Tennant Company (NYSE:TNC)
Q4 2015 Earnings Conference Call
February 23, 2016 11:00 AM ET
Chris Killingstad - CEO
Tom Paulson - SVP & CFO
[Operator Instructions] Thank you for participating in Tennant Company's fourth 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.
Thanks, Sean. Good morning, everyone, and welcome to Tennant Company's fourth quarter 2015 earnings conference call. I'm 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; Karen Durant, Vice President and Controller; and Tom Stueve, Treasurer.
Our agenda today is to review Tennant's performance during the 2015 fourth quarter and full-year and our outlook for the 2016 full-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.
We are using slides to accompany this conference call. Well, we hope this makes it easier for you to review our results. A taped replay of this conference call along with these slides will be available on our Investor Relations website at investors.tennantco.com for approximately three months after this call.
Now, 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, 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 also provide the most directly comparable GAAP measure. There were special non-GAAP items in the fourth quarter 2015.
Our 2015 fourth quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results for the 2015 fourth quarter and full-year. Our earnings release was issued this morning via Business Wire and is also posted on our Investor Relations website.
At this point, I'll turn the call over to Chris.
Thank you, Tom, and thanks to all of you for joining us this morning. Like other industrial companies, we saw a more sluggish business environment in the 2015 fourth quarter, coupled with continued foreign currency headwinds.
Despite adverse macroeconomic conditions and lapping a strong prior-year quarter, our growth strategies are working. On a constant currency basis, Tennant would have reported 2015 fourth quarter net sales up 0.2% to $216.7 million and adjusted net earnings per diluted share on a constant currency basis of $0.93, equal to the prior-year quarter.
For the 2015 full-year on a constant currency basis, Tennant would have reported organic sales growth of 4.3% and adjusted earnings per diluted share up 11.1%. We know that our growth strategies have led and will continue to lead to market share gains over time. In the current volatile economic environment, one way to validate our performance is to compare results to our only public cleaning industry competitor.
On a global basis, our organic sales growth has outpaced them in each of the last eight quarters through the 2015 third quarter. In our largest region, the Americas, our organic sales growth for the 2015 first nine months was 8.8% compared to their organic sales decline of 4% over the same period. This was on top of our organic sales growth in the Americas of 11.6% for the 2014 full-year, compared to their organic sales growth of 3% for the 2014 full-year.
This is evidence that our growth strategies are working. Our goal is to continue to perform well and remain competitively advantaged in our industry. Contributing to our 2015 fourth quarter results were solid sales through distribution and to strategic accounts, particularly in North America and EMEA.
In Tennant’s largest region, the Americas, organic sales increased approximately 0.5% on top of the very robust organic sales growth of 16% in the prior-year quarter.
We also were pleased to see fourth quarter organic sales gains in the EMEA region for the first time in 2015, where organic sales rose approximately 1.1%. Another bright spot was sales of scrubbers equipped with ec-H2O technology, which increased nearly 4% in the fourth quarter. This set a record quarter for ec-H2O technology sales. For the 2015 full-year, sales of scrubbers equipped with ec-H2O technology grew 2.6% to $156.9 million.
Now I'd like to comment on our sale of the Green Machines outdoor city cleaning line that is noted in our press release. We announced our intent to sell this line in the 2015 third quarter after determining that it did not sufficiently complement our core business. At the end of January 2016, we sold this business to our master distributor for the Central Eastern Europe, Middle East and Africa region. This is the right decision for Tennant. The primary customer for the Green Machines products is municipal governments, where the selling process is much different than it is with our core target customers, and the Green Machines’ products needed further investment to remain competitive.
We are pleased with the structure of this sale. The buyer will continue to invest in and manufacture the product in Scotland and maintain jobs and employment conditions. Additionally, Tennant has an opportunity to generate revenue two ways: by continuing to sell Green Machines in certain regions as a distributor and by serving as the exclusive service provider for Green Machines. The impact of the sale is anticipated to reduce Tennant’s annual revenues by approximately $10 million.
Related to the sale, we appropriately realigned the company's infrastructure costs. This resulted in a restructuring charge in the 2015 fourth quarter. Tom will provide more details on this.
With the Green Machines sale complete, we believe we are well positioned to operate more efficiently. This is so important in a slower growth environment. We are focused on investing in our strongest growth opportunities for Tennant and those are in our core industrial and commercial cleaning solutions. We are confident in our growth strategy. We aim to reach our goal of a $1 billion in organic sales through a strong new product and technology pipeline; sales gains in emerging markets; a return in growth in Europe; ongoing focus on strategic accounts and an enhanced go-to market strategy designed to significantly expand Tennant’s worldwide market coverage and customer base.
Let me spend a few moments updating you on our progress in driving the company's top and bottom line results through innovative products and technologies and efficiencies. We have a strong innovation engine to fuel our revenue growth. Sales of new products introduced within the past three years rose to 26% of equipment revenue for the 2015 full-year. We continued to execute against the strongest new product pipeline in our history. In 2015, Tennant introduce 36 new products, including product variants, that's on top of 55 new products launched from 2012 to 2014.
We are on track to introduce at least 13 new products in 2016, including several significant industrial machine launches. The total number is below recent years, reflecting the considerable investment needed for large industrial product development. We expect introductions in 2017 to return to a number more comparable to 2015. Among our latest new products and technologies are the IRIS Asset Manager and our next generation ec-H2O NanoClean. We are very excited about both of these.
We introduced IRIS in the 2015 fourth quarter, and we recently received a significant order from a large retailer in Europe that specified IRIS, allowing us to displace one of our largest competitors for this important piece of business. The IRIS onboard technology tracks machine productivity and maintenance needs, including machine and ec-H2O usage. It helps customers with large fleets of equipment make informed decisions and reduce their overall cost to clean, which is a very attractive proposition and a fast emerging trend. The data is available online 24/7 through an easy-to-use portal. The IRIS Asset Manager is available on many of our commercial and industrial cleaning machines.
Also the launch of our next generation of sustainable cleaning technology, ec-H2O NanoClean, has been successful. We introduced the ec-H2O NanoClean technology on the T300 Walk-Behind Scrubber and T7 Micro Rider Scrubber. It is now also available on all of our other applicable commercial scrubbers.
The name NanoClean refers to the creation of nano-scale bubbles that are an important part of the cleaning mechanism. Like the original ec-H2O, the next generation ec-H2O NanoClean technology electrically converts water into an innovative solution that offers the same benefits as the original, but cleans better, cleans more soils and is effective in more applications.
In addition, the Orbio os3 continues to gain momentum. The os3 delivers on-site generation of an effective multi-surface cleaner and anti-microbial solution that meets U.S. EPA regulatory guidelines for disinfection and sanitization. It is easy to operate, affordable and compact. Customer satisfaction is high for those who have already adopted this disruptive technology. We still believe the os3 has great potential for growth.
Turning to key digital initiatives. We continued the global rollout of our new customer relationship management or CRM marketing and sales management tool. This system helps us identify new customers, grow our existing business and improve the overall Tennant customer experience. As I mentioned on our call last quarter, we already have implemented our new CRM solution in North America, EMEA and Australia, and we are benefiting from its improved sales analytical capabilities. We expect to complete the rollout to Japan, China and other regions early this year.
E-commerce continues to grow as an important sales platform and customer interface for Tennant. We estimate that more than 70% of our customers start their buying journey online, and increasingly, they are purchasing parts and consumables this way. Our progress in building a more robust platform is on track and our secure My Tennant portal is the first step in this effort. It is generating more inquiries and more cost-effective sales for us. E-commerce is a growing trend in other industries and we expect this evaluation to occur in the cleaning industry as well.
In a few years, we anticipate being able to report e-commerce as another significant revenue channel, along with our existing direct distribution and strategic account channels. These are just a few examples of the work we have done to position us for continued success.
Now, I'd like to take a moment to welcome our newest Board member. Just last week, we announced the addition of David Windley to Tennant’s Board of Directors. David is President of IQTalent Partners, which is that talent acquisition professional services firm. Before that, he was the Chief Human Resource Officer at Yahoo. His prior experience also includes serving in human resource leadership roles at Microsoft and Intuit. Over his 30-plus year career, David has helped companies build high performing leadership teams and acquire the right talent to effectively deliver corporate strategies. We look forward to benefiting from his insights, as we continue to deliver innovative products and solutions that reinvent the world cleans.
Our platform to accelerate organic sales is working. We have a diverse portfolio of initiatives that are creating value through new product introductions and expanding our global sales and marketing initiatives to increase our global market share, while concurrently running a more efficient business to raise productivity.
While we are seeing global economic sluggishness and unfavorable foreign currency impact carry-forward from the latter part of 2015 into the early part of this year, we are staying in the course strategically, but proceeding cautiously. We remain committed to both our organic growth goal of $1 billion in sales, as well as a 12% or above operating profit margin.
Now I'll ask Tom to take you through Tennant’s fourth quarter financial results. Tom?
Thanks Chris. In my comments today, all references to earnings per share are on a fully diluted basis. Also please note, as I go through the results, I'll generally not comment on the year-to-date financials as those are detailed on the earning release.
For the fourth quarter ended December 31, 2015, Tennant reported net sales of $205.9 million, compared to $216.3 million in the prior-year quarter. Excluding an unfavorable foreign currency exchange impact of about 5%, organic sales grew approximately 0.2% in the 2015 fourth quarter. On a reported basis, the 2015 fourth quarter sales of $205.9 million were 0.5% higher sequentially compared to the 2015 third quarter.
For the 2015 full-year, organic sales rose approximately 4.3%, excluding an unfavorable foreign currency exchange impact of about 5.5%. For the 2014 full-year, organic sales rose approximately 10.3%, excluding an unfavorable foreign currency exchange impact of about 1%. As Chris mentioned, we believe our growth strategy will allow us to continue to increase our market share.
As adjusted, our fourth quarter 2015 net earnings were $14 million or $0.78 per share. These as-adjusted results exclude the restructuring charge of $2 million pre-tax or a loss of $0.09 per share and a $0.04 per share favorable tax true-up related to the 2015 third quarter long-lived asset impairment charge. In the year-ago quarter, Tennant reported net earnings of $17.5 million or $0.93 per share. Foreign currency exchange headwinds unfavorably impacted our 2015 fourth quarter financial results. I'll provide more information about the special items and foreign currency exchange impact in just a few minutes.
Turning now to a more detailed review of the 2015 fourth quarter. Our sales are categorized into 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, 2015 fourth quarter organic sales increased approximately 0.5%, excluding about 3% of unfavorable foreign currency impact. Organic sales in the fourth quarter in North America increased approximately 1.6% and were fueled by strong sales through distribution and to strategic accounts, including sales of new products.
In the 2015 fourth quarter, Latin America organic sales declined approximately 11%. However, organic sales growth in Brazil was slightly positive and above 0.3%, despite the continued economic headwinds. For the 2015 full-year, Brazil achieved organic sales growth of approximately 3.5%. This is an important emerging market for us and we remain confident about the long-term growth prospects there.
In EMEA, our organic sales in the 2015 fourth quarter increased approximately 1.1%, excluding an unfavorable foreign currency impact of about 10.5%. Strong sales to our master distributor for the Central Eastern Europe, Middle East and Africa or CEMEA region and organic sales growth in Western Europe, were partially offset by lower sales of outdoor equipment.
As Chris mentioned, at the end of January 2016, we sold the Green Machines outdoor city cleaning line to our master distributor for the CEMEA region. As of December 31, 2015, our Green Machine assets were still classified as held-for-sale. In addition to the restructuring charge we recorded in the 2015 third quarter, we also recorded a $2 million pre-tax restructuring charge in the 2015 fourth quarter. These restructuring actions were designed to reduce our infrastructure cost and consisted primarily of severance.
In the Asia-Pacific region, organic sales in the 2015 fourth quarter decreased 3.6%, excluding an unfavorable foreign currency impact of about 8%. Organic sales growth was particularly strong in Australia and was also positive in China and Japan. However, this was more than offset by lower organic sales in the other Asian countries. For the 2015 full-year, organic sales in China rose approximately 5.5% compared to the prior-year.
Tennant's gross margin for the 2015 fourth quarter was 42.4% compared to 43% in the prior-year quarter. Unfavorably impacting gross margin was a large percent of sales through distribution that channel tends to have lower gross margins. Also these results include foreign currency headwinds that unfavorably impact the gross margins by approximately 90 basis points. Even so, we were still able to achieve a gross margin of 43% for the 2015 full-year.
Research and development expense in the 2015 fourth quarter totaled $8.1 million or 3.9% of sales compared to $7.5 million or 3.4% of sales in the prior-year quarter. We continued 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 2015 fourth quarter as-adjusted to exclude the $2 million pre-tax restructuring charge totaled $59.5 million or 28.9 % of sales. Although at a slower pace, we continue to invest in our sales growth and efficiency initiatives, which combined with the benefits from our restructuring charges, are anticipated to improve S&A leverage in future quarters. S&A in the fourth quarter of 2014 was $63 million or 29.1% of sales.
Our 2015 fourth quarter operating profit as-adjusted to exclude the $2 million restructuring charge totaled $19.7 million or 9.6% of sales compared to the year earlier operating profit of $22.6 million or 10.5% of sales. We have routinely discussed the impact of foreign currency exchange on our sales, but with a significant change in foreign exchange rates during 2015, we believe it is helpful to provide additional information.
As many of you know, in a global company such as Tennant, isolating the impact of foreign currency exchange is complicated. We have calculated an estimated constant currency income statement, which assumes no change in exchange rates from the prior year. In so doing, we are then able to compare that to our actual financial results to isolate the estimated impact of foreign currency exchange.
Here is a recap of the estimated foreign currency exchange impact on our 2015 fourth quarter financial results. Unfavorable impact to sales of approximately 5% or about $10.8 million. Unfavorable impact to gross margin of 90 basis points; using a constant currency, our gross margin would have been about 43.3% compared to 42.4% as-reported. Unfavorable impact to operating profit of approximately $3.6 million; using a constant currency, our operating profit margin would have been about 10.8% compared to 9.6% as-adjusted.
And unfavorable impact of earnings per share of approximately $0.15; using a constant currency, our earnings per share would have been about $0.93 compared to $0.78 as-adjusted. The estimated unfavorable impact from foreign currency exchange during the 2015 fourth quarter was a bit larger than we anticipated, due to the prevailing strength of the U.S. dollar.
We continue to actively work on a number of opportunities to help mitigate the foreign currency exchange headwinds that include: increasing selling prices in the affected local markets, where possible; starting to produce and ship some products from locations with a more favorable foreign currency exchange pairing; and expanding the scope of our hedging strategies to include cash flow hedging in order to hedge forecasted foreign currency transactions with foreign exchange option contracts or forward contracts.
Despite external circumstances beyond our control, we remain committed to our goal of a 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 cost essentially flat in our manufacturing areas, as volume rises; striving for zero net inflation at 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.
We continue to successfully execute our tax strategies. Tennant's overall effective tax rate for the full 2015 full-year excluding the special items was 29.6%, compared to 30.7% for the first nine months of 2015, and compared to 27.2% for the 2014 full-year. The base tax rate for the 2015 full-year was 30.7%, which excludes special items and also routine discrete tax items. The Federal R&D tax credit was reenacted before year-end, so the full year favorable impact was all recorded in the 2015 fourth quarter.
Turning now to the balance sheet. Again, this continues to be very strong. Net receivables at the end of the 2015 fourth quarter were $140.4 million versus $152.4 million a year earlier. Quarterly average accounts receivable days outstanding were 61 days for the fourth quarter compared to 62 days in the prior-year quarter.
Tennant's inventories at the end of the 2015 fourth quarter were $77.3 million versus $80.5 million a year earlier. Quarterly average FIFO days inventory on hand were 89 days for the 2015 fourth quarter compared to 84 days in the year-ago quarter. Capital expenditures at $24.8 million and the 2015 full-year were $5.2 million higher than $19.6 million in the prior year, with planned investments in investment technology process improvement projects, tooling related to new product development and manufacturing equipment.
Tennant's cash from operations was $45.2 million in the 2015 full-year, down $14.2 million compared to $59.4 million in the prior-year, primarily due to the timing of tax payments. Cash and cash equivalents totaled $51.3 million versus $93 million a year ago. Total debt of $24.7 million declined $3.4 million from $28.1 million a year ago. Our debt-to-capital ratio was 8.9% at the end of the 2015 compared to 9.1% a year ago.
Regarding other aspects of our capital structure, Tennant is currently paying a quarterly dividend of $0.20 per share. We paid cash dividends of $14.5 million in the 2015 full-year. Reflecting our commitment to shareholder return, we're proud to say that Tennant has increased the annual cash dividend payout for 44 consecutive years.
During the 2015 full-year, we purchased 764,000 shares of Tennant's stock for a total cash outlay of $46 million. This was significantly higher than the 2014 full-year when we purchased 225,000 shares for a total cash outlay of $14.1 million. Our Board of Directors authorized a new share repurchase program of up to an additional 1 million shares of Tennant common stock in June of 2015. This authorization underscores the Board's continued confidence in our business and the strength of our capital position.
As of December 31, 2015, we had approximately 642,000 shares remaining under our repurchase program, which aims to enhance shareholder value by providing the financial flexibility to offset any dilutive effect of stock-based compensation programs and to consider repurchases to create value, based on overall market conditions. Assuming the stock market continues to be volatile, we expect to be active in repurchasing Tennant's shares.
Moving now to our outlook for 2016. We estimate 2016 full-year net sales in the range of $795 million to $825 million, down 2.1% to up 1.6%, or approximately 0% to up 4% organically, assuming an unfavorable foreign currency impact on sales in the range of 1% to 2% and a sales decline from the divestiture of approximately 1%. We estimate 2016 full-year earnings in the range of $2.25 to $2.55 per share. Foreign currency exchange headwinds in 2016 are estimated to negatively impact operating profit in the range of $3 million to $6 million on a negative impact of approximately $0.10 to $0.20 per share. On a constant currency basis, 2016 full-year earnings are anticipated to be in the range of $2.35 to $2.75 per share.
The estimated slightly higher effective tax rate in 2016 is also anticipated to negatively impact earnings per share by approximately $0.05. For the 2015 full-year adjusted earnings per share total $2.49 and net sales of $811.8 million.
Our 2016 annual financial outlook includes the following expectations: slower economic growth in North America, modest improvement in Europe and growth in emerging markets; continued negative foreign currency impact on sales for the full-year in the range of an unfavorable 1% to 2% with a $3 million to $6 million negative effect on operating profit; decline in sales of approximately 1% from the sale of the Green Machines outdoor city cleaning line with an immaterial impact on earnings; gross margin performance of approximately 43%; research and development expense of approximately 4% of sales; capital expenditures in the range of $25 million to $30 million; and an effective tax rate of approximately 31%.
Tennant’s operations are performing well and our objective is to continue to build our business for sustained success. We expect our 2016 financial results will be stronger in the second half of the year. And in the first half of the year, the first quarter will be most challenging, especially considering the strong growth we achieved in the 2015 first quarter.
Now, we'd like to open up the call to any questions. Thanks Sean.
[Operator Instructions] And there are currently no questions. Mr. Paulson, I turn the conference back to you.
Do you want to check - we’ll give the queue just another 15 seconds so just to make sure that there isn't questions, then I’ll actually turn it over to Chris to make the closing remarks.
Okay. We’ll close it with Chris.
All right, I will close. While we anticipate foreign currency and global economic volatility to remain challenging in the coming quarters, we believe that Tennant is competitively advantaged through our innovative products and technologies and our go-to market strategy, and we are well positioned to perform efficiently. We remain committed to reaching our goals of a $1 billion in organic sales and a 12% or above operating profit margin, and we are very excited about Tennant's future. We look forward to updating you on our 2016 first quarter results in April. Thank you for your time today and for your questions. Take care everybody.
And this concludes today's conference. You may now disconnect.
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