Tennant Company (TNC) Q4 2017 Earnings Report, Transcript and Summary

Good morning, my name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's Fourth Quarter and Full Year 2017 Earnings Conference Call. This call is being recorded. There will be time for Q&A at the end of the call. [Operator Instructions]. Thank you for participating in Tennant Company's Fourth Quarter and Full Year 2017 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, Jamie. Good morning, everyone, and welcome to Tennant Company's fourth quarter 2017 earnings conference call. I'm Tom Paulson, Senior Vice President and Chief Financial Officer of Tennant Company. Joining me today are Chris Killingstad, Tennant's President and CEO; Andy Cebulla, Vice President of Finance and Corporate Controller; and Jeff Cotter, Senior Vice President, Corporate Counsel and General Secretary. Today we will review progress on our core strategies, Tennant's performance during the 2017 fourth quarter and full year and our outlook for 2018. First, Chris will brief you on our operations and then I'll cover the financials. After that, we'll open up the call for questions. We are using slides to accompany this conference call. We hope this makes it easier for you to review our results. A replay of this conference call along with these slides will be available on our Investor Relations website at investors.tennantco.com following this call until March 31, 2018. 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. This 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 nonoperational items. For each non-GAAP measure, we will also provide the most directly comparable GAAP measure. There were special non-GAAP items in the fourth quarter and the rest of 2017. There were no special non-GAAP items in 2016. Our 2017 fourth quarter earnings release includes a reconciliation of these GAAP measures to our -- these non-GAAP measures to our GAAP 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. I'd like to begin this morning by putting 2017 in context. The management team has a strong vision for Tennant and the growth we want to achieve. And in 2017, we took major ambitious steps toward that goal. I am also pleased to report that we achieved an important milestone by exceeding $1 billion in annual revenue for the first time in our history. Very few areas of our business remained untouched by our strategic and organizational transformation. We experienced significant change during this year, and we had some big wins, and admittedly some challenges. In Q1, we took steps to right-size our business and put the resources in the optimal places to improve our ability to create long-term success. Our global resources are better aligned with promising growth opportunities, and we expect both revenue and cost improvements over time as a result of these enhancements. With IPC, we executed the largest acquisition in Tennant's history. This significant achievement enabled us to further our strategy of diversifying our revenues by region, product category and sales channel. Our IPC integration remains on track, and we remain confident in our ability to achieve anticipated synergies over the next three years. IPC is a formidable company with a strong management team, dedicated people, robust product offering and high customer loyalty. We are committed to preserving these strengths and creating a better combined organization as we move forward. Further, our focus on innovation remains strong, and our new product pipeline continues to churn out a robust offering of products and technologies. In 2017, our core Tennant business launched 32 new products and product variants, and our vitality index was once again above our target of 30%. Finally, we experienced some challenges during 2017. We took important steps to realign our global workforce to support the company's strategic growth initiatives and made investments to improve our service capabilities and manufacturing operations. Much remains to be done. But the moves we made this year have been strategic, performance-enhancing in the long term and within our control. We made important progress in Q4 and are gaining momentum with these initiatives as we move into 2018. For the 2017 fourth quarter, overall consolidated net sales grew nearly 32% to $279 million, reflecting the contribution from IPC. On an organic basis, sales grew 2.1% and adjusted net earnings totaled $0.34 per share. Please keep in mind that both our reported and adjusted EPS in the quarter reflect the impact of accelerated amortization for IPC intangible assets. While we saw continued gross margin challenges in the fourth quarter, most of which were carried over from earlier in the year, there were several areas of positive momentum during the quarter that I'd like to highlight. First, as I mentioned before, we experienced a turnaround in our service operations as we enhanced our staffing and continued to make progress filling our field service trucks and ended the year at historically normal levels. This is an important step to allow us to meet the needs of our customers and return to profitable service growth. Second, our manufacturing operations stabilized and showed improvement throughout the quarter. We have made efforts to drive new efficiencies with investments in technology, robotics and skilled labor. All of these items bode well for 2018. Third, we saw positive sales momentum during the quarter, especially in strategic accounts, and believe this will continue into 2018. Importantly, each of our global regions contributed to organic growth. And we have the best 12-month growth period we've seen in over 10 years in our EMEA region. We are also pleased with APAC, a region challenged historically, which exceeded our expectations and returned to growth within the quarter. As we discussed, we are confident in Tennant's long-term growth plan and its ability to deliver shareholder value. We are committed to diversifying our revenue streams by expanding our sales growth drivers across all geographic regions and managing our go-to-market strategy to address new customer segments and products; building on our recognized technology leadership and supporting our robust new product pipeline; optimizing our cost structure to improve operating efficiency, while continuing to fuel growth investments; strengthening our financial position and balancing solid cash flow, growth investments, debt reduction, dividends and share repurchases; successfully completing the integration of IPC and focusing on our organic growth plans and being open-minded about the right strategic inorganic growth opportunities with potential to further enhance shareholder value. Before I turn it over to Tom, I want to briefly address the idea that was put forward by a shareholder in mid-December. Tennant welcomes open communication with all of its shareholders and values constructive input toward the shared goal of enhancing value. After thoroughly evaluating the potential merger that was suggested by PrimeStone, the board, in consultation with its advisers, concluded that continuing to execute the company's business plan represents the best path forward and is in the best interest of Tennant and its shareholders. We regularly evaluate our strategic direction, and have considered transactions across the industry multiple times over many years as part of the company's regular review of potential options to enhance shareholder value. Prior to announcing the IPC acquisition, we reviewed a range of potential transactions, including the same concept shared by PrimeStone. And we ultimately concluded that the acquisition of IPC was the best way to enhance shareholder value. With the significant progress that we've made to date with the IPC integration, we remain highly confident in that decision. As you heard today, 2017 was a year of major change for Tennant during which we completed the acquisition of IPC, the largest acquisition in our company's history; executed a significant restructuring to lower costs and to support key growth initiatives; and made significant investments to improve Tennant's service capabilities and manufacturing functions. As a result, the board and management team strongly believe that we are positioned to deliver on our long-term growth plan and continue to deliver shareholder value in 2018 and beyond. Now I will ask Tom to take you through Tennant's fourth quarter financial result. Tom?

Thanks, Chris. In my comments today, references to earnings per share on a fully diluted basis except for the 2017 GAAP result, which were calculated with the basic weighted average shares outstanding due to the as-reported net loss. However, non-GAAP 2017 earnings per share are calculated on a fully diluted basis. Also note that our financial results in 2017 include the financial performance of IPC Group, which was acquired at the beginning of April 2017. As a reminder, the first quarter of 2018 will be the last quarter where IPC is broken out and that beyond that, the results will be part of our organic performance. As Chris highlighted, it's important to view our fourth quarter results in the context of our expansive efforts throughout 2017 to better position the business both strategically and operationally for improved long-term sales and earnings goal. These efforts continue as we expect to reap the benefits as we move through 2018. For the fourth quarter ended December 31, 2017, Tennant reported net sales of $279 million or roughly 32% higher compared to the same period last year. On an organic basis, sales rose 2.1%. Our organic sales results exclude a favorable foreign currency exchange impact of about 1.8% and the impact of the IPC acquisition that increased net sales by 28%. Looking at the bottom line, fourth quarter of 2017 [Technical Difficulty] intangible assets related to the IPC acquisition. Turning now to more detailed review of the 2017 fourth quarter. As a reminder, we categorize our sales into three geographic regions, which are, the Americas, which encompass all North America and Latin America; EMEA, which covers Europe, the Middle East and Africa; and lastly, Asia Pacific, which includes China, Japan, Australia and other Asian markets. We took steps early in 2017 to restructure our global workforce to better support the company's most promising growth opportunities. And we are pleased that we were able to generate organic growth in each of our global regions in the fourth quarter. In the Americas, 2017 fourth quarter sales improved 6.4%, 1.8% organically, driven by both North America and Latin America. In North America, fourth quarter sales improved 4.8%, up 1.8% organically, primarily reflecting gains in strategic accounts. Organic sales in Latin America also grew in the 2017 fourth quarter, up more than 24% on a reported basis and 1.7% organically. Performance in this region reflects a strengthening economy in Brazil and stable order patterns in Mexico. In EMEA, sales in the period were consistent with our expectations and, the region posted slight growth on top of particularly strong third quarter performance, which grew 14.6%. Reported sales improved a 143.4% [Technical Difficulty]. Is the operator still online?

Yes, I am.

Can you verify? We just heard from outside of our office here that the people had been cut off from the call.

They were cut of momentarily on the webcast, but is back on now.

And do you know how much we missed, so we could go back and start over again at the appropriate point?

I can check that for you.

Thank you.

The audio was down from Slide 9.

Okay. I'll start at Slide 9 then, and I will repeat that part here. I apologize for everybody out there for the inconvenience of this and we'll move through this. For the fourth quarter ended December 31, 2017, Tennant's reported net sales of $279 million are roughly 32% higher compared to the same period last year. On an organic basis, sales rose 2.1%. Our organic sales results exclude a favorable foreign currency exchange impact of about 1.8% and the impact of the IPC acquisition that increased net sales by 28%. Looking at the bottom line, fourth quarter 2017 net loss was $3.2 million or $0.18 per share. Our reported results in the quarter reflected the impact of several special items. Except for the tax law change application, these items are directly tied to either strategic growth or cost reduction initiatives. Together, these items lowered earnings by $12.8 million. Here is a breakdown. $6.2 million or $0.22 per share of costs related to the previously announced pension plan termination; $2.5 million restructuring charge or $0.10 per share from integration efforts related to IPC; IPC acquisition cost of $1.7 million or $0.08 per share; and a provisional income tax charge of $2.4 million or $0.13 per share to reflect the estimated impacts of the U.S. Tax Cuts and Jobs Act of 2017. Excluding these special items, Tennant reported adjusted net earnings of $6.2 million or $0.34 per share. By comparison, Tennant reported net earnings of $15.4 million or $0.85 per share in the year-ago quarter. Additionally, it is worth noting our fourth quarter results include a pretax charge of $5.3 million or $0.22 per share from accelerated amortization of the intangible assets related to the IPC acquisition. Turning now to a more detailed review for the 2017 fourth quarter. As a reminder, we categorize our sales into 3 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, Japan, Australia and other Asian markets. We took steps early in 2017 to restructure our global workforce to better support the company's most promising growth opportunities, and we're pleased that we were able to generate organic growth in each of our global regions in the fourth quarter. In the Americas, 2017 fourth quarter sales improved 6.4%, up 1.8% organically, driven by both North America and Latin America. In North America, fourth quarter sales improved 4.8%, up 1.8% organically, primarily reflecting gains in strategic accounts. Organic sales in Latin America also grew in the 2017 fourth quarter, up more than 24% on a reported basis and 1.7% organically. Performance in this region reflects the strengthening economy in Brazil and stable order patterns in Mexico. In EMEA, sales in the period were consistent with our expectation and the region posted slight growth on top of a particularly strong third quarter performance, which grew 14.6%. Reported sales improved 143.4% in the 2017 fourth quarter, up approximately 0.3% organically. Results here reflect solid sales performance in Iberia, Netherlands and Scandinavia. In the Asia Pacific region, sales increased 40% or 8.4% organically. The growth in APAC was led by improved sales in China, Japan and Australia, which is ahead of recent trends and encouraging as we have invested in our leadership team within the region. Now looking at gross margin. Tennant's gross margin in the 2017 fourth quarter was 41.4% and the as-adjusted gross margin was 40.9% compared to 44.2% in the prior-year quarter. The as-suggested 330 basis points change reflects lower-than-anticipated field service truck productivity levels and negative mix from IPC and higher strategic accounts, remaining manufacturing inefficiencies and the impact of raw material cost inflation. As we have discussed previously, we have initiatives in place to address these factors, which provided improvement late in the fourth quarter and expect further progress as we move through 2018. Research and development expense in the 2017 fourth quarter totaled $7.8 million or 2.8% of sales. That compares to $10 million or 4.7% of sales in the prior year quarter. The lower R&D expense reflects timing of project spend over the course of the year. We remain committed to our stated annual R&D spend of 3% to 4% of revenue and maintaining a robust pipeline of innovative new products and technologies that Chris noted. Selling and administrative expense in the 2017 fourth quarter was $98.3 million or 35.2% of sales. This includes $5.3 million of accelerated amortization related to IPC and $10.8 million in nonoperational costs. These items negatively impacted S&A by 5.8 percentage points during the quarter. Regarding IPC, we remain very enthusiastic about this acquisitions as prospects for Tennant, which has delivered nearly 5% organic growth since the acquisition. As we noted last quarter, the accelerated amortization schedule does impact the timing of accretion, which we now believe will occur in 2019. However, excluding the accelerated amortization, IPC will be accretive to our earnings in 2018. From a return perspective, IPC continues to deliver solid performance and our integration efforts are off to a positive start. As we discussed last quarter, earnings before interest, taxes, depreciation and amortization will be an important measure for Tennant going forward, especially considering the impact of accelerated noncash amortization expense and the higher level of interest expense that we now have resulting from the acquisition. Our 2017 fourth quarter adjusted EBITDA was $30.9 million or 11.1% of sales. Adjusted EBITDA in the prior-year quarter was $26.5 million or 12.5% of sales. Looking at the 2017 full year, adjusted EBITDA was $101.6 million or 10.1 percent of sales. Adjusted EBITDA for the prior year was $85.7 million or 10.6% of sales. We remain committed to initiatives that can help us improve across every profitability measure. These include driving organic revenue growth, holding fixed cost essentially flat in our manufacturing areas as volume rises, striving for 0 net inflation at the gross profit line and standardizing and simplifying processes globally to continue improving the scalability of our business model, while minimizing increases in our operating expenses. Looking at our tax rate. The overall as-adjusted effective tax rate for the 2017 full year was 32.7%, which is higher than guidance due to an unfavorable mix of foreign earnings that we experienced in the fourth quarter. Turning to some cash flow and balance sheet items. Capital expenditures totaled $4.1 million in the fourth quarter of 2017 compared to $4 million in the fourth quarter of 2016. Current CapEx continues to reflect planned investments in information technology projects, tooling related to new product development and manufacturing equipment. We continue to tightly managing capital spending. Tennant's cash from operations for the fourth quarter was solid at $22.1 million compared to $24.6 million in the 2016 fourth quarter. In the fourth quarter, we repaid an additional $15 million of our debt. Our debt-to-capital ratio was 56% at the end of the 2017 fourth quarter. Looking at other aspects of our capital allocation. Tennant paid cash dividends of $14.3 million in 2016 and $15 million in 2017. Moving to our outlook for the full year 2018. As Chris stated, we have in place strategies to both position Tennant for enhanced revenue growth and operational improvement. While we continue to face gross margin headwinds as we move into 2018, as we previously mentioned, we made good strides during the fourth quarter to enable margin improvement in 2018. We expect these measures to gradually take hold as we move through the year. For 2018, we estimate full year net sales in the range of $1.07 billion to $1.1 billion, up 6.6% to 9.7% or up approximately 3% organically for the full year. On a GAAP basis, we anticipate earnings to be in the range of $1.70 to $1.90. This includes an anticipated $2 million to $3 million of acquisition-related charges. Excluding these charges, we anticipate earnings to be in the range of $1.80 to $2 per share, and adjusted EBITDA to be $111 million to $116 million. Our reported adjusted earnings guidance for the year also reflect the impact of higher noncash amortization expense of approximately $0.22 per share. Our 2018 annual outlook include the following additional assumptions. Reasonable growth in all region, especially strategic accounts in North America; gross margin performance in the range of 41% the 42%; R&D expense in the range of 3% to 3.5% of sales; capital expenditures in the range of $25 million to $30 million, and an effective tax rate of approximately 24%, inclusive of the impact from the new legislation in the U.S. As noted in the morning announcement, we are including some specific additional guidance for the 2018 first quarter due to items that we expect uniquely impact this period. Due to the anticipated higher level of R&D spending in the first quarter to support new product launches along with normally lower first quarter earnings, which reflect our customers' initial slow ramp up of capital purchases, the first quarter earnings will be lower than the remaining 3 quarters. The first quarter will also include an additional quarter of interest expense and acquisition-related amortization for IPC, causing the earnings to be lower than the prior year. As a result, the company anticipates the 2018 first quarter adjusted earnings per share will be in a range of $0.15 to $0.20 per share. And now, we'd like to open up the call to questions. Jamie?

[Operator Instructions]. And your first question comes from Chris Moore with CJS Securities.

Maybe just start with the 3% organic growth. In the last call, you talked about the potential of being able to possibly raise prices 1% or 2% during 2018. Is price increase embedded in there?

Yes, pricing is embedded in the 3% organic growth. And without getting real specific, our pricing benefit that we had in the year that we just exited, 2017, was roughly 1.5%, maybe a little bit lower. We think we'll have a similar pricing benefits in the upcoming year.

Got you. It sounds like the strategic accounts, particularly Q4, were doing well. A couple of things Is that conversation still pretty much isolated to North America or is there much progress on the strategic account front in Europe?

I mean, strategic accounts in North America matter more than anywhere in the world. But I will say we are making a nice progress, particularly in Europe, but also in Asia Pacific on our strategic account business. But of particular note was the strength in Q1 of our strategic accounts, and the expectation that they'll be an important part of our growth in 2018 also.

And it is important to note, we won two major strategic accounts in Europe, one in Germany and one in France in the third quarter, which contributed to that 14.5% growth rate. And we should see the benefits of that continuing to 2018. But the issue we faced in North America was we knew we had all these strategic accounts in the pipeline. But as you know, it's a long and complicated negotiation process. And it's unusual to have kind all of them be delayed to the extent that they were. But we're really pleased to see that they started to free up in fourth quarter 2018, and that momentum is going to continue -- I mean, sorry, 2017, and that momentum is going to continue into 2018. So we are back on track with strategic accounts with North America is what I would say.

Got you. Terrific. Maybe just switching to gross margins. You went through kind of the four key items there. Maybe we could talk -- start with the second one, mix of IPC and the strategic account. So in terms of -- after the intangible amortization's all gone on the IPC said, still trying to understand if those -- the IPC strategic accounts, do they run against to -- make more difficult to get back to that 43%, 44% gross margin range?

It is a force that works against us from a gross margin standpoint, but I think it's really important to note that in the case of IPC, IPC on a standalone basis has better EBITDA margins historically on a pro forma basis than Tennant did. So at the EBITDA level, even though we're having lower gross margins due to their business model going through distribution, we -- it's enhancing to the EBITDA. And in the case of strategic accounts, same thing. I mean, we have -- we try to be indifferent to channel and try to be -- we need to be efficient below the gross margin level and bigger piece of the business, while might have lower gross margins, they should be significantly accretive to our targets from an EBITDA standpoint. And in the quarter, Chris had said, it is notable that out of the 330 basis point miss versus prior, two key things. One, that was highly unusual quarter a year ago where we were above 44% in the quarter. And then the other piece is that the IPC mix and strategic accounts had close to a 200 basis points impact on margins. And that's okay. We're still moving forward on EBITDA, and we think we especially exited the quarter much stronger in service and also some of our manufacturing inefficiencies.

Got it. And last question on the gross margins. The raw material cost inflation, could you talk about that a little bit?

Yes, it stabilized is the good news. And that when it was still a bit above our expectations from our original plan, but we really feel that the stabilization we've seen and the pricing that we've put in place will allow us to appropriately cover our inflation in 2018. I mean, it's an important assumption. But we have seen stabilization. And we think that through, both through pricing and through our sourcing efforts to reduce cost, that we can mitigate inflation, and it won't be detrimental to our margin structure in the upcoming year.

We've stated that our goal is to get to 0 net inflation at the gross margin line. We obviously did not accomplish that in 2017. Part of that was the restructuring because we did do a major restructuring in our supply organization to enhance the talent and also allocate the talent to the areas of greatest opportunities. That team is now in place and operating smoothly. And we expect them to provide benefits to help us offset some of that inflation in addition to the price stick in 2018.

[Operator Instructions]. Your next question comes from Marco Rodriguez from Stonegate Capital Markets.

I was wondering if we could kind of circle back around here on strategic accounts. Just wanted to talk a little bit more about the comment you guys just made that the strategic accounts are kind of back on track in North America. Maybe if you could kind of dive in a little bit deeper, just kind of talk about where that sales processes, maybe if you can, how many strategic accounts you might be working within the pipeline? And just kind of how you expect that to kind of transition or move through fiscal '18?

Well, a couple of comments. I'm sure Chris will jump on this too. I mean, the encouraging news is, we knew we were going to go through a period in back half of last year and this year that there was a lot of renewals coming on. And we historically do well. We tend to always win the business we have and penetrate deeper. And while Q3 didn't come through as expected, Q4 is back on track. And we expected to have a positive impact all the way through the year. And therefore, it's one of the reasons why we're a bit more bullish on the business. And we did see solid order patterns throughout the fourth quarter. And we ended with a nice open order position, and strategic accounts is important part of that.

Yes, I'd say that we have a nice mix of strategic accounts existing, especially some very big retailers that are just starting to come online in the first quarter. Some new business that we have not had before in various customer segments, including building service contractors. And those are also just starting to come online. So I think we're at the -- in the early stages of actually extracting the value from these contracts. So I think it bodes well for 2018. And in some cases because the contracts are 2 or 3 years, and we supply the equipment kind on a quarterly basis, it's also going to benefit us going forward into 2019.

That's very helpful. And in fiscal '18, do you have any sort of, I don't know, quarters or time periods where you have a large amount of strategic accounts that might be coming up for renewal that -- I don't know, I guess, the risk being obviously that they kind of delay a little bit again?

Yes, we can't get specific on that. I mean, we end up being up on the positive side or the negative side on that. Sometimes we are positive surprises, sometimes negative. But you should just expect the typical seasonality in our business in that Q1 is always the low point of the year from a revenue standpoint as a percent of the total. Q2 and Q4 are the big points. And Q3, due to it being summer, is a little bit lower. But I wouldn't expect any different seasonality in the upcoming year than we historically have.

Got it. Okay. And then kind of shifting gears here to the initiative you have underway to bring your gross margin back into that 42%, 43% rate that you've kind of adjusted here given the IPC acquisition. The field service trucks, the field service area seems to be getting some improvements from what I took from your comments as well as some of the automation on the manufacturing. I think that last quarter, you kind of put a target out there that at the end of Q2, you'd be kind of at that normalized 42% to 43% rate. I'm just trying to kind of confirm if you guys are still on track with that -- that guidance, I guess?

Yes, we would hold to that guidance. We hope we are being conservative. Given the quarter in Q4 didn't happen as fast as we would have liked, but it ended in a good place. I mean, I gave you 1 data point that's probably the most relevant. We were all the way back to a normalized level of open service trucks. And that was really good news. I mean, we'd improved our recruiting efforts. We improved our training efforts. We had a normal amount of open trucks, and we've seen normalized attrition also. So as those people get trained up, that will -- we should see the expected improvement quickly. But it didn't up to late in the quarter or early in this current year, but it should bode well for the upcoming years. That's just 1 example of a good exit point that allows us to hold to our previous expectation. We should be back to 42% to 43% as we exit Q2.

And then the other thing on the manufacturing front, we had some issues getting our welding robots up and running to our satisfaction. They are now meeting, and in some cases exceeding, our expectations of running on three shifts and we're getting all the benefits. The other issue we had is many manufacturers have had over the last 12 months is attracting skilled labor. And we made some changes to our pay and benefits practices, changed how we recruited. And the good news is we now are pretty much fully staffed. But what I think really bodes well for the future is we were running at something like 30%-plus turnover on a monthly basis through much of 2017. And that turnover right now is in the low single digits, which is the best we've seen in a long time. And as you know, when you have stable labor, they know what they're doing in the factory, it bodes well for efficiency.

Got it. And just to make sure I'm kind of fully understanding the field service individuals that you got back up to a normalize level here exiting Q4. Kind of training them up, if you will, so given your target at the end of Q2, being back to that 42%, 43%, it sounds like automation is already back to where you had expected it to be. So I'm assuming it's about a quarter to 2 quarters to kind of train new service people up to where they are the most effective?

The average is 90 days is what we would say, but it does vary. When you look at the sheer numbers of people that we brought on, it's likely to take a little bit longer before you get them fully trained. But you're right. Being at a fully staffed level as you enter the year, it's going to be towards sometime during Q2 where those new folks are going to be completely operating where you'd like. And it takes a while. The people at them are off for 25 years, they are more efficient.

But even for them we've instituted a lot of process changes to enhance our kind of performance once the dust settles. So even the veterans have had to learn some new tricks here in the short term. So that's impacted our ability to perform. But I think by Q2, we should be pretty much back on track from a training standpoint.

Yes, I think it is important to note that from a strategy standpoint, we feel very good where we're at in both of those areas as we enter the year. It's still going to take us time to get back to where we were, though. So we hope we remain conservative, but we like the changes we made.

Got it. Okay. And then two real quick kind of housekeeping items here just from a modeling perspective. Your S&A expenses after you take out those $10.8 million in one-time expenses that you guys pointed out. If I'm doing my math right, S&A is at about $87.5 million in Q4, up about $3 million from Q3. Is that a normalized level that we should be thinking to model going forward or there any other sort of onetime items? And then lastly, I don't know if I missed this in the call, but what was the weighted average shares for Q4 on the adjusted basis?

Yes, I'll let Andy jump in on the weighted average shares there in a second. I'll take the first questions first. The two things that you need to look at is you look across is that in Q4 is over $5 million of accelerated amortization in our S&A expense. And for the full year in 2018, that'll be just over $21 million. So you need to adjust it there to kind of get a sense of it. Remember that IPC will come on and have another quarter's worth of S&A. And the other element that we did have is we had a lot of open positions in the year that we're beginning to fully replace those as we manage our expenses in a lower growth environment. So we still are going to push to drive some leverage improvement in the upcoming year. But as you restate for the 1x last year, we aren't going to see significant improvement as a percent of revenue. That's a long-winded answer to a complicated question.

And the weighted average shares are 18 172 on a adjusted basis.

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

Thank you. So we believe we are building a formidable platform for long-term growth and shareholder value that will continue to take shape in 2018. Tennant is invested in more diversified revenue streams. We are anticipating achieving stronger sales execution across all geographies. We remain the destination for the best technology. We are improving our efficiency and delivering on the financial strength and capital allocation strategy that could increase shareholder value in multiple ways. We look forward to sharing a more detailed strategic plan and long-term operating model for the future later this year. Thank you for your time today, and for your questions. Be well, everybody.

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