Tennant's (TNC) Chris Killingstad CEO on Q2 2014 Results - Earnings Call Transcript

| About: Tennant Company (TNC)

Tennant Company (NYSE:TNC)

Q2 2014 Results Earnings Conference Call

July 24, 2014 11:00 AM ET

Executives

Tom Paulson - SVP and Chief Financial Officer

Chris Killingstad - President and CEO

Analysts

Jason Ursaner - CJS Securities

Joe Maxa - Dougherty & Company

Rosemarie Morbelli - Gabelli & Company

Bhupender Bohra - Jefferies

Operator

Good morning. My name is Trishanta, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's Second Quarter Earnings Conference Call. This call is being recorded. There will be time for Q&A after end of the call. (Operator Instructions). After the Q&A please stay online for closing remarks from management. Thank you for participating in Tennant Company's second 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, Trishanta. Good morning, everyone, and welcome to Tennant Company's second 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 second 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 will open up the call for your questions.

Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations 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 or second quarter of 2014, but there were special non-GAAP items in the first and fourth quarters of 2013.

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

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

Chris Killingstad

Thank you, Tom, and thanks to all of you for joining us this morning. As you saw in today's earnings release, Tennant executed very well on our growth strategies in the second quarter. We set several records in the quarter. Among them we are pleased to report the highest quarterly revenue in our company's history. Sales rose in all our product categories. We continue to be encouraged that the implementation of the early stage of our growth strategy is off to a strong start. Our stated goal is to attain $1 billion in revenues by 2017. All of our key drivers to reach this goal performed well in the first six months of 2014. And we expect continued sales gains and improved profitability as the year progresses. As a result, we are increasing our 2014 full year sales range and raising the low end of our earnings guidance range. Tom will discuss that in a moment.

Now let's take a closer look at Tennant’s second quarter. Our consolidated net sales of $219.1 million rose 9.4% compared to the prior year quarter and were up 8.9% organically. Contributing to our performance were strong sales through Tennant’s direct selling channel, demand for new products such as the T12 rider scrubber, and gains in commercial, industrial and outdoor equipment.

Sales of scrubbers equipped with ec-water technology grew 7.6% versus the prior year quarter and surpassed $40 million in quarterly revenue for the first time. This follows an 11.7% increase in ec-water sales in the 2014 first quarter.

Turning to a few highlights across our geographic regions. Sales increased 11.1% organically in Tennant’s largest region, the Americas setting a quarterly revenue record. Contributing to our Americas sales was one of the largest contracts that Tennant has ever received. The order included both Tennant equipment and Orbio units for a public school district in a major U.S. city.

Education is a targeted vertical market for us. And this win demonstrates the desire for schools to clean their facilities in more environmentally friendly ways. In EMEA, organic sales declined 1.9%. This was predominantly due to timing of orders. Some of the orders we had expected in June were received in July. Our strategies in EMEA are on track and we expect a return to organic sales growth in the second half 2014.

In the Asia Pacific region organic sales rose 18.9% as a result of broad-based sales gains. In China, organic growth was approximately 25% in the 2014 second quarter. We made further progress on our initiative to expand into the western part of that country where we will open a sales office in late July.

We also are rolling out our successful North American strategic accounts structure and strategy in China this year. We remain confident about our continued growth prospects and expect double-digit sales increases in China for the full 2014 year.

Taking a look at our new products. As you know, Tennant continues to execute against one of the most robust new product and technology pipelines in the company’s history. Innovative products and technologies are a significant driver of the company’s revenue. Sales of new products introduced since the 2012 fourth quarter have risen steadily from 2% of total equipment sales in the 2013 first quarter to 10% in the 2014 second quarter. This demonstrates the growing momentum of new product sales as we complete our launches and demand accelerates.

This year we expect to introduce 16 new products, nine launched in our first half and will be followed by seven in the second half. During the 2014 second quarter, we launched the second product in our redesigned modular large equipment portfolio. The T17 is our new mid-size rider scrubber. We are manufacturing the majority of Tennant’s new products on modular equipment platforms, which allows us to offer a wider range of possible machine features more efficiently and cost effectively. The new T17 has the largest available battery capacity in its class, making it highly productive. It will clean up to eight hours on a single charge.

At the end of the second quarter, we introduced the S30 mid-size rider sweeper, which provides innovative indoor and outdoor sweeping performance with optimized dust control in both light and heavy duty applications.

With the S30, we now have a complete line of sweepers from sub-compacts to industrial sized riders. In addition, we expanded our burnisher line with the introduction of walk-behind burnishers in the 2014 second quarter. Tennant's battery-operated burnishers are emissions free and deliver higher performance propane-like, gloss results. This is important to customers because it eliminates the health and safety concerns related to propane use. Our walk-behind burnisher was recognized as a winner of the 2014 international design excellence awards.

Also in the quarter, the Orbio Technologies Group from Tennant Company introduced the Orbio os3, which is the latest innovation in on-site 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 multi-surface cleaner and an anti-microbial. It meets U.S. EPA regulatory guidelines for disinfection and sanitization. The os3 is small, simple to use and affordable.

We are very excited to offer our customers this new technology. We are beta testing the os3 at a number of sites and are encouraged by the positive response across a broad range of industries. In other corporate developments, we recently hired Carol McKnight as Tennant’s Senior Vice President of Global Human Resources. We are delighted to welcome her on-board. Carol was previous a Senior Human Resources executive for ATK. She succeeds Tom Dybsky, who retired. Tom served Tennant very well in that role for 15 years and we hope he enjoys his very well deserved retirement.

As we recently announced, Rusty Zay takes over for Andy Eckert, who is leaving to seek a new opportunity. Andy headed up our largest geography which has grown substantially, we thank him. And we know that Rusty will swiftly transfer his exceptional leadership from global marketing to leading the Americas, in order to drive our blueprint for 1 billion growth and profitability growth. We are initiating a search for candidates to succeed Rusty and lead global marketing.

I would also like to note that Tennant thrilled to partner with the Minnesota Twins baseball team as its official cleaning solutions partner which we announced this week. This partnership and our equipment will further enhance the Minnesota Twins efforts in water conservation and environmental sustainability at what has been called the greenest ballpark in America.

Tennant’s cleaning solutions are used every day in stadiums and arenas across the country. We expect to further leverage this experience with other potential stadium customers. Now, I will update you on our strategy for growth. Earlier this year, Tennant announced a growth strategy to reach sales of $1 billion by 2017. The plan reflects the fact that over the past five years, the company has been building a scalable business model capable of delivering improved operational efficiency and profitability. To take full advantage of that effort, we have shifted our focus to organic revenue growth and to increase market share and enhance the organization's ability to reach an operating profit margin of 12% or above.

The initial results from our new growth strategy are very encouraging. We have already generated robust organic sales gains in both the 2014 first and second quarters.

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. We are pleased with our progress in the 2014 second quarter and first half in all of these areas.

Our plan to achieve the $1 billion revenue goal by 2017 includes an assumption of approximately 2% global GDP growth. And we anticipate Tennant's targeted 7% compounded annual growth rate to be broken down approximately as follows; up to 3% from new products included 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.

Now I'll ask Tom to take you through Tennant 's second quarter financial results. Tom?

Tom Paulson

Thanks Chris. In my comments today I'll reference this earnings per share on a fully diluted basis. Also please note as I go through the results I'll generally not comment on the year-to-date financials as well as details on earnings release. For the second quarter ended June 30, 2014 Tennant reported net sales of 219.1 million compared to 200.2 million in the prior year quarter.

Organic sales grew approximately 8.9% excluding the favorable foreign currency exchange impact of about 0.5%. We are encouraged by the solid level of organic sales growth in the past four quarters. As you may recall Tennant's organic sales rose approximately 10.5% in the 2014 first quarter 5.1% in the 2013 fourth quarter and 6.8% in the 2013 third quarter.

This excludes an unfavorable foreign currency exchange impact of about 1% in each of those three quarters. Second quarter 2014 net earnings were $15.5 million or $0.83 per share. In the year ago quarter Tennant reported net earnings of $14.3 million or $0.76 per share.

Turning now to a more detailed review of the 2014 second quarter. Our sales are categorized in three geographic regions which are the Americas which encompasses all 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 second quarter organic sales increased approximately 11.1% excluding about 1% of unfavorable foreign currency impact. Record quarterly sales in North America were fueled by strong sales of sweepers and scrubbers, this included scrubbers equipped with ec-water technology and continued demand for new products.

In EMEA, our organic sales declined about 1.9%, excluding a favorable foreign currency impact of approximately 5.5%. We had another good quarter in our city cleaning business with increased year-over-year sales for the third consecutive quarter. Revenue in other areas was down primarily the sales for our master distributor in our Central Eastern Europe, Middle East and African markets. EMEA’s 2014 first quarter organic sales did grow about 5.4% excluding a favorable foreign currency impact of approximately 4.5%.

As Chris noted our strategies are on track in EMEA. The sales decline in the 2014 second quarter was predominantly due to timing of orders and we expect a return on organic sales growth in the 2014 second half. We also anticipate the EMEA profit margins will continue to improve. This is a result of process improvement projects as well as benefits from the restructuring actions initiated last year.

In Tennant's Asia-Pacific region organic sales rose approximately 18.9%, excluding an unfavorable foreign currency impact of about 3%. Organic sales increased for the fifth consecutive quarter in this region. Growth in the 2014 second quarter was broad-based and included solid sales performance in China which had organic sales growth of approximately 25% as Chris mentioned.

Tennant’s gross margin for the 2014 second quarter was 43.5% compared to 43.8% in the prior year quarter. This was within our target range of 43% to 44%. Gross margin in 2014 second quarter was 30 basis points lower than the prior year quarter due primarily to cost related to hiring and training additional manufacturing employees to support higher levels of production.

Gross margin increased sequentially from 41.8% in the 2014 first quarter to 43.5% in the 2014 second quarter. This sequential improvement was due primarily to higher mix of sales due to direct selling channel which tend to have higher gross margins and also benefits from recently enacted selling price increases.

While fluctuations can occur due to shifts in both product mix and selling channel mix, and changes in cost and selling prices, we anticipate the gross margin for the 2014 full year will be within our target range.

Research and development expense in the 2014 second quarter totaled $7.7 million or 3.5% of sales compared to $7.8 million or 3.9% of sales in the prior year quarter. We continue to invest in both our core business and [OREO] scenario which is focused on advancing a suite of sustainable water based cleaning technologies.

Selling and administrative expense in the 2014 second quarter totaled $64.5 million or 29.4% of sales. This compares the S&A in the second quarter of last year $58.3 million or 29.1% of sales. To accelerate future growth, we are making targeted strategic investments in this area that include additional direct sales, distribution, and marketing capabilities. It’s worth noting that we succeeded in reducing S&A as adjusted to under 30% of sales in three over the last five quarters, which were the lowest percentages achieved in the last 10 years.

Our 2014 second quarter operating profit totaled $23.1 million or 10.6% of sales compared to the year earlier operating profit of $21.6 million or 10.8% of sales. We remain committed to our goal of 12% or higher operating profit margin by successfully executing our strategic priorities and assuming the 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 costs essentially flat in our manufacturing areas as volume rises, striving for zero net inflation of the gross profit line and standardizing and simplifying processes globally 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 on 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 have achieved our targeted organic revenue growth in the mid to high single digit rage in both the third and fourth quarters of 2013 and we now reported 10.5% in the 2014 first quarter and 8.9% in the 2014 second quarter. These past four 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 half was 32.6%. The base tax rate of 32.3% which excludes routine discrete tax items was within our targeted range of 31% to 33%. Note that we are not able to include any benefit in the 2014 first half for the federal R&D tax credit as this has not yet been reenacted for 2014.

Turning now to the balance sheet. Again, this continues to be very strong. Net receivables at the end of the 2014 second quarter were $158.3 million versus $146.8 million a year earlier. Quarterly average accounts receivable days outstanding were 64 days for the second quarter compared to 61 days in the 2013 second quarter.

Tennant's inventories at the end of the 2014 second quarter were $79 million versus $62.7 million a year earlier. Quarterly average FIFO days inventory in hand were 79 days for the 2014 second quarter compared to 75 days in the year ago quarter.

Capital expenditures of $7.4 million in the 2014 first half were comparable to the $7.2 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 was $10.5 million in the 2014 first half versus cash from operations of $15.2 million in the 2013 first half. The decrease in cash from operations was primarily due to an increase in working capital as a result of our growth initiatives.

Cash and cash equivalents totaled $62.6 million, up $14 million from $48.6 million a year ago. The company's total debt of $28.2 million declined $4 million from $32.2 million a year ago. Our debt-to-capital ratio was 9.5% at the end of the 2014 second quarter versus 11.8% a year ago.

Regarding other aspects of our capital structure, effective with the June 2014 dividend, Tennant raised the payment 11% from $0.18 to $0.20 per share. We paid cash dividend for $7.2 million in the 2014 first half compared to $6.6 million in the first half of last year.

Reflecting our commitment to shareholder return, Tennant has now increased our annual cash dividend payout for 43 consecutive years. During the 2014 first half, we purchased 217,534 shares of Tenant stock at an average price of $62.56 per share for a total cash outlay of $13.6 million. As of June 30, 2014, we had 413,069 shares remaining under our repurchase program.

Moving now to our outlook for 2014. As Chris said, based on the 2014 first half results and expectations of future performance, we are increasing our sales range and raising the low end of our earnings range guidance. We now estimate 2014 full year net sales in the range of 800 million to 815 million, up 6% to 8% over last year.

We anticipate earnings in the range of $2.60 to $2.80 per diluted share, an increase of 15% to 24% compared to 2013 as adjusted. Our previous guidance estimated 2014 full year net sales in the range of $780 million to $800 million and earnings in the range of $2.50 to $2.80 per diluted share.

For the full year 2013, adjusted earnings per share totaled $2.26 on net sales of 752 million. Our current 2014 annul financial outlook includes following expectations. Modest economic improvement in North America and Europe and steady growth in emerging markets, foreign currency impact on sales for the full year in the range of neutral to an unfavorable 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 that has not been reenacted for 2014. Therefore we are not allowed to include its favorable impact in the 2014 tax rate we record until it is enacted.

While we do not provide detailed quarterly guidance, we do expect our 2014 third quarter sales level will be at about the average of our 2014 first and second quarter sales levels. As I mentioned in last quarter’s conference call, 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. As a result, we are not anticipating that we will achieve an improvement in S&A leverage in the 2014 third quarter as compared to the prior year quarter.

With regard to diluted earnings per share in the 2014 third quarter, we are expecting quarter-over-quarter growth of up to 20%. Importantly, we expect an improvement in our operating profit margin in both the 2014 third and fourth quarters compared to the respective quarters on the prior year.

And now, we’d like to open up the call to any questions. Trishanta?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Jason Ursaner with CJS Securities.

Jason Ursaner - CJS Securities

Good morning. Congratulations on a great quarter.

Chris Killingstad

Thank you.

Jason Ursaner - CJS Securities

Just first on the long-term growth strategy. Chris, you talked a lot about the investments you need to make in order to prepare the global platform for the growth you're anticipating. And just generally when I look at SG&A, obviously it did move up quite a bit in the quarter. I mean I heard the commentary on increasing in line with sale. So maybe more qualitatively or maybe in terms of headcount, how far along you think you are on making those investments, how confident do you feel that you’re finding the right people and putting the money effectively into the parts of your business that you want?

Tom Paulson

I'll take that one Jason. We're pretty far along and we do expect as I’ve just commented that we will not see improvement, we don't expect to see improved leverage in the third quarter, but as we begin to move forward, we begin to expect to see improvement in our leverage, not necessarily in every single quarter, but we will continue to see improvement. It’s paramount to the delivery of the 12% or better operating margin and we have to get our S&A expanding at somewhere 28% or lower as a percent of revenue.

As far as the headcount adds, we've added about -- almost 200 heads in the last 18 months. So that's significantly more than -- we haven’t added head since, our headcounts was going down for the crisis. We hit a low point of 2,800 employees in the middle of 2009 and we didn’t add heads for effectively almost four years and now we have added 196 in the last 18 months. Most of those heads have predominantly been in the sales function the service our marketing organization and most recently in the fourth quarter. As I commented we began to add heads manufacturing as we have ramped up for higher production levels but those heads have come in those areas and we don’t believe we will see a spur where we will add that number head in such a short period again as we go forward. We will be more paced as we add and we frankly had led our capacity go in some places where we just had many opportunities to quickly add heads. And I would also comment that those head haven’t reached their full potential, yet either that will be coming down the pike as it takes at least a year for a sales person to really reach their peak revenue power and we are just beginning that down that path here.

Chris Killingstad

The other thing that I would add is that really nice thing here is that we are adding heads based on an analysis of our global geographies and vertical markets and figuring out where we have the biggest potential to grow. So these are targeted investments and as you see we took up our sales guidance we did take up the high end of our earnings guidance because we fully anticipate that some of these investments are going to return benefits that are so attractive that we need to continue to invest in them to accelerate our revenue growth which as you know is our number one priority at the moment. So it’s a good problem to have and we are off to a start, I think you are seeing that some of the sales gains we are getting here in the first two quarters are partially result from the early success of the people adds we've made especially in the marketplace.

Jason Ursaner - CJS Securities

Would agree, and really appreciate that level of detail. Just with the new product strategy, the new introduction, the T17 and the S30, assuming both are part of the modularization strategy, if we maybe take a step back and look at the T12, which has been out for a little longer now and you've gone through the staged manufacturing, that's all complete, are you seeing the margin benefit from just overall modularization that you would've expected?

Chris Killingstad

Yes, the answer is yes. We're getting the gross margin benefits that we had anticipated. And then with the T17 and the S30, you've got to remember, we still say that the T12 is one of our key new product sales drivers, because we tend to kind of ramp up sales of new products over somewhere between a two and a three year period for that peak, which is a really nice thing.

So, we haven't even hit the peak annual sales for the T12 and we're only getting started on the T17 and the S30, which should benefit us significantly over the next couple of years at higher margins.

Jason Ursaner - CJS Securities

And are both of those going to have manufacturing rollouts similar to the T12?

Tom Paulson

The difference will be right now that the T12, we actually started up in three of our key factories in the U.S., in Europe and also in China. And the T17 is only right now the day we had manufactured in two factories and that's in the U.S. and Europe. And we were just completing the start up in Europe of that product. And the current time we don't intend to produce it in China, it's a fairly more expensive product roughly twice the price of the T12. And right now we don't see the demand for that level of product being high enough produced in China, not to say that we won't move it at some point in time because we fully intend to continue to move more and more production into China to satisfy not only the Chinese market but the Asia Pacific market.

Jason Ursaner - CJS Securities

Okay. And just last question from me. The rollout of the North America style strategic accounts, in Asia is it mainly focused on western companies expanding their operations there or is it also capturing a lot of the larger local companies?

Chris Killingstad

I think it's both. I think you start with the western companies like they’re easier to penetrate but our largest strategic account in China RT-Mart is actually a Chinese retail chain.

Tom Paulson

And the big benefit we'll see is we believe in China as we move towards the same type of the structure effectively in Australia which is our largest and most mature market in Asia. We already have a very similar structure how we run the selling organization as we do in North America. There is lots of similarities between the Australian business and North America just, it's just smaller obviously but we do have a number one share there and it's many similarities.

Jason Ursaner - CJS Securities

Okay, great. I appreciate it, I'll jump back in the queue.

Tom Paulson

All right, my pleasure. Thank you.

Operator

Your next question comes from Joe Maxa with Dougherty & Company.

Joe Maxa - Dougherty & Company

Thank you. Good morning, nice quarter.

Chris Killingstad

Good morning, Joe. Thank you.

Joe Maxa - Dougherty & Company

So just looking at the guidance, 6% to 8% for the year versus the stronger first half; in the back half, you gave some color but I am just wondering is there or are there some tougher comps or what are we seeing where you might see that deal growth rate de-accelerate in the second half?

Tom Paulson

As we generally are Joe, we hope we’re being conservative. And we certainly -- we're very comfortable with the sales revenue range we gave out there. We are seeing tougher comps so that is part of the de-acceleration. We definitely as you remember, we did return organic growth in the back half of last year, so it does make the comps tougher from a revenue point of view.

Joe Maxa - Dougherty & Company

Do you need the new products like the os3, the T17 to really gain meaningful traction to hit the upper end of that range you’ve given?

Tom Paulson

Broadly speaking we do need success in new products and we fully expect that we’ll see improvement in our new products in the back half of the year. And the biggest new product that we need is the T17; I mean that’s the big revenue generator. All of our new products are important but that’s the one that we expect to generate the most revenue. And we really won’t see that hit its drag until the back half of the year but we need new product success.

Chris Killingstad

Yes. And I’d say just T17 is important but remember T12 is still the biggest driver of new product growth and we haven’t reached the peak annual sales on that one. So that’s going to be the key. And we’re really hopeful that our new line of burnishers, these walk-behind burnishers that are battery powered but the level of propane like performance could be a break through for us because most of our customers are really proactively looking for ways to eliminate propane use inside their facilities. The other thing I would say on Orbio is that while we’re very optimistic about Orbio and the os3, I think that really took off in the second half that would be a better fit over and above what we have currently projected.

Joe Maxa - Dougherty & Company

And then feedbacks on all these new products, I mean you’ve given some color but are you expecting I guess -- it’s hard to tell I mean what’s the initial feedback but how fast these things might ramp?

Chris Killingstad

No, I mean we know from history especially on the industrial side how they ramp and we know that they don’t reach peak annual sales until second or third year. They are off to starts that fully meet our expectations at this point, but as you said it's early days. And hopefully in a quarter or two be able to announce that the T17 and some of these other products have exceeded our expectations which as you remember, the T12 did in 2013 and continues to do this year.

Joe Maxa - Dougherty & Company

Yes. Just one point to clarification Tom, the EPS for Q3 or did could indicate was going to be 20% year-over-year bulk park?

Tom Paulson

Yes, we said no higher than 20%. And I mean we're really -- a couple of things going on there. One, I mean we do expect to continue to invest, and we don't anticipate creating any expense, S&A leverage and Q3. And the other piece is that in Q4, remember that we are really comparing against a very high tax rate, we have some unusual items in Q4 last year and we're expecting to have a fairly significantly lower tax rate in the quarter in Q4 than -- this year than last year.

Those are couple of the pieces or color that we just wanted to make sure people didn’t get too exuberant in Q3 relative to what we've experienced in the first couple of quarters.

Joe Maxa - Dougherty & Company

Thank you.

Tom Paulson

You're welcome.

Chris Killingstad

Welcome Joe.

Operator

Your next question comes from Rosemarie Morbelli with Gabelli & Company.

Rosemarie Morbelli - Gabelli & Company

Good morning and congratulations.

Chris Killingstad

Thanks Rosemarie.

Tom Paulson

Thanks Rosemarie.

Rosemarie Morbelli - Gabelli & Company

One quick clarification on the operating margin, your 12% target, is that for 2017 as well?

Tom Paulson

We would hope that we can actually achieve that on a sustain basis before 2017. What we really would say is assuming success in our $1 billion target; we would believe that we'll have the ability to take our operating margins above that 12% with the $1 billion of revenue. So we would certainly hope that we would get there on a sustained basis before achieving that $1 billion, we just haven’t committed to a specific timing on that.

Rosemarie Morbelli - Gabelli & Company

Okay, thanks. And I was wondering if you could give at least me a little more on the Orbio os3. I mean this is the electrolysis, no-chemical products and then you add antimicrobial products, or is it part of the electrolysis that results in killing bacteria or microbes?

Chris Killingstad

Rosemarie, this is Chris and remember the first product we launched three, four years ago now is the 5,000 SC which only dispensed a cleaning solutions. What we launched in the April and May time period is the os3 on-site, on-demand generation of both a cleaning solution and an antimicrobial solution that disinfects and sanitizes. And in both cases, we use water electrolysis. So water electricity and a small amount of salt is just that way the solution is manipulated, allows us to produce either a cleaning solution or a sanitizing and disinfection solution. The other beauty with this unit is it half the size and really half the cost of the 5,000 SC but it provides twice the benefit because of the two streams and it’s small, it’s affordable. And so far what we are doing here is that we are trying to get as many units placed with big potential customers in the key verticals that we have chosen to compete in and we want to handhold those key customers to ensure that the testing goes really well because our experience is if the testing goes well and these are customers that can order many units than they will start placing those unit orders and we’re anticipating that's going to start happening in the back half of this year.

But we do know based on our audits of the customers that have units in place is that they are very pleased with the performance and the simplicity of the os3 which bodes really well for the future and we remain usually excited by its prospects.

Rosemarie Morbelli - Gabelli & Company

So are we talking because of the disinfection part of it, are we talking mostly about schools and hospitals as opposed to industrial customers?

Chris Killingstad

All of our customers really do use a mix of cleaning chemicals and sanitizing disinfecting chemicals. I mean most facilities have bathrooms; many have kitchens and which need to be sanitized and disinfected.

So, one of the issues we had with the 5,000 were only provided a cleaning solution and so only saw part of their cleaning problem. What they needed was one solution, one protocol for cleaning, sanitizing and disinfecting so they could eliminate all their traditional cleaning, sanitizing and disinfecting chemicals. And with the os3, they now have that. Right? And they are also finding that it's, on-site, on-demand which is really nice versus having to order chemicals, store chemicals and figure out how to dispose of them. And it is extremely simple to use as what we found from their operators on a day-to-day basis.

Rosemarie Morbelli - Gabelli & Company

Okay, great. Thank you.

Chris Killingstad

You are welcome.

Operator

(Operator Instructions). The next question comes from Bhupender Bohra from Jefferies.

Bhupender Bohra - Jefferies

Hi, good morning Chris and Tom.

Chris Killingstad

Good morning.

Tom Paulson

Good morning, Bhupender.

Bhupender Bohra - Jefferies

Yes, nice quarter.

Tom Paulson

Thank you.

Bhupender Bohra - Jefferies

So, the first question, if you guys can update on the pricing initiative like just give us some color on how that is being accepted by your customers?

Tom Paulson

Yes, we did achieve about -- we’ve got about 1% of pricing benefit in the second quarter and for the -- on a year-to-date basis we're somewhere between 0.5% and a full percent of pricing benefit on a year-to-date basis. And we expect, we just might do better than 1% pricing benefit for the balance of the year. I mean we expect a full year to be similar, may be a little bit better than last two years we we’ve got about 1% of pricing benefit.

So it's in line with our expectations and I would say that the pricing has been accepted. And it's also it doesn't hurt that we are beginning to see some inflation. But particularly in steel and resins are two areas that affect our cost structure. And we are seeing inflation there and our customers understand that and makes -- improves our ability to price.

Bhupender Bohra - Jefferies

Okay. The second question on the Americas, you guys have been giving some color in previous calls on especially Latin America and some of the regions within Americas; what kind of drove the organic growth can you give us some color and from geographic point of view and from commercial and industrial end market point of view?

Chris Killingstad

Well, I would say that North America will continue to be very strong. I mean the growth investments that we’ve made in North America are definitely paying dividends, you saw they grew by 11.1% organically in the second quarter. Now, I am not sure they’re going to grow at that rate going forward. Remember, we did say that we have the biggest deal in the company’s history and that was focused on North America in the second quarter, that large school district, but strong growth there. You read the press like we do that Brazil’s economy has slowed down, that’s been another growth driver for us. So, we continue to expect growth in Brazil but maybe not at the high levels that we’ve seen over the last two to three years. Mexico actually is growing nicely for us and the rest of the Latin American economies which are not so material to the overall America’s results but nonetheless are performing and will continue to do so.

Bhupender Bohra - Jefferies

Okay. So, on that if I look at our estimates, let’s say [suite] estimates or the numbers we had for the second quarter and you guys actually raise the sales guidance, actually more than what the beat was. So, where do you see that confidence actually in the second half, like which -- I mean you’re expecting North America to kind of slowdown or not grow at the same rate? Do you see more like Europe is actually coming back up a lot or Asia Pacific actually doing much more than what it did?

Chris Killingstad

No, I mean we see growth across the board. I mean as I said, I didn’t think we were going to grow to 11.1% in North America but I think we’re going to see high single-digits growth in North America in the back half still. EMEA Europe, Middle East, Africa decline by 1.9%; we’re saying that that’s going to get back to organic growth. Remember we had 5.4% organic growth there in the first quarter which I think is more in line with what our expectations are going forward. And Asia-Pacific will continue to be a nice growth driver for us. And also remember that many of the investments we've made and Tom mentioned that we've added about 200 people, and many of those resources are in sales service and marketing. And many of them are just getting up to speed and also they’re at the very early stages of delivering value in the marketplaces they’ve been placed. So that should accelerate as we go through the second half and into 2015.

Bhupender Bohra - Jefferies

Okay. And how we already started selling the T17, or is it going to be?

Chris Killingstad

Just started.

Bhupender Bohra - Jefferies

Just start, okay.

Tom Paulson

Very early days.

Chris Killingstad

Yes. So that all the benefit from that and the S30 and really our walk-behind burnishers which is the other one we have high hopes for, all the benefits from those really is in the future.

Bhupender Bohra - Jefferies

Okay. Thanks a lot guys.

Operator

You have a question from Rosemarie Morbelli with Gabelli & Company.

Rosemarie Morbelli - Gabelli & Company

I was just wondering that large district order; was that a big bump because you filled up the pipeline or is there more to come, it is more for over the longer period that you will fill that pipeline?

Chris Killingstad

Yes, I think that the majority of the products were actually delivered in the second quarter. A portion of that deal will be delivered in the third quarter as well, but the majority was in the second quarter.

Rosemarie Morbelli - Gabelli & Company

Okay. So that would be why we can’t expect to another 11% top-line growth?

Tom Paulson

One other pieces, yes.

Rosemarie Morbelli - Gabelli & Company

Okay. And then lastly, have you seen in the marketplace an impact from Diversey bringing up its machines into North America, and I can't never remember the name?

Tom Paulson

Taski.

Rosemarie Morbelli - Gabelli & Company

Thanks.

Tom Paulson

They’re somebody we pay attention to. I mean they are a much stronger brand in Asia and also in Europe and they have some growth objectives in North America that we are going pay attention to. We can’t say that they are making a big difference yet but we are aware they are coming and we are paying attention but haven’t seen anything dramatic yet.

Rosemarie Morbelli - Gabelli & Company

All right. And they were talking about having recycling machines; I mean dark water coming in and then being recycled within the machines, and which allows using less water. Have you seen that and do you have a similar technology?

Tom Paulson

We have not seen that product in the market yet and I mean I can that it’s an area that mean we are clearly working in that area, the concept of being able to recycle water on-board a machine and not have to dump out the water out of a scrubber is an interesting idea and it would -- it certainly improve efficiencies of a cleaning person, it would also has sustainability side to it but we have not seen that product in the market yet.

Rosemarie Morbelli - Gabelli & Company

Okay, thank you very much.

Tom Paulson

Welcome.

Operator

There are no further questions at this time.

Chris Killingstad

Alright, great. 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. With the first half results that included organic growth of approximately 10% by placing a renewed focus on growing Tennant’s revenues while continuing to leverage our cost structure. We expect to generate stronger 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 look forward to updating you on our 2014 third quarter results in October. Thanks for your time today and for your questions. Take care, everybody.

Operator

Thank you. Ladies and gentlemen, this concludes today's Tennant company second quarter earnings conference call. You may now disconnect.

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