Good morning. My name is Andrew and I'll be your conference operator today. At this time, I'd 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 at the end of the call. [Operator Instructions] After the Q&A please stay on line for closing remarks from management. [Operator Instructions] 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.

Thanks, Andrew. Good morning, everyone, and welcome to Tennant Company's second quarter 2016 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; and Karen Durant, Vice President and Controller. Our agenda today is to review Tennant's performance during the 2016 second quarter 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. 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. 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. As you saw in our earnings release today, Tennant returned to modest organic growth of approximately 2.4% in the 2016 second quarter. This stemmed primarily from sales to strategic accounts in the Americas and in the Europe, Middle East, Africa, or EMEA regions. The company's second quarter net sales were $216.8 million, with diluted earnings per share of $0.85. On a constant currency basis, Tennant would have reported second quarter earnings per share of $0.89, which would have been up 12.7% versus a year ago. In the Americas region, we posted record second quarter sales and in EMEA we were pleased to see the strongest organic sales growth since the second half of 2014. The company's sales and earnings gains over the prior year quarter demonstrate our ongoing focus on executing our growth strategies and leveraging our operating efficiency. Tennant's operations are performing well and we continue to build our business for sustained success. As I mentioned last quarter, we were encouraged to see rising sales momentum toward the end of the first quarter and into the early second quarter. As we progressed through the second quarter, order patterns were lumpy, reflecting sluggish economic conditions. The third quarter was starting out as expected, although it is early. We anticipate the global economy will continue to be volatile. Based on Tennant's performance to-date and our expectations for the remainder of 2016, we are narrowing our full-year revenue guidance. We are also raising our earnings guidance to reflect a less adverse foreign currency exchange environment than we previously anticipated. Tom will discuss our guidance in more detail in just a moment. As I said before, we are staying the course strategically. We are committed to reaching our goals…

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 were detailed in the earnings release. For the second quarter ending June 30, 2016, Tennant reported net sales of $216.8 million, compared to sales of $215.4 million in the 2015 second quarter. Excluding an unfavorable foreign currency exchange impact of about 1% and the impact from the divestiture of the Green Machines outdoor city cleaning line reduced net sales by 0.7%. Organic sales grew approximately 2.4%, as Chris noted. Second quarter 2016 net earnings were $15.3 million, or $0.85 per share. In the year ago quarter Tennant reported net earnings of $14.8 million or $0.79 per share. Foreign currency exchange head winds unfavorably impacted our 2016 second quarter financial results. I'll provide more information about this in just a few minutes. Turning now to a more detailed review of the 2016 second 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, 2016 second quarter organic sales increased approximately 2.5%, excluding about 1% of unfavorable foreign currency impact. This is despite lacking the strong Americas organic sales growth of approximately 7.5% in the prior year quarter. Organic sales in the 2016 second quarter benefited from sales to strategic accounts and sales of new products. Organic sales growth in Latin America was approximately 15%, despite the continued economic head winds. This is an important emerging market for us and we remain confident about the long-term growth prospects…

[Operator Instructions] Your first question comes from the line of Joe Maxa with Daugherty & Company. Your line is open.

Thank you, good morning.

Good morning, Joe.

Good morning, Joe.

Congrats on a nice quarter.

Thank you.

Wanted to ask a little bit about the guidance, sounded like the Q3 tougher comp was that in a certain geography? And then to continue along those thoughts with your guidance, you talked about growth in emerging markets. Are you suggesting that Asia-Pacific region may see some growth in the back half of the year versus the weakness you saw in the first half?

We do anticipate right now, I mean, we had - we're obviously not pleased with our growth organically in Asia-Pacific in the front half and as we were going into second quarter after our decline in Q1, we commented that we were concerned we might not return a growth in Q2 and in fact we didn't, but we now anticipate based on some adjustments to the business we've made that we will see some level of organic growth in the back half of the year. Regarding your question about the Q3 comparison, there's an - and Asia-Pacific will be a tough one here. The Americas was really - grew 8% organically in the third quarter last year, EMEA was down a couple percent, but APAC had a great quarter, was up 21% so the Q3 comp in APAC is going to be tough. It gets easier as we go into Q4.

I see, okay. And then on Europe, nice organic growth, or I should say EMEA, are you expecting that to continue? What happened to drive that growth in this quarter? And …

Yeah, I mean, we …

…back half.

The two biggies in EMEA, I mean, we've been at this a long time and been making adjustments to the business. I would consider Q2 a bit of a break through. The particular strength was in strategic accounts in all of our key markets and also new products, which - there's some overlap there obviously we're highly successful.

Thanks a lot.

Joe, this is Chris. I mean, this has been a long-term effort. We've been working on restructuring our EMEA business for a number of years now and I think we're finally in a position where we have the best organization and the best strategy in place we've ever had, so a strong foundation upon which to grow. And an example is, you know, the restructuring we did in the French business, and that's beginning to pay off. I mean, if our business - if I recollect - and maybe, Tom, you have the number, but it was like up 27% in the second quarter.

Yeah. It was dramatic, dramatic growth. And to add on that, Joe, you did comment around the back half. I mean, we do anticipate growth organically in the back half for Europe and for the full year. Not at the rates that we saw in Q2. We would acknowledge that Q2 was certainly better than our typical run rate. We'll take it, but we'd expect to see organic growth but at a lower rate in the back half of the year.

All right. Thank you.

I think the right example where we started, a lot of the restructuring in France first bodes well for the work we've done in the other markets as well over time, which is why we're, you know - even though one quarter is not a trend make, we are somewhat confident now in the future.

The France growth rate was factual, I don't have the actual number in front of me, so it was 27%, which is stellar performance, obviously.

I know it's early, but have you seen or expect to see any impact from the Brexit situation?

You know, it's hard to say. We’d say a couple things. One, we no longer have manufacturing in that country and our revenue exposure is less than 5%. So it's not material. But it's anybody's guess what kind of impact we'll see over the long haul, but it's certainly seemed to stabilize and we're not seeing any impact today.

Thank you.

Thanks, Joe.

The next question comes from the line of Bhupender Bohra with Jeffries. Your line is open.

The question on second quarter, Tom, can you talk about, like, you know, what trends you saw, like, as we, you know, passed through April, May, and June on a monthly basis, you know, did it get stronger? Because as we heard from some of the industrial customers out there, you know, they took some extended shutdowns and, you know, things were not up to the mark in terms of, you know, performance-wise, so could you just give us some flavor, some color on the monthly progression of orders here for the second quarter?

Sure, yeah. It is inconsistent and, I mean, as you remember when we commented and gave guidance for back towards the end of April for the full year, at that point we had seen a strong finish to Q1, particularly the last several weeks of March, and that momentum continued into April and for basically the full month of April, it was pretty darn good. And then it was choppy the rest of the quarter. I mean, it was up and down and it did not honestly finish with momentum. That's one of the reasons why we're being a bit conservative we hope as we look to the rest of the year, but, you know, we didn't finish with as much momentum. We still had a decent open order exposition and our quarter now in Q3 is starting out like it needs to, choppy, but we're seeing the order - we're seeing the level of orders that we need. We'd like to see it be more consistent, but the reality of it is Q3 is made in the back part of August and September. I mean, July, you know, matters, but it really - the last six to seven weeks are where you make the quarter, so we're - we're being a bit tempered in our thoughts.

Right. And the other thing we've seen and we talked about this is that, you know, the business in manufacturing and warehousing is somewhat soft and that's not surprising. You see, you know, business investment, industrial production has been down so that has impacted us. So, I think what you saw is that we have been pretty good at adjusting our efforts against the vertical markets that are more robust right now, where there's more activity, and that's education, health care, and construction.

Right, yeah. That was my next question because I just wanted, you know - good that you gave color on that, commercial versus industrial, I believe most of that North America 2% growth came from the commercial side of the business, right.

Yeah. I mean, but, we have the construction business where we do sell our bigger industrial equipment into construction. So that is actually pretty robust. It's the traditional manufacturing and warehousing part of our business where we have traditionally been strong that's a little bit weaker, but it's weaker across the board for most companies, I think right now, especially in North America.

Okay. That's good. Just one more question. You know, you guys talked about, like, you know, you focused on some new growth avenues here over the long-term medium to long-term telemetry and some robotics and all those things. Just give us some color, like have we -- you talked about, like, IRIS has gained traction. What kind of revenue opportunities IRIS will have over the next few years and, you know, I'm sure like we're in the early stages of robotics here, still haven't seen that yet.

Yeah, I'll comment on that. I mean, we're not in a position to give any specifics around what the telemetry or IRIS will drive in our business. We're really pleased with the traction we're gaining though. We commercialized it in Q4 after several years of hard work and it is mattering and we're actually seeing telemetry being specked into bids and that's advantageous for you see because we think we're a bit ahead of our competitors. They are doing the same things. We think we're advanced. But it is, we're having success, early days and we think it really will matter over the long haul, but we're not prepared to give any specifics, but it will matter. In the case of robotics, you know, there's nothing meaningful in the market today. I mean, but it will happen. It's just a matter of when. And we think before it's going to begin to be material we're probably three years out. Chris commented on that last call. But we're investing. We have a partner and we're really pleased with the progress we're making around being able to get a product commercially into the market here in the not too distant future.

But the most exciting thing, I think, medium long-term is that we are moving away from competing just on cleaning performance, which is a lot harder to do. You could say a Tennant machine is better than a competitive machine, but it's harder to prove. We are starting to look at our customers' needs much more holistically and address a broader array of higher order issues. As we said, managing labor costs, right, at 70% of their costs for the first time we're putting in place solutions such as IRIS and eventually robotics, but even things, like, you know, battery technology and water recycling that address those. And I think those solutions, if we are advantaged, are much stickier, right, because if they adopt them it - the changing costs are much higher and as Tom said we think, we don't know definitively, but when we hear in the market that we are advanced in some of these technologies. And I think first move or advantage could be very meaningful. And that's what we're going for.

Okay. And lastly on the new products share, you guys talked about M17, the battery powered and the new launches, M20 and 30 on the industrial side, you know, when you look at the second half guidance, is anything baked in there from, you know, getting traction in those new products for the year? Or …

One of the positive pieces - it is one of the positive pieces in the back half Bhupender and we're not assuming any great big wins.

Okay.

You know, that typically isn't the way that particularly industrial equipment happens. You gain momentum. We will have more momentum in the back half than we have in the front half and we'll have more momentum next year. So, you know, the back half ability to grow a bit higher is, that is clearly one of the components of that. And I think very importantly the - it really bodes well for next year, where we get a full complete year of those industrial products and remember those are - there's a smaller number in new products, but the ring value of those is much higher and we hope to see momentum for at least two to three years as we go forward.

Well history tells us that on the industrial equipment we see peak annual sales either in the second or third year, but usually in the third year. So this should continue to accelerate for, you know, for another 18 months or so.

Right. Just wanted to make sure there's nothing highly baked in from those products in the second half, especially the fourth quarter here.

No.

These are mostly 2017, 2018 kind of …

Certainly part of the growth, but there's nothing big baked in.

Okay, okay. Got it. Thanks a lot, guys.

You're welcome, Bhupender. A - Chris Killingstad You’re welcome.

Your next question comes from the line of Chris Moore with CJS Securities. Your line is open.

Maybe just focus on the margins for a second. Operating margins were 10.4% this quarter, do you see that as being sustainable for the rest of fiscal 2016?

You know, it would be, certainly not in Q3 and we would expect, you know, we're certainly going to be striving to have our margins be above the prior year, and as you know, Chris, we don't really think about our margins on a sequential basis.

Right.

We really look at our margins and trying to drive improvement versus the prior year and that will be our objective in both Q3 and in Q4. But we're happy with the performance in Q2, but, you know, we want to keep seeing improvement versus the prior year in each and every quarter that we possibly can and that's one of our number 1 objectives every quarter as we're going in.

Got you. From a gross margin kind of trend perspective, the 14 new products that you're introducing, any of them meaningfully higher gross margins, you know, that might impact you next fiscal year? I know Chris talked about the industrial equipment being, you know, strong into the construction arena. Are the gross margins there a little bit better than normal? Or – in that same 44%, 43% range?

They actually are a bit higher.

Okay.

Particularly as we're selling in through some of the rental categories, you know, going to construction. So we do have a little bit better margins there, but our key objective with new products is we always want to have equal to or better margins on the product that it's replacing and so in general over time new product activity does help our margins structure modestly.

Got you, got you. And last question, in terms of – I know that overall target 12% range on the operating margin side, how much of that is coming from, you know, kind of on the lean initiative side versus, you know, growth that you'll need to get there?

The two primary drivers are growth and then very importantly creating leverage in our operating expenses by not adding people in our overhead positions. That's the key, is we need growth and the critical component is we want to add position that drive revenue, meaning through enhanced sales and service coverage and in our functions that are support functions we need to hold the line and really just see inflationary type increases. And so most of it will come through operating expense leverage that will be a result of the growth, and we hope we have upside in our gross margins and that we're not counting on that. We're just counting on our lean efforts through the gross margin line to mitigate inflation.

Got you, okay.

Yeah, but we're actually pretty happy with the way we're operating right now. We're operating pretty efficiently. I mean there's more to come, but if you look at it, I mean, you know – the 43.9% gross margin at the top end of our range and if you look at our S&A expenses they were pretty much flat versus last year, which I think is strong performance in this environment. So if we can continue to remain the discipline that we've established in those two areas and we get a little bit of tailwind on the sales side, we should be able to leverage very nicely.

And we don't talk about it specifically, Chris, but we tend to focus on the lean efforts that are going through our supply chain, you know, operationally. We also add initiatives that are going on around lean in our other support functions that are positively impacting operating expenses. We just tend to not focus as much there, but a lot of the same principles are happening throughout the organization.

Got you. All right, thanks.

Thanks.

You're welcome.

[Operator Instructions] Your next question comes from the line of Marco Rodriguez with Stonegate Capital Markets. Your line is open.

Good morning, guys. Thank you for taking my questions.

Sure, Marco.

Most of my questions have actually been asked and answered, but just a couple of quick follow-ups. Just wanted to dive a little deep into the increased sales you guys saw in the Americas and also EMEA on the strategic accounts, were there any sort of additional marketing activities, promotional activities that help drive those types of sales? If you can just kind of talk a little bit about that and then what your kind of expectations for strategic accounts are for the remainder of the year?

Well, strategic accounts has been our biggest source of growth over the last five years and we continue to count on benefits out of strategic accounts as we go into the future in basically all geographies. And I can't really point to saying there's one marketing campaign that drove incremental strategic account revenue. We tend to be targeting big strategic accounts, not only to penetrate existing customers deeper, but we're constantly going after accounts where we haven't made in-roads yet, and so it's really a combination of deeper penetration with existing strategic accounts and having some wins with new strategic accounts. And in that case, the marketing effort matters, but also the quality of our sales organization, it's very targeted against them and organized around strategic accounts and in conjunction with new products, all those things work together to create the success we're having.

And I would add that some of the strategic account business that we've won we have mentioned that we've won two major deals because of our IRIS technology, one in Europe and one in North America. So IRIS, we feel – we're getting in the door of customers that have not bought from us in the past because of that technology. And I think that bodes really well for the future and, as I said, because we're solving a higher order need for them, it's not just about the cleaning performance anymore. And it's still very, very early phase on IRIS. The other thing I would say is that we are very advantaged in terms of how we're organized around strategic accounts in North America and have been for a number of years. You know, we've duplicated that structure now in Europe, and so going forward we hope to see similar types of benefits.

Got you. Very helpful. Thanks. And last quick question, in terms of the guidance change on EPS due to the FX change, is there one currency in particular that drove you to make the change or is it across the board?

It's really across the board. And no one – no one currency, and we hope we're being conservative. I mean, we’ve adjusted our currency impact down. I mean, we've been relatively in line in the first half, although slightly favorable in total and certainly our expectations are we're going to be a fair amount favorable in the back half, original to our original operating plan. We hope our assumptions are being conservative, but with things like Brexit happening and the volatility I think it's advantageous to just be cautious how we're thinking about it.

Got you. Thanks a lot, guys. I appreciate it.

Thank you, appreciate it.

You're welcome.

Since there are no further questions at this time, I'd like to turn the call over to management for closing remarks.

All right, thanks, Andrew. We were pleased with both our return to organic growth in the second quarter and stronger earnings. We are continuing to pursue our growth agenda. While we anticipate that the global macroeconomic environment will remain challenging, we believe that Tennant is competitively advantaged, your innovative products and technologies and our go-to-market strategy and we are well positioned to leverage our operating efficiency. We remain committed to reaching our goals of a billion dollars 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 third quarter results in October. Thank you for your time today and for your questions. Take care.

Excuse me presenters.

Yes.

We did have one final question come in. Your next question comes from the line of Joseph Garner with Emerald Advisers. Your line is open.

Hey, guys, sorry about that. Chris, I just thought while we have you maybe get your thoughts on how you see the competitive environment and how you think you're doing in terms of market share?

Well, as you know, the only company that reports public information is Nilfisk-Advance, that is part of the NKT Group out of Denmark, so we kind of use them as a proxy in some ways and I can't remember exactly what the statistic is and in terms of how many – you know, how many quarters in a row we actually outperformed them from --

Its nine to ten quarters globally we've outperformed Nilfisk from an organic growth point of view.

Organic growth standpoint nine to ten quarters in a row. That tells you that we're getting market share from them. They along with us, we're the two biggest players in the market. We're seeing Kärcher out of Germany being very active, so we have increased our focus on them and view them maybe as a more significant competitor going forward. But historically, it's always been Nilfisk, but we used the proxy of Nilfisk to say that we are well positioned and we probably have been taking a share over the last 18 months or so.

And in the markets where you've taken some price to offset the FX impact, what have you found have been the responses in those markets? Have the competitors followed or, you know – or are you, you know, kind of taking those and kind of being the only one raising prices? Just kind of curious what responses you're seeing, if any, out there.

Yes, I mean, we've – I can't say that we've had great success taking price increases in those markets. We've taken it where we can. In all honesty in the markets where we would need to take price to offset in places like Australia and Canada are two examples, we have strong market positions. We want to protect our market position so the pricing benefits that we've gotten are not meaningful and so, I mean – and as we look at it overall, Joe, I mean, our pricing benefit through the first half of the year is virtually zero, it's slightly positive.

Right.

And, you know, for the full year, we anticipate very minimal pricing benefit in total. It's about a half a percent through the first half so that's trailing below where we've been in the last few years, so it's pretty tough to get price.

Okay.

And it should be in a non-inflationary environment, it’s common, we see inflation. There's lots of forecasts. We anticipate that we'll be in a position where we'd certainly, based on the trends and what we're hearing is that it could very well be an environment where people are able to take price in our industry in the first quarter of next year.

Very good. Sorry, again, to extend the call. Just I thought the sales results were particularly solid and just wanted to get your thoughts on how those were stacking up versus what you were seeing elsewhere out there in the industry. So thanks a lot. Appreciate it.

No, our pleasure.

Our pleasure, Joe. Thank you.

And there are no further questions at this time.

All right.

Thank you.

Thanks again, everybody. Take care.

This concludes today’s conference call. You may now disconnect.