise sensitive environments as well as HEPA dust control filtration to maintain indoor air quality.

Earlier this month, the Orbio Technologies group from Tennant Company introduced the Orbio os3. The os3 is the latest innovation in onsite generation technology. Through the process of water electrolysis, which combines water, electricity and a small amount of salt, the os3 system creates an onsite and on-demand effective cleaning solution as well as a disinfecting sanitizing solution that meets U.S. EPA regulatory guidelines for disinfection and sanitization. The os3 is small, simple and affordable and designed to fit in most janitorial closets.

The os3 delivers many compelling benefits to building and facility managers such as simplified cleaning processes, reduced cost to clean; diminished exposure for staff and facility occupants to chemical concentrates and volatile organic compounds as well as lessen dependence on conventional packaged chemicals and their associated environmental footprint. We are very excited to begin offering our customers this new technology.

At the end of the second quarter, we planned to launch the second product in our redesign modular large equipment portfolio. The T17 will be our new midsize rider scrubber. This and the majority of our new products are being manufactured on modular equipment platforms. Modularity allows us to offer a wider range of possible machine features more efficiently and cost effectively.

As you will recall, we introduced our first modular large equipment product in 2013, the T12 compact rider scrubber. Demand for the T12 has exceeded expectations and it was recently given a 2013 good design award for industrial design excellence. This award remains the oldest and the most recognized program for innovative design excellence worldwide.

Our T12 model also received the Visitors’ Choice Innovation Award last November from the International Sanitary Supply Association or ISSA. We are pleased with how well the T12 has been received and we believe that bodes well for the T17.

Speaking of awards, we are also delighted that Tennant Company was named to the Forbes 2014 list of the 100 most trustworthy companies in America. I want to congratulate everyone at Tennant for their part in this honor. We take great pride in conducting our business with the highest ethical standards and a philosophy of stewardship. We appreciate this recognition by Forbes.

Now, turning to our strategy for growth. As I outlined on our fourth quarter conference call, Tennant is targeting $1 billion in sales by 2017. Our plan reflects the fact that over the past five years, we have built a scalable business model that is capable of delivering improved operational efficiency and profitability. To take full advantage of that effort the company is shifting its focus to organic revenue growth in order to increase market share and enhance the organizations ability to reach a 12% or above operating profit margin.

We have identified opportunities to increase our global market coverage and customer penetration in existing underserved markets where our value proposition is compelling such as the industrial, retail, education and healthcare sectors. As a result, we have been investing in additional direct sales, distribution and marketing capabilities to accelerate growth. We believe the robust organic sales gains that we saw in the first quarter are an early indication that we're on the right path.

Going forward, the key drivers of our growth strategy will continue to include strong and sustained new product growth in our core business and in the Orbio Technologies Group, continued significant sales gains in emerging markets, growth in Europe. Ongoing focus on strategic accounts and an enhanced go-to-market strategy designed to meaningfully expand Tennant's global market coverage and customer base.

As I mentioned earlier, we are pleased with our progress in the 2014 first quarter in all of these areas. Our plan to reach $1 billion in revenue by 2017 includes an assumption of approximately 2% global GDP growth. We anticipate Tennant's targeted 7% compounded annual growth rate to be broken down approximately as follows. Up to 3% from new products including Orbio; up to 3% from our enhanced go-to-market strategy including Europe and strategic accounts and up to 2% from emerging markets.

We will carefully monitor our performance and seek to accelerate our timeline wherever possible. We are excited to have a strong start to 2014. And we are optimistic about our prospects for the remainder of this year and beyond as we work to attain a $1 billion in revenue and a 12% or greater operating profit margin.

We will continue to manage our business with a focus on operational excellence and strong cost controls, while investing in direct sales, distribution and marketing capabilities and maintaining a strong pipeline of new products in order to deliver a long-term growth and improved profitability.

Now, I will ask Tom to take you through Tennant's first quarter financial results. 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 31, 2014, Tennant reported net sales of $184 million compared to $168 million in the prior year quarter. Organic sales grew approximately 10.5%, excluding an unfavorable foreign currency impact of about 1%.

As you may recall, Tennant's organic sales rose approximately 5.1% in the 2013 fourth quarter, and 6.8% in the 2013 third quarter excluding an unfavorable foreign currency exchange impact of about 1% in both quarters. We are encouraged by the solid level of organic sales growth in these last three quarters.

First quarter 2014 net earnings were $5.8 million or $0.31 per share. In the year ago quarter Tennant reported adjusted net earnings of $5.5 million or $0.29 per share.

Turning now to a more detailed review of the 2014 first quarter. Our sales are categorized into three geographic regions which are the Americas, which encompasses all of North America and Latin America; EMEA which covers Europe, the Middle East and Africa; and lastly Asia Pacific which includes China and other Asian markets, Japan and Australia.

In the Americas, 2014 first quarter organic sales increased approximately 10.1% excluding about 2% of unfavorable foreign currency impact. Record sales for the first quarter North America were due to strong sales of scrubbers equipped with ec-water technology, continued high-demand for new products as well as strong sales through distribution and through strategic accounts. Organic sales growth in the emerging market of Latin America was approximately 10%.

In EMEA, organic sales grew about 5.4%, excluding a favorable foreign currency impact of approximately 4.5%. As Chris noted this was the first quarter of organic sales growth for EMEA since the third quarter of 2011. EMEA results benefited from higher sales through distribution and increased sales of our Green Machines outdoor sweepers.

As you may recall, we recorded a $1.4 million restructuring charge in the 2013 first quarter that was primarily focused on reducing the size of our European sales and service organization. We also recorded a $1.6 million restructuring charge in the 2013 fourth quarter to right size our cost structure and enhance our go-to-market approach primarily in Europe.

Going forward, we anticipate the EMEA sales growth and profit margins will improve as a result of process improvement projects as well as benefits from the restructurings.

In Tennant's Asia Pacific region organic sales rose approximately 25.8%, excluding an unfavorable foreign currency impact of about 7.5%. Organic sales increased for the fourth consecutive quarter in this region. Growth in the 2014 first quarter was broad based and included continued strong sales performance in China, which had organic sales growth of approximately 50%.

Tennant's gross margin for the 2014 first quarter was 41.8% compared to a gross margin of 43.1% in the prior year quarter. Gross margin in the 2014 first quarter was adversely impacted by product mix and also the selling channel mix with strong sales through distribution and sales through strategic accounts. As we mentioned on our previous calls, sales through distribution and through strategic accounts tend to have lower gross margins which are typically offset by the lower cost of a more efficient selling process.

Looking forward based on the inflationary environment, we have announced selling price increases in most of our geographies with an effective date of March 1st. We anticipate the 2014 full year gross margin will be within our target range of 43% to 44% due to expected benefits from the recently enacted selling price increases.

Research and development expense in the 2014 first quarter totaled $7.5 million or 4.1% of sales compared to $7.5 million or 4.5% of sales in the prior year quarter. We continue to invest in both our core business, and Orbio, which is focused on advancing a suite of sustainable water-based cleaning technologies.

Selling and administrative expense in the 2014 first quarter totaled $60.2 million or 32.7% of sales, this compares to S&A in the first quarter of last year of $56.7 million as adjusted or 33.7% of sales. S&A expense was down a 100 basis points as a percent of sales due to continued operating leverage efficiencies.

As Chris mentioned, to accelerate future growth we are making targeted strategic investments in this area that include additional direct sales, distribution and marketing capabilities.

Our 2014 first quarter operating profit totaled $9.2 million or 5% of sales, compared to the 2013 first quarter operating profit of $8.3 million as adjusted or 5% of sales. Improved R&D and S&A leverage in the 2014 first quarter was offset by lower gross margins due primarily to product mix and selling channel mix.

We remain committed to our goal of a 12% or higher operating profit margin by successfully executing our strategic priorities and assuming that global economy improves. As we work towards this target, we are keenly focused on driving organic revenue growth in the mid-to-high-single digits holding fixed cost essentially flat in our manufacturing areas as volume rises. Striving for zero net inflation of the gross profit line and standardizing and simplifying global processes to continue to improve the scalability of our business model while minimizing any increases in our operating expenses.

Thus far, we have made significant progress in building a scalable business model capable of delivering improved operational efficiency and profitability. We are now placing a renewed focus on accelerating organic revenue growth. We are encouraged that we achieved our targeted organic revenue growth in the range of mid-to-high single digits in both the third and fourth quarters of 2013 and we now report a 10.5% in the 2014 first quarter. These past three quarters represent the highest organic sales growth achieved in two years.

We continue to successfully execute our tax strategies. Tennant's overall effective tax rate for the 2014 first quarter was 32.5%. The base tax rate of 31.9% which excludes routine discrete tax items was within our targeted range of 31% to 33%. Note that we were not able to include any benefit in the 2014 first quarter for the federal R&D tax credit as this is not yet been reenacted for 2014.

Turning now to the balance sheet. Again, we continue to have a very strong balance sheet. Net receivables at the end of the 2014 first quarter were $144 million versus $130.4 million a year earlier. Quarterly average accounts receivable days outstanding were 64 days for the first quarter compared to 65 days in the 2013 first quarter.

Tennant's inventories at the end of the 2014 first quarter were $73.8 million versus $64.1 million a year earlier. Quarterly average LIFO days inventory in hand were 88 days for the 2014 first quarter down two days compared to the 90 days in the year ago quarter.

Capital expenditures of $3.5 million in the 2014 first quarter were comparable to the $4 million in the prior year period with planned investments in tooling related to new product development, manufacturing equipment and process improvement projects.

Tennant's cash from operations which is typically negative in the first quarter due to the seasonality of the business totaled a negative $9.3 million versus cash from – I'm sorry, total of negative $3.9 million versus cash from operations of a positive $7.3 million in the 2013 first quarter. The most significant change in cash flow in the 2014 first quarter as the increase in receivables primarily due to a high level of sales in March.

Cash and cash equivalents totaled $63.4 million up $13.6 million from $49.8 million a year ago. The company's total debt of $28.2 million declined $3.6 million from $31.8 million a year ago. Our debt-to-capital ratio was 9.6% at the end of the 2014 first quarter versus 12 last year.

Regarding other aspects of our capital structure, Tennant is currently paying a quarterly dividend of $0.18 per share. We paid cash dividends of $3.5 million in the 2014 first quarter compared to $3.3 million in the year ago quarter. Reflecting our commitment to shareholder return, Tennant has increased our annual cash dividend payout for 42 consecutive years.

During the 2014 first quarter, we purchased 58,158 shares of Tennant's stock at an average price of $61.14 for a total cash outlay of $3.6 million. As of March 31, 2014, we had 572,445 shares remaining under our repurchase program.

Moving now to our outlook for 2014. Based on our 2014 first quarter results and expectations of future performance, we are maintaining our guidance and estimate 2014 full year net sales in the range of $780 million to $800 million up 4% to 6%. And earnings in the range of $2.50 to $2.80 per diluted share, an increase of 11% to 24% compared to 2013 as adjusted. For the full year 2013, adjusted earnings per share were $2.26 and net sales of $752 million.

Our current 2014 annual financial outlook includes the following expectations; modest economic improvement in North America and Europe and steady growth in emerging markets; unfavorable foreign currency impact on sales for the full year of approximately 1%; gross margin performance in the range of 43% to 44%; research and development expense of approximately 4% of sales and capital expenditures in the range of $20 million to $22 million.

We anticipate a base tax rate excluding any special items in the range of 31% to 33% depending primarily upon the mix of full year taxable earnings by country. Note that our 2014 base tax rate does include the 2014 benefit for the federal R&D tax credit. However, as I mentioned earlier the Federal R&D tax credit program has not yet been reenacted for 2014. So we are not allowed to include that favorable impact on the 2014 tax rate we record until it is enacted.

While we do not provide quarterly guidance, we do expect our 2014 earnings will be stronger in the second half of the year as our investments for growth begin to generate incremental revenues and profits. During the initial ramp up of strategic investments to accelerate future revenue growth, we anticipate our selling and administrative expense will grow at approximately the same rate as our sales.

Importantly, we expect to increase our operating profit in 2014 with the majority of the improvement expected in the second half.

And now, we'd like to open up the call to questions. Celina?

Question-and-answer Session

Operator

(Operator Instructions) The first question will come from the line of Mr. Joe Maxa of Dougherty & Company.

Joe Maxa - Dougherty & Company

Thank you and good morning.

Tom Paulson

Good morning, Joe.

H. Chris Killingstad

Hi, Joe.

Joe Maxa - Dougherty & Company

Congrats on a nice revenue quarter, I do want to talk a little bit about the margins regarding – getting back to that 43% to 44%, how much do you think that the increase in pricing will contribute to that and then, I guess the balance would assume a shift in product mix back to maybe more historical levels?

Tom Paulson

The price increase matters Joe. We will anticipate for the full year that minimally will get a full year pricing benefit of about 1% or larger that won't be significantly above 1%. The pricing benefit that we got in Q1 was only about – roughly 0.5%, so pricing matters – does matter. We were confident in our capability of getting pricing in the back half as we are seeing some modest level of inflation and we have taken – we have taken broad increases. And we do assume that we – our product mix improves, what I would say is, product mix in the quarter was unusual and we think one-time in nature. So we think the shift to a more normal product mix will also be meaningful. And that gives us the confidence with those two pieces that will be back for the full year between 43% and 44%.

Joe Maxa - Dougherty & Company

Can you give us a little more color on the product mix on what drove it so low – the unusual one-time items, was it particular products or just much stronger distribution than expected?

Tom Paulson

No. It was – the mix continued similar to what we saw in Q4 the channel mix is affecting us. I would say that in Q1 distribution was even stronger than we saw in Q4, but the overall impact was similar and we were anticipating that's going to stay the same for the rest of the year. So we are not assuming that our mix between direct and distribution and strategic accounts meaningfully moves, we just believe we can offset that through pricing and through the product mix side.

And it really was a few specific products and a few specific one time events that are pretty customer specific and they were the right things to do for our business in the short-term and we think that some of the sales were one-time in nature and we were comfortable that we are going to return to – what we would consider a normalized mix the balance of the year.

Joe Maxa - Dougherty & Company

Okay. That's helpful. And then I want to talk a little about the Orbio launch, is this more of a – the new os3, is it going to be a global launch, I'm just wondering about just compared to the 5000-SC global and then is this also going to be going through direct and indirect. Maybe just a little more color?

H. Chris Killingstad

Hey, Joe. This is Chris. It's going to be focused in North America to begin with and it's going to be focused on a select number of verticals so education healthcare, building service contractors. And the majority will be driven by our Orbio specialist sales team, but we have signed up a select number of distributors who were willing to adhere to the very strict performance guidance lines that we had established for them taking on the os3.

So with the 5000, we basically gave it to all of our sales people and to all of our distributors that was much harder to control than its going to be going forward where it's a handful of Orbio specialists, a handful of distributors and vertical markets that we think are the best early adaptor opportunities for us. And that's proving out to be true here in the early going.

Joe Maxa - Dougherty & Company

Okay.

H. Chris Killingstad

So then in terms of the rest of the world, we are testing it in Europe. We are focusing mostly on the U.K. where we have put in place some resources. And then once we have proven the technology out in the U.K. we will hopefully expand that throughout the EMEA, at least Western Europe in 2015.

Joe Maxa - Dougherty & Company

Okay. Then just one more on the head count growth, 115 people or so in 2013, what should we be thinking about for 2014?

Tom Paulson

We are not ready to give a specific number Joe. What can I say is our head count in total didn't meaningfully move in Q1, we did continue to add some sales and service coverage and marketing resource. But, we will continue to do that throughout the year but most of that will come in the front part of the year and you will see us improve our leverage in the back half of the year as we slowdown some of our investment in that regard unless we determine that it is the right thing to keep accelerating. But, we are going to be a bit measured in. It's just natural that the skew hurts us a little bit more in the front half as you need those investments to really ramp up. And we will begin to see more leverage in the back half.

H. Chris Killingstad

It is important to note that we have added over 100 direct sales distribution-related resources to marketing resources. That's – it generated – revenue generating positions that we are focusing on here over the last three quarters and as we go forward.

Joe Maxa - Dougherty & Company

All right. Thank you very much.

Tom Paulson

Thanks Joe.

Operator

Your next question comes from the line of Jason Ursaner with CJS Securities.

Jason Ursaner - CJS Securities

Good morning, congratulations on a strong start to the year.

Tom Paulson

Thanks Jason.

Jason Ursaner - CJS Securities

Just following up on a few of Joe's questions. Organic sales in the quarter clearly were very strong, so I guess just wondering why maybe not a change to the full year outlook, the organic growth needed to get you in that 4% to 6% up for the year, why wouldn't that be moving higher especially layering in some of the price increases now for the rest of the year?

Tom Paulson

Yes. It's a good question Jason, I mean the straight-forward answer is, its just one quarter but probably more importantly than that we are just choosing to remain conservative, it would be easy to go ahead and take the guidance up. We just think it's the prudent thing to be conservative with just one quarter under our belt.

Obviously, based on the strength of the revenue growth and pretty solid order pacing as we start our Q2, our confidence level is certainly higher than it was before we started the year. But, we are choosing to remain conservative.

Jason Ursaner - CJS Securities

Okay. And do you think any of the revenue growth in Q1 could have been customers buying ahead of the normal – I'm assuming April is kind of a normal time for price increases and I know last year, you guys didn't really do a normal price increase. So maybe you didn't have the same push in Q1. Just wondering if you think any of that could have played into it.

Tom Paulson

We have a couple of instances where it was – there was some movement in our revenue in the quarter. But nothing meaningful, it was a very modest amount of a total growth. So it certainly something you have to pay attention to. But, it wasn't meaningful.

Jason Ursaner - CJS Securities

Okay.

H. Chris Killingstad

And I think the fact that our order patterns as we start out the second quarter remain just strong is an indication that Tom said it wasn't meaningful.

Jason Ursaner - CJS Securities

Got it. And on the gross margin, you specifically mentioned the product mix and selling channel breakdown driving maybe 1% or 1.5% below target in the quarter. And it sounded if there wasn't any reason, do you expect to change from either of those going forward. So I just wanted to make sure I understand getting back to the 43% plus range, I your view that's just primarily a function of dropping most of the price increase to the bottom line at this point?

Tom Paulson

The two biggest pieces are an expectation that pricing for the full year will generate at least 1% benefit that does matter a lot. And we will begin to see that help in Q2. And the other thing, as we really believe that some of the product mix issues were really one-time in nature in the quarter and we see those going away quickly.

So we actually think the return in the range will happen fast and we are not saying we are going to get all the way back to some of those great margins we had in the past. But we are very comfortable will be back within range.

Jason Ursaner - CJS Securities

Okay. And the product mix, its manufacturing or its customer specific?

Tom Paulson

Customer and product. So nothing to do with our supply chain or supply chain continues to be a real star in our organization.

Jason Ursaner - CJS Securities

Okay. And then I guess just last question for me. The standalone Orbio, could you possibly maybe put a little more context for that product as part of the 3% growth. Obviously, you guys sound more optimistic on traction given the benefit of experience from the last generation. So just a nice side contributor to growth or is this really in your view a core part of it going forward?

H. Chris Killingstad

Well, we are pursuing this aggressively and have stayed the course over the last four, five years and invested heavily behind this because we fully believe that its going to be a core part of our growth going forward. And I think this time we have the right product. I mean its half the size, half the cost of the 5000-SC, it produces onsite both the cleaning solution as well as the microbial solution.

We have the ability to create concentrate from the unit and take that concentrate to satellite locations around the facility where they can plug it into a dispensing system and create cleaning, sanitize and disinfecting solutions. There we have I think smartly focused on a core group Orbio sales specialists and limited our focus also to healthcare education and BSEs with a few retailers built in there that have proven through the testing process to be extremely interested in this product and are going to be early adaptors.

So we hope here by the second half of this year, we are going to be able to start publicly taking about some really good news behind this product.

Jason Ursaner - CJS Securities

Okay. Great. Looking forward to it and congrats again, thanks.

Tom Paulson

Thanks Jason.

Operator

(Operator Instructions) Your next question comes from the line of Scott Graham of Jefferies.

Scott Graham - Jefferies

Hey, Chris, hey, Tom. How are you?

Tom Paulson

Good, Scott. How about yourself?

Scott Graham - Jefferies

Goes well. Thank you.

Tom Paulson

Good.

Scott Graham - Jefferies

I was just wondering if you could track for us two things on sales, first, development of sales as the quarter progressed on a year-over-year basis. And secondly, the impact in North America on from the weather on sales in January, Feb.

Tom Paulson

Sure. The order pattern did accelerate during the quarter. So it was – as it is typical, I would say that maybe the way to comment on that. As we did get a decent read on the quarter early but Q1 always starts slow and just due to the year-end and the calendar year. It accelerated – I will make two further comments on that. We did have a larger open order position at the end of the quarter than the prior year as you know we are not – it’s not a great indicator of the business, but it’s certainly a positive.

And most importantly as Chris commented, our order patterns are very much inline and remain solid in Q2. So we feel we exited and entered this quarter in very good shape. And it’s proven itself out.

On the weather side, we can honestly say, we had any measurable negative impact on our business in Q4. So we won't play the weather card. I'm sorry –

H. Chris Killingstad

Q1.

Tom Paulson

In Q1, I'm sorry. Yes, in Q1. We had no measurable impact in the quarter.

Scott Graham - Jefferies

Okay. So were you talking about, I know you said an acceleration during the quarter in the first part of your answer. But that's kind of normal, right because March is always the largest month. On a year-over-year basis you are saying your orders were up 1Q this year versus 1Q last year, open orders?

Tom Paulson

Significantly, yes. We had a decent open order position coming into the quarter. We exited with open order position that grew. And I mean it's above the prior year. And this was the organic growth was completely on the strength of orders was not any kind of system loading or anything at all, it was just a plain good organic quarter.

Scott Graham - Jefferies

Very good. Thank you both.

Tom Paulson

You bet.

H. Chris Killingstad

You're welcome.

Operator

Your final question comes from the line of Dana Walker with Kalmar Investments.

Dana Walker - Kalmar Investments

Good morning. A few questions, what do you attribute to the renewed strength in ec-water in the quarter?

H. Chris Killingstad

It was great to see 11.7% growth. And then we actually had strong growth in the fourth quarter too. And it's all about the key purchases from key strategic accounts who were the early adaptors when we launched the product. So they are in the – they are in position to replace those ec-water scrubbers. They love them. And they have replaced their fleet with new ec-water machine. So I think that's a very bullish sign for us as we go forward here as more and more of these strategic accounts are going to turn over their fleet.

Dana Walker - Kalmar Investments

So you believe this is like-for-like trends or like-for-like replacement rather than a displacement of a competitive unit with your system?

H. Chris Killingstad

Yes. In the last two quarters, we believe that to be the case.

Dana Walker - Kalmar Investments

Chris, do you have a read though on market share and that you were later, lesser share arriver to the commercial side of the business?

H. Chris Killingstad

Can you clarify that question Dana?

Dana Walker - Kalmar Investments

Well, my impression is that ec-water allowed you – you lead in industrial; you hadn't led in the commercial business until ec-water gave you a big push forward. I am wondering what you are seeing market share wise in the commercial side of the business?

H. Chris Killingstad

I think that we would say that we gained market share on the commercial side of the business. We also say that our attachment rates for ec-water hover in the 50% range. I mean 50% of the machines that have ec-water available on both in the industrial and commercial are today being sold as ec-water machine to both existing and new customers.

I'm not sure we are able to exactly calculate the incremental market share gain from ec-water, but I would say directionally especially on the commercial side of the business it has had a positive impact.

Dana Walker - Kalmar Investments

One last question. As you have added people into sales and marketing over the last several quarters, what types of assumptions are you making on channel mix as you do that? And as Tom and you talk about projecting gross margin ranges, whether you need to fall within a certain mix to justify those people additions.

Tom Paulson

Yes. Dana, I don't – we've absorbed some of the channel mix changes over the last few quarters, right now our expectation is, is we are about where we are going to be. And there will be a quarter here and there that will be different, but I don't see a major shift going forward in our channel mix. I mean part of the investments are on the direct side of our business also. So we think we are about the mix that we are going to see and there will be some modest adjustments here, there. But we are comfortable, we will be back at our targeted gross margins level and will continue to just be nice leverage in S&A and continued improvement in our operating profit margins particularly in the back part of the year.

Dana Walker - Kalmar Investments

If you add people though, are you indifferent to where your unit growth takes place channel wise?

H. Chris Killingstad

I mean, we have always said, we have the strongest margins on our direct industrial side. And so there is growth opportunities there when we are producing them. But we have also said that we have been underrepresented on the commercial side of the business and a lot of that business goes through distribution. And I think we are now structured around distribution adding appropriate resources where we have identified the biggest growth opportunities.

So distribution as you saw, its one of the first time we have actually call that distribution in an earnings release as a growth driver. So that's a good thing because a lot of opportunity there, we added resources and they are already beginning to pay dividends for us.

Strategic accounts we have had a lot of success there in North America over the last four or five years increasing success in EMEA and its starting to happen in Asia Pacific too. So I think it's more of the same greater intensity on that part of the business. But, we also said that on our distributor business and strategic account business that it's a more efficient sales process, so while there maybe lower gross margins when you get down the operating profit margin it should be basically margin neutral.

Tom Paulson

And to your point Dana, we are a bit – don't care that much about where our mix goes as long as we stay true to our business model and create the efficiencies below the gross margin line. We still want to aggressively manage gross margins, but the thing that matters the most is the improvement in our operating margins and driving efficiency in our business model on a go forward basis that's how we pay very close attention to because you could get out of way with your margins. But, we are comfortable that we are managing that nicely.

Dana Walker - Kalmar Investments

I do have a follow up, as you talk about ec-water and selling to early customers, would the presently sold ec-water commercial units have features that the original generation didn't have?

Tom Paulson

In some instances I mean there is simple example would be the T12 that's a revitalized product. It has ec-water on it. So I mean that's just a simple example of a product that's more enhanced relative to the original ec-water offerings that we have had in the past. But, nothing that dramatic but we certainly believe that as people renew their – repurchase their fleets that we will be on the winning side of a majority of those transactions.

Dana Walker - Kalmar Investments

Very well. Well done. Thank you.

Tom Paulson

Welcome.

H. Chris Killingstad

Thank you, Dana.

Operator

And there are no further questions at this time. I'll now turn today's conference call back to management.

H. Chris Killingstad

Thank you, Celina. We are pleased with our progress to-date and confident that we have laid a strong foundation for our future. We will continue to focus on growth building on an excellent start to 2014, the first quarter results that included double-digit sales gains. By placing a renewed focus on growing Tennant's revenues while continuing to leverage our cost structure, we expect to generate strong bottom line financial performance. We are committed to reaching $1 billion in revenue by 2017 while achieving a 12% or greater operating profit margin.

We are hosting our Annual Shareholder meeting this Wednesday in Goldman Valley, Minnesota. Please join us, if you can. Otherwise, we look forward to updating you on our 2014 second quarter results in July. Thank you for your time today and for your questions. Take care, everybody.

Operator

Thank you. This will conclude today's conference call. And you may now disconnect your lines.

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Tennant (TNC): Q1 EPS of $0.31 in-line. Revenue of $184M (+9.5% Y/Y) beats by $10.13M.