Tennant Company

Mr. Paulson, you may begin your conference.

Thanks, Sean. Good morning, everyone, and welcome to Tennant Company's fourth quarter 2011 earnings conference call.

I'm Tom Paulson, 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 2011 fourth quarter and full year, and provide our outlook for 2012. First, Chris will brief you on our operations, and then I'll cover the financials.

After that, we'll open up the call for your questions. Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations of future performance.

Such statements are subject to risks and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we file with the Securities and Exchange Commission.

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

Additionally, on this conference call we will discuss non-GAAP measures that include or exclude special or non-recurring items. For each non-GAAP measure, we'll also provide the most directly comparable GAAP measure.

Our earnings release includes a reconciliation of these non-GAAP measures to our GAAP results. 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.

Thank you, Tom, and thanks to all of you for joining us this morning. We are very pleased with Tennant's performance in the 2011 fourth quarter and full year.

We had a record year with net sales of $754 million and adjusted diluted earnings per share of $1.95. In light of the global economic uncertainties during 2011, we were especially excited by our progress and I want to commend Tennant's employees for their efforts.

We also had record fourth quarter sales, which resulted in 48% growth in adjusted diluted earnings per share compared to the prior year quarter. This was the fourth sequential quarter in which Tennant has posted record sales.

In 2011, Tennant returned to and surpassed our pre-recession sales levels. Among the financial highlights of the 2011 fourth quarter, net sales grew approximately 6% organically to $193.2 million, lapping double-digit organic sales growth in the prior year quarter.

Fourth quarter gross margins of 43.2% were above our stated range of 42% to 43%. Operating profit rose to 8% of sales, up 170 basis points from 6.3% of sales as adjusted in the prior year quarter.

Quarterly earnings per diluted share increased to $0.59, up from adjusted earnings per diluted share of $0.40 in the year ago quarter. And the company ended the quarter with total cash of $52.3 million versus $39.5 million a year ago.

Tennant's robust financial performance in the 2011 fourth quarter was driven in part by strong sales of industrial equipment in our Americas region and increased global sales of scrubbers equipped with our sustainable ec-H2O technology. Scrubbers equipped with ec-H2O technology again posted double-digit sales gains, growing approximately 22% in the 2011 fourth quarter compared to the prior year quarter.

For the 2011 full year, sales of ec-H2O equipped scrubbers rose approximately 46% to $140 million, up from $96 million in 2010. Full year sales of scrubbers equipped with ec-H2O hit the top end of our stated revenue range for the year, demonstrating that customers around the globe continue to widely adopt this technology.

As a result, ec-H2O sales were a key contributor to Tennant's 13% revenue increase for the 2011 full year versus 2010.

In addition, ec-H2O continued to fuel our percentage of sales from new products introduced in the past 3 years. New products accounted for approximately 35% of our equipment sales in 2011.

This exceeded our ongoing goal to generate 30% of sales from new products. In 2012, we expect continued double-digit growth of ec-H2O sales in the range of 15% to 20%.

As most of you know, one of our competitors, Kärcher, has filed claims in various jurisdictions challenging the advertising of our ec-H2O technology. We are vigorously defending our company, technology, and advertising against these baseless attacks.

We have been in the marketplace with ec-H2O for nearly 4 years, have satisfied thousands of customers, and this technology continues to experience significant sales growth.

We are pleased that the U.K. Trading Standards Board has decided to take no further action after examining the evidence supporting our ec-H2O advertising claims, and we continue to actively oppose the outstanding matters in the U.K., Belgium, and Germany.

We take pride in the integrity of our business and in the value of our products and stand behind the science of ec-H2O technology. Tennant remains committed to being the industry's innovation leader, and we are investing to secure our future.

Innovating within our core business and funding the start-up phase of Orbio will require Tennant's R&D investment to remain around 4% of sales in 2012, as it was in 2011. We have developed a detailed product and technology roadmap, and we're making tremendous progress in R&D.

In fact, we have one of the strongest new product and technology pipelines in Tennant's history. It is appropriately balanced between our industrial and commercial product lines, as well as interesting new technologies.

Turning to our Orbio Technologies brand. During the fourth quarter, we continued to develop a pipeline of new chemical-free and other sustainable cleaning technologies.

We are focusing on creating a suite of Orbio products and solutions. Our goal is to set the standard for sustainable cleaning for our customers around the world.

An example is our Orbio 5000-Sc, which we launched as our first Orbio branded product at the end of the 2011 first quarter.

Since then, we have expanded our rollout as planned in North America, and introduced the 5000-Sc in Europe, and select areas in Asia Pacific region. The 5000-Sc is an innovative dispensing unit designed to replace many daily cleaning chemicals.

The system uses Orbio's split stream technology, combining tap water, a small amount of salt and electricity to create an effective and eco-friendly multipurpose cleaning solution.

It matches or exceeds the performance of many daily cleaners, allowing customers to reduce the use of chemicals. The Orbio 5000-Sc is available for rental on a 24 month term with pricing based on level of use.

Offering the 5000-Sc as a rental model has a slower revenue ramp than a capital equipment model. Our rollout remains on track and is meeting our expectations and we are receiving very positive customer feedback.

Before I move on to our growth and efficiency initiatives, I'd like to mention a milestone event that occurred at the end of 2011, the grand opening of our new China plant. This facility more than doubles our footprint in China.

It is located outside of Shanghai in Qingpu, just a few miles from our previous location. We are very pleased that the move to the new leased site was completed ahead of schedule, and under budget.

Our team did an outstanding job to make this happen.

We continue to expand our business in this fast-growing marketplace. The new plant is Tennant's manufacturing center for China and the Asia-Pacific region, producing small walk behind scrubbers and sweepers.

This facility also serves as a low-cost global source for Tennant's sub-assemblies.

Moving forward, we remain focused on increasing Tennant's revenues through continued market penetration with our sustainable cleaning technologies, including scrubbers equipped with ec-H2O and the Orbio 5000-Sc, expanding our strategic accounts business with particular emphasis on global customers, growing in new or underserved market segments through new channel partners such as Grainger and Staples, the introduction of new products, and ongoing penetration of emerging markets.

At the same time, we are further leveraging our operating efficiency by executing on a number of initiatives that will simplify our processes, reduce our costs, and make it easier for our customers to do business with Tennant. Let me give you more details.

First is pricing. This is one of the areas where we believe we can do a better job.

We are working toward implementing a global pricing policy that will streamline our internal reporting capabilities, enable quicker price changes, make us more nimble in serving our growing global customer base and improve our profitability.

Invoicing and collections is another function that we are focusing on. We are putting in place a standardized global process to manage invoicing and payments.

This initiative will not only enhance our efficiency, it will enable us to consolidate invoicing for global customers and better meet their needs as well. Our third initiative involves machine configuration and customization.

Here, we are fundamentally restructuring the way we organize our products' hierarchy within our SAP system.

This will allow us to ensure consistent practices relative to pricing, order taking, production and invoicing around the world. Additionally, we have 2 other priorities for later this year and into 2013 that cover the creation of an improved sales lead and pipeline management system, and a seamless quote-to-order process.

Initiatives like these are critical to achieving our ambitious operating profit margin goal of 12% in the 2013 fourth quarter. We remain on track to attain this long-term goal by successfully executing our strategic priorities, and assuming the global economy grows at a modest rate.

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 full year financials, as those are detailed in the earnings release. As Chris noted, we are very pleased with the company's performance in the 2011 fourth quarter.

Throughout 2010 and the first half of 2011, Tennant had achieved on average organic sales growth of about 13% in each of those 6 quarters.

We estimated at the beginning of the 2011 third quarter that we were back to pre-recession sales levels and we anticipated organic revenue growth going forward would be back in our traditional range of mid to high single-digits. This has been the case with organic revenue growth of approximately 7.4% in the 2011 third quarter and 5.7% in the 2011 fourth quarter.

For the fourth quarter ended December 31, 2011, Tennant reported net earnings of $11.3 million, or $0.59 per share on fourth quarter net sales of $193.2 million.

In the year ago quarter Tennant reported adjusted net earnings of $7.7 million or $0.40 per share as adjusted per share. Turning now to a more detailed review of the 2011 fourth quarter.

Tennant's 2011 fourth quarter consolidated net sales of $193.2 million increased 5.7% over the prior year fourth quarter. Overall, foreign currency exchange effects were essentially flat, compared to the prior year period.

Therefore organic sales grew approximately 5.7% in the quarter.

Again, we estimate we're now back to pre-recession sales levels for our large equipment. This is partially attributed to the improvement in the general economy.

We also now offer ec-H2O and large scrubbers and we recently updated the styling, reduced the noise levels and improved dust control and many large sweepers. These new offerings have been extremely well received by our customers.

In the 2011 fourth quarter, we had strong sales of industrial equipment, especially the T16 and T20 scrubbers due to the recent product upgrades and the availability the ec-H2O on these large scrubbers.

Our sales are categorized 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 and other Asian markets, Japan and Australia. In the Americas, we reported 2011 fourth quarter organic sales growth of approximately 9.5% excluding about 0.5% of unfavorable foreign currency impact.

The growth in the Americas was driven by strong sales of scrubbers, equipped with ec-H2O technology in North America and strong gains in Latin America, particularly in Brazil where we have expanded our market presence and increased sales of larger industrial equipment. In EMEA, the organic sales were essentially flat, excluding an unfavorable foreign currency impact of approximately 1%.

EMEA sales growth of industrial products primarily increased sales of large scrubbers equipped with ec-H2O technology was offset by slower sales of commercial equipment.

Sales of outdoor city cleaning equipment were essentially flat compared to the prior year quarter. However, this was due to lower sales of the recently discontinued Hoffman's products offsetting the higher sales of Green Machine products.

We sold a record number of 500zes in the 2011 fourth-quarter beating our previous record just set in the 2011 third quarter. And there is growing interest in this environmentally friendly city cleaning sweeper as lithium-ion battery powered with zero carbon emissions.

In Tennant's Asia-Pacific region, organic sales rose approximately 0.5% excluding a favorable foreign currency impact of about 3.5%. The growth in Asia-Pacific was primarily due to increased sales in emerging markets, which were partially offset by selling price decreases in some mature markets related to movements in foreign exchange rates.

We remain very positive about the growth potential in this region, especially in China.

Tennant's gross margin for the 2011 fourth quarter was 43.2% was up 60 basis points versus 42.6% as adjusted in the prior year quarter. The higher gross margin was primarily driven by improvement in EMEA's gross margin.

EMEA benefited from a more profitable product mix with lower sales of the recently discontinued Hoffman's products and higher sales of Green Machine sweepers, particularly the 500zes city cleaning sweeper.

Sequentially, Tennant's 2011 adjusted gross margin increased each quarter from 41.7% in the first quarter to 42.2% in the second quarter to 42.9% in the third quarter and now to 43.2% in the fourth quarter. We are pleased that Tennant's performance, that Tennant performed in line with our target range of 42% to 43% gross margin in 2011.

Research and development expense in the fourth quarter totaled $7.7 million, versus $6.9 million in the prior year quarter.

R&D expense as a percent of sales was 4% in the fourth quarter of 2011, compared to 3.8% in the prior year quarter. Selling and administrative expense in 2011 fourth quarter totaled $60.4 million, compared to $59.4 million as adjusted in the fourth quarter of last year.

The increase in selling and administrative expense on a dollar basis was primarily attributed to high variable cost, related to higher sales volume, ongoing investments in our sustainable cleaning business and legal and severance expenses.

The 2011 fourth quarter selling and administrative expense as a percent of sales, however was down 120 basis points to 31.3% from 32.5% as adjusted in the prior year quarter due to continued tight cost controls and improved operating efficiencies. Our 2011 fourth quarter operating profit was $15.5 million or 8% of sales, compared to adjusted operating profit of $11.5 million or 6.3% of sales in the fourth quarter of last year.

The 170 basis points improvement in operating margin was primarily due to greater selling and administrative operating efficiencies and higher gross margins. As Chris mentioned, we remain on track to continue our operating profit margin improvement and our goal is to reach a 12% operating profit margin in the 2011 -- 2013 fourth quarter.

We believe that Tennant is capable of attaining this ambitious long-term goal by successfully executing our strategic priorities and assuming the global economy grows at a modest rate.

As we work towards this goal, 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 enable building of a scalable business model while minimizing any increases in our operating expenses.

We have been successful in leveraging our existing workforce, and have continued to hold our employee count to above 2,800. This number is essentially flat with when we completed the restructuring effort that began in the 2008 fourth quarter and is now down about 10% from Tennant's pre-recession peak.

Yet, we have been to able the grow sales from $596 million in 2009 to a record $754 million in 2011. We're also successfully executing our tax strategies.

The 2010 fourth quarter restructuring and realignment of Tennant's international operations is providing commercial benefits and financial reporting efficiencies, as well as a more tax-efficient capital and legal entity ownership structure. As anticipated, there is a positive impact to our overall 2011 tax rate, as well to our long-term expected tax rate.

Tennant's overall effective tax rate was 28.1% in the 2011 fourth quarter and was 32.9% for the 2011 full year.

The 32.9% effective tax rate includes the 2011 second quarter limited $0.5 million tax benefit associated with the $5.5 million of pre-tax special charges related to the Hoffman's product obsolescence and the international executive severance. Both of these special charges adversely impacted the overall effective tax rate.

Tennant's overall 2011 full year effective tax rate excluding these items was 30.4%. The full year base tax rate excluding these items and also excluding discrete tax items was 30.9%, which was in line with our targeted range of 31% to 33%.

Turning now to the balance sheet. Again, we are pleased with the company's progress.

Net receivables at the end of the 2011 fourth quarter was $128.9 million, versus $127.5 million a year earlier. Quarterly average accounts receivable days outstanding were 58 days for the fourth quarter, versus 59 days in the 2010 fourth quarter.

Tennant's inventories at the end of the 2011 fourth quarter were $65.9 million, versus $61.7 million a year earlier.

Quarterly average FIFO days inventory in hand were 88 days for the 2011 fourth quarter, which were 5 days higher, compared to 83 days in the year ago quarter, primarily due to higher levels of inventory to support 2011 fourth quarter sales and service initiatives. Accounts payable totaled $46.9 million at the end of the fourth quarter versus $40.5 million in the year ago quarter.

Capital expenditures totaled $13.9 million in 2011 versus $10.5 million in 2010.

We continue to tightly control capital spending by utilizing a rigorous prioritization process to ensure we approve projects that best align with our strategies and are designed to offer an attractive return on investment. Tennant generated $56.9 million in cash from operations in 2011, which was higher than the $42.5 million generated in 2010.

Cash and cash equivalents at the end of the 2011 totaled $52.3 million, compared to $39.5 million a year ago, an increase of $12.8 million.

The company's total debt of $36.95 million was $5.7 million higher than $30.8 million a year ago. The increase in debt was chiefly due to taking out a total of $20 million of 4% fixed rate long-term debt and $10 million increments in each of the first 2 quarters of 2011.

This was partially offset by paying down our revolving credit facility by $15 million. Our debt-to-capital ratio was 14.2% at the end of 2011, versus 12.5% at the end of 2010.

Regarding other aspects of our capital structure, effective in the 2010 fourth quarter, we increased our quarterly cash dividend 21% from $0.14 to $0.17 per share. During 2011, we paid cash dividends of $12.9 million.

Tennant has increased its annual cash dividend payout for 40 consecutive years. In February 2011, our Board of Directors authorized a new share repurchase program of up to 1 million shares of our common stock.

This provides us the financial flexibility to offset dilutive effects of stock-based compensation programs and to consider repurchases to create shareholder value based on overall market conditions. During 2011, we purchased approximately 469,000 shares at an average price of $37.51 per share, for a total cash outlay of $17.6 million.

We have approximately 720,000 shares remaining under our current repurchase program. As of December 31, 2011, we now have about 18.8 million shares outstanding.

Moving now to our outlook. Based on our 2011 financial results and expectations of future performance, we are initiating full year sales and earnings guidance for 2012.

We estimate 2012 full year earnings in the range of $2.30 to $2.45 per diluted share on net sales in the range of $790 million to $805 million. Our current 2012 full year financial outlook includes the following expectations.

The global economy stabilizes with modest improvement in North America, continued uncertainty in Europe and steady growth in emerging markets.

Foreign currency impact on sales for the full year that is flat to slightly unfavorable. Minimal inflation net of cost savings initiatives and selling price increases, a gross margin at the high end of the targeted range of 42% to 43%, research and development expense of approximately 4% of sales, and capital expenditures in the range of $16 million to $18 million.

We anticipate a base tax rate excluding special items in the range of 31% to 33%, depending primarily upon the mix of full year taxable earnings by country.

While we do not provide detailed quarterly guidance, we do expect that the 2012 quarterly sales pattern to be similar to the pre-recession years of 2006 and 2007. Those years had a sales breakout between the first half and second half of 48% and 52% respectively with the lowest sales level in the first quarter and the highest sales level in the fourth quarter.

The 2012 quarterly sales pattern may even be a bit more skewed towards the second half due to other factors including the following. The foreign currency exchange effect is expected to be unfavorable in the first half offset by a favorable effect in the second.

Our announced selling price increase in North America effective in April 2012 will be primarily realized in the second half. Potential selling price increases in other geographies would be realized in the second half, and offering the Orbio 5000-Sc as a rental model has a slower revenue ramp than our traditional capital model.

We remain on track to reach our goal of 12% operating profit margin in the fourth quarter of 2013, and we do anticipate improving our quarter-over-quarter operating profit margins in each quarter of 2012.

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

For the ec-H2O products, what kind of expectations do you have in 2012, relative to Orbio 5000? Are you seeing any customers trying to play either of those products off of each other?

I think on the fringes, customers will have to make a choice, if the 5000-Sc meets their needs better than having a fleet of scrubbers, with ec-H2O. I think that if they are cleaning floors, carpets, and they're doing spray and wipe cleaning across much of their facility, the 5000-Sc may be the better option.

But we, again, see robust sales of our ec-H2O technology as we indicated in our expectation of 15% to 20% growth there, and there is still a lot of opportunity in terms of penetrating markets with ec-H2O where the 5000-Sc right now because, in many cases because of its size and its cost is not the way our customers are going to go. So I think the 2 can co-exist and expand our overall market share.

When you discussed some restructuring and some initiatives that you're taking on this year to improve margin, would the effect of those moves be mostly seen in SG&A?

They predominantly would be in SG&A. And we will, we believe we'll begin to see some benefits of that in our operating expense leverage and we'll even see a higher level of benefits as we move into 2013 and in the future years.

But the benefit will be predominantly going to the operating expense line.

So in addition to the sales ramp geared towards the second half of the year as you described, there will also be this impact from SG&A leverage in the second half of the year as well?

Some modest level of benefit. We would, as I said, we would expect a higher level of benefits in 2013.

But if you look at the types of improvement that we'll see year-on-year in our operating expense leverage as a percent of revenue, we would likely see improved leverage in the back half driven by higher revenue and also beginning to see some of the benefits of many of our initiatives that we're doing to drive our operating expense leverage.

And one question on the Kärcher litigation, what kind of impact are you seeing in Europe on ec-H2O sales?

Well, we're not really seeing any impact. ec-H2O sales were very strong, as we've indicated in the release.

It's one of the real bright spots in Europe. It continues to grow and the penetration levels in Europe are the highest anywhere in the world.

So I would assume that -- on the last conference call you guys indicated that there was a sluggishness to the start of the quarter. I assume that's evaporated and now you're having more normalized buying patterns from your customers, is that correct?

Yes, couple comments on that Dan. We were pretty explicit and transparent about the front-end of our order patterns in the fourth quarter.

That in fact did take longer to normalize than we would have anticipated. So we did continue to see it go and be not the high level of growth rates as we would have liked to have seen.

But it improved significantly as we exited the year. And now as we're going into this year, order patterns are still a bit choppy, they're not as consistent as we would like, but they're broadly in line with our expectations globally on what kind of revenue forecast we're internally assuming and how that fits in with the full year expectations.

Okay. And then in Europe, you guys said that the volumes were essentially flat in the last quarter.

Has it deteriorated since then? I would think that things might have been getting even a little worse since the end of the year.

We wouldn't really say that. What we would remind a couple of things.

The year-on-year growth that we saw that was relatively flat in Europe was predominantly on the commercial side of our business and we were lapping a particularly strong organic growth period the quarter before. And I am honestly doing this from memory, but I think that organic growth was around 15% or 16% in Q4 of 2010.

So we were lapping a tough comparable and then we did see really nice strength in our industrial business, and in our city cleaning business. So, I would say, based on what we did in Q4, it was fairly consistent with what we saw in Q2 and Q3 in Europe, which we're not out of the woods here, there is still lots of questions mark.

It's a questionable economy, but our results were kind of delivering against our own expectations right now.

Okay, good. And then, you guys have done a good job growing without really increasing head count, are we reaching an inflection point where that's going to have to change, we're going to have to expand here, I guess just depending on the region are you going to expand your head count to really meet the growth targets you guys have set?

It's not our intent. We will see the adds of head count in growth markets like Brazil and China, where we'll need to add sales and service people and that's for sure and we will need to add some administrative support.

But in other geographies, we intend to continue to leverage our process improvement efforts and our underlying ERP system to modestly increase head count. There'll be places where we'll need to, but it's very important part of the delivery of our operating margin goals is to minimize the head count adds, especially in administrative areas.

You've got to remember we got to get to between 27% to 28% of sales, operating expense as a percentage of sales to achieve our 12% operating profit goals. So, the process improvement efforts and their impacts on holding head count relatively flat is very important to us.

A question on the Orbio 5000, can you talk a little bit more about the demand and what are seeing there? Maybe give us a sense of how fast that's growing?

Joe, I know this frustrates you, but we're not prepared to do that yet. I remember we frustrated you also at the front-end of our ec-H2O ramp up where we didn't talk about it.

But what we're saying right now is that, it's on track. The rollout has been expanded in North America.

We are now rolling it out in Europe and select Asia-Pacific markets. It's meeting our internal expectations and customer feedback is extremely positive.

But for competitive reasons at this point, we're not going to divulge unit placements, when we think it's appropriate to do so and hopefully it's sooner rather than later, but we haven’t determined the timing, we will be more explicit about the businesses being generated by the 5000-Sc.

Okay. How about on the acidic side, the second stream, are you -- can you give us any color on your expectations or perhaps reaching a disinfectant status that you've been talking about?

No. We said it's in the pipeline.

It is something that we're working on. It is a future generation project and product.

And we have not indicated when we will bring that to market yet. But just know that we're actively pursuing that as well as a number of other initiatives as well that we haven’t talked about.

Okay. And lastly from me, just you talk about the 15% to 20% growth in ec-H2O this year, where should we see the other key growth areas?

More of the same what you saw in Q4 or do you see something else coming up to help out this year?

Growth in strategic accounts should continue to be strong for us, going after some of these underserved or reserved markets with the partners like Grainger and Staples will help us grow, emerging markets we're looking for strong growth there as well. Our industrial equipment sales picked up nicely in 2011, and we expect to see that continue.

So it's broad-based.

I was hoping you guys would be able to tell us something that -- I’m not sure if you’ve done this before, I don't think you have, at least not on my watch. Could you tell us the sales growth of sweepers versus scrubbers by region?

We have not provided that level of detail, Scott. And for -- we're just -- we're not prepared to get down at that level of disclosure for multiple different reasons.

But what we can say is, we have seen very meaningful growth over a period of time in our scrubber business due to the introduction of ec-H2O both on Walk Behinds and then more recently ride-ons and we have made some nice updates to our sweeper business and it’s due to the economical recovery and also some of the newer upgrades to our sweeper business that they've had meaningful for growth too. So we are continuing to see growth in both those segments.

All right, so let me try this in a different way. Would you be willing to tell us by region, what sales were for your sweepers and scrubbers combined, ex the H2O and then maybe just tell us, what the growth of -- what the EC growth was by itself in each market?

Yes. We're not prepared to give anything more than we have been on which is -- I think a fair amount of transparency on ec-H2O revenue by quarter and obviously everybody is aware of that, all of that is coming on our scrubber business, and we do talk at times about we're seeing on our sweeper business.

But we're just not prepared to go back and give that kind of revenue detail for several reasons.

The only think we do say is that the split between our large and small, which is really in many cases our industrial, which is the largest scrubbers and sweepers versus commercial is about 50-50 and when you look at equipment sales.

Yes, no, that I was aware of. Okay, so how about on the cost side?

You've indicated some things that you're doing to improve your processes, and I was wondering if you were to kind of quantify that as part of the walk up from here to 12% margin, would you say, maybe 50, maybe 100 basis points is actually structural based on these process improvements and maybe the rest is sales-driven, is there a way to weigh that?

It'd be hard to give a precise break between that, but because what I would say, Scott, is that, we're holding ourselves to -- we're not allowing ourselves to plan on our gross margin above 43%. So what we're assuming is that the combination of revenue growth, which is obviously a positive, our ability to price and to continue to drive efficiencies on our supply chain, all of that's going to net-out and we're going to stay at the higher end of our gross margin range.

We'd like to believe that there is some opportunity there, but we're not counting on it. And then as you go down into the operating expense side, there is really 3 phenomena going on in there.

One is the efficiency plays around consistency and processes in leveraging our ERP system. The other piece is revenue does benefit us.

As we just naturally be disciplined about not adding people as revenue grows, that's just a general discipline. And then, the third component is attacking our indirect spending and really treating that similar how we treat a bill of material spend, and that's also a very important efficiency gain.

So -- but we're not -- I couldn't give you a good direction about the exact split of those 3, but all of those matter.

So I wanted to just drill down a little bit more on that last question that was asked in the sense of, -- as you look over the next I guess it is 8 quarters then to get to that 12% operating margin goal, we shouldn't assume gross margins go above 43%. And so, having said that, then that 31% that is between the gross margin and the operating margin, SG&A is going to be 27%to 28% and R&D will be around 4%, is that how we should think about it?

Yes, you could see R&D go down a little bit. If you looked at our historical R&D spend over 10 or 12 years, it's been between 3% and 4%.

Obviously, it's been a long-term target. It's been more recently that we've been at the higher end of that, spending at the 4% range and we've been doing that for an extended period.

You might see our R&D go down a little bit, but it certainly won't go underneath the range of 3% to 4%. So the real pressure is on our operating expenses.

So, if you're not going to grow the operating expenses, then what you really need, and you're not going to take out a lot of operating expense, then is what I hear you say, you really need to get the sales up?

We absolutely anticipate growth in our targeted range of 6% to 9% of growth. And if we were to have a situation where growth slowed and we were growing below the 5% level, we would not be able to achieve that 12% target.

There's absolutely a dependence on revenue growth to deliver our 12% during that fourth quarter of 2013. The thing I would add is that, we view the gross margin as a potential upside.

We wouldn't apologize for gross margins being higher than 43. We just want to ensure that, we are adequately addressing our business model and really attacking operating expenses to drive efficiency and not utilizing the upside that might come in gross margin to take the pressure off internally.

Okay, so, all right. So I just want to make sure I clearly understand this.

So 6% to 9% top line growth combined with 43% gross margins and you don't expect to take out a lot of cost, so it's all leverage?

Well, we will take out cost on the indirect spending side. If you, most of that, a higher percent of our indirect spending that we'll be attacking goes through operating expense line, and those are expenses like consulting fees, benefits, travel expenses, it's in both the operating expense line and also non-billed materials spending and cost of goods sold, that's over $200 million of spending a year.

And we're now attacking, driving reduction, absolute dollar reductions on that spending similar to how we attacked low-cost sourcing in our bill of materials. And it's about consolidating buys.

It's about making longer-term commitments to suppliers to take pricing declines or holding pricing flat. It's about centralizing the buys so we're not giving as much authority onto people in smaller budgets to drive that.

And that, we're already beginning to see some benefits from that, and those efforts don't instantaneously drive benefits, it takes a bit of time. But we're really encouraged by what we're seeing there.

All right. As I said, we are pleased with our strong financial performance in the 2011 fourth quarter and the full year, and we remain bullish about Tennant's future.

We're focused on controlling costs across the organization in order to achieve further operating leverage and enhance profitability. At the same time, we will continue investing in the core business and in our sustainable water-based cleaning technology to fuel Tennant's revenue growth.

We remain committed to achieving our strategic vision, which is to become a global leader in water-based and other sustainable cleaning technologies. So thank you today for your time and for your questions, and we look forward to updating you on our 2012 first quarter results in April.

Bye-bye everybody.