Good morning and thank you for participating in Tennant Company’s Third Quarter 2012 Earnings Conference Call. This call is being recorded. If you do not wish to participate, you may disconnect at this time. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] We ask that you remain on the line for closing remarks by management after the question-and-answer session. Beginning today’s meeting is Tom Paulson, Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

Good morning, everyone, and welcome to Tennant Company’s third quarter 2012 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 2012 third quarter and first 9 months and our outlook for the remainder of 2012. First, Chris will brief you on our operations, and then I will cover the financials. After that we will open up the call for your questions. Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company’s expectations of future performance. Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today’s news release and the documents we file with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement, for a description of the risks and uncertainties that may affect our results. Additionally on this conference call, we will discuss non-GAAP measures that include or exclude special or nonrecurring items. For each non-GAAP measure, we also provide the most directly comparable GAAP measure. There were special non-GAAP items in the 2011 second quarter and in the 2012 third quarter. Our 2012 third quarter earnings release also includes a reconciliation of full year 2011 non-GAAP diluted earnings per share to our 2011 GAAP diluted earnings per share. 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. Back in July, you may recall that we characterized the economic environment as challenging for our business, but we anticipated an improving economy in North America in the third quarter. However, after rising 4.7% in the 2012 first half, Tennant sales in North America, our largest geography, declined 3.3% in the third quarter. We had expected to see an improving North American economy in the third quarter, but instead the sales cycle slowed and some customers delayed capital equipment purchases. Tennant sales in the 2012 third quarter in our strategic accounts and distributor channels met our expectations. The shortfall was from lower sales of large industrial equipment through our direct channel and government business, which were both adversely impacted by economic uncertainty in the 2012 third quarter. The slowdown in these 2 areas led to the decline in Tennant’s third quarter sales in North America. Despite this, we anticipate that our North America region will return to organic growth in the 2012 fourth quarter. While we can’t control the macroeconomic climate, we can continue to execute well and I’m very pleased with our progress in this regard. We had many third quarter accomplishments. Among the highlights, sales in China and Latin America remained robust, growing organically approximately 10% and 30%, respectively, in the 2012 third quarter. Our strategic accounts business is a key revenue driver for Tennant and we continue to make good progress expanding our relationships with key customers around the world. Notably, we expanded our business with Sodexo to Europe. Sodexo is a global leader in providing facility services to a broad array of industries. Tennant already was an approved supplier for Sodexo in North America where they were an early supporter of ec-H2O…

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 will generally not comment on the year-to-date financials as those were detailed in the earnings release. In reviewing our 2012 third quarter results, I think it will be helpful to put them in context. As we recover from the recession 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 return to our traditional range of mid-to-high single-digits as we lapped those very high growth quarters. That was the case in the second half of 2011 with organic sales growth of approximately 7.4% in the 2011 third quarter and 5.7% in the 2011 fourth quarter. The organic sales growth of approximately 1.6% in the 2012 first quarter was lower than anticipated, primarily due to order timing in the Americas, as well as the impact from increased tightening of credit in Europe. In the 2012 second quarter, organic sales growth was approximately 2.6% with about 6.8% growth in the Americas, which more than offset the declines in EMEA and Asia Pacific. Now in the third -- 2012 third quarter, organic sales declined approximately 1.7%, with Americas down about 0.7% and EMEA down about 5.5%. Sales in Asia Pacific grew organically by approximately 1.3%. Based on the increased economic uncertainty in Europe and now also North America, we are lowering our 2012 full year net sales to a range of $735 million to $745 million. This is expected to result in organic sales growth…

[Operator Instructions] Your first question comes from the line of Andrew Gadlin from CJS Securities.

Could you talk a little bit about the kind of progression through the quarter by month, what you saw in some of your key markets?

Sure. I will talk broadly and first I would remind people, and we’ve talked about this in the past, that the third quarter is generally our toughest quarter to forecast in. And the reasons for that being is that summer has a big impact on our business in North America and August is a pretty tough quarter in Europe, as everyone is aware of. And therefore, the quarter really happens in September. It’s really -- that’s the make or break month in our quarter, which is -- typically we don’t have as much skew to the last month in a quarter. What we saw from a trend standpoint is, we were a bit behind in July and August with where our expectations were, but not meaningfully -- not at a meaningful level. And what we did not see at all was the rebound that we would expect to see in September. And so it was a matter of, we saw enough -- we saw some signs during the quarter. September did not come back with the way we expected and was really substantially below our expectation, which is what drove the miss relative to expectations in the quarter.

Right. But it’s also important to note that all other parts of our business, other than our direct channel in North America and the current business in North America, exhibited the same trends that they had for the first half of the year, all right. So this is really kind of an issue in one discrete part of our business, but unfortunately it’s a fairly significant part of our business in our largest geography; direct sales, large equipment, and our government business.

Got it. Can you talk a little bit about some of the pricing improvements you put in earlier this year? Have those stuck?

We have seen a pricing benefit so far this year of about 1.5% in total, and we did begin to see that pricing benefit weighing a little bit in Q3. Our pricing benefit in Q3 was more in the 0.5% range, which has brought our pricing benefit down a bit on a year-to-date basis. We still expect to end the full year at about 1.5% pricing benefit, which was at the lower end of what we would have hoped, but we did see some -- a bit of weakening in the quarter.

Was that because of mix or pushback?

It was -- it was not mix-driven.

Okay. And then you cited in your comments as well as in the press release kind of a slowdown of the purchasing process. Have you seen any pickup or has there been any slide from September into October? Have you seen any of that so far?

Yes. What I would comment there is we’ve seen improvement in our order patterns and -- in October and so this really -- of particular note in North America, in the areas that we saw weakness we're now seeing order patterns that reflect an ability to have organic growth in the quarter. So, there's been -- there has been a difference and it’s one of the key reasons why we have some level of optimism about our ability to grow organically in the fourth quarter.

And how important is October to the fourth quarter?

It's -- we don’t have the same kind of skew as we have in Q3, but I would also tell you that December is the most important month in the quarter. But it’s still always encouraging to get off to a start that is very much in line with what you’d expect, or as I would say, we trailed a little bit in the third quarter.

Just a final question on the share buyback, it looks like you slowed down a little bit in the quarter. Can you comment on that as well as what you think you’ll be doing going forward?

It's -- part of it, we are obviously always affected a bit by the level of low trading activity in our stock. It’s tough to get back into the market. And what we continue to -- are going to continue to look for a buying opportunity as we look forward. So, we expect to continue to use our buyback authorization to buy back shares and we will certainly expect to finish the year above where we ended last year, which we are modestly above so far.

Your next question comes from the line of Scott Graham from Jefferies.

So, I just wanted to understand, we have a fourth quarter implied guidance where it looks like kind of at the, if were to just say like at the midpoint, you’re still expecting a year-over-year rise in earnings. Is that -- and if my math is wrong on that please tell me, but is that because you are expecting North American growth, is that going to be the leader in this?

It certainly -- it’s our largest geography. It’s the most important element in any of our financial forecasting. And we do anticipate a return to organic growth in our guidance numbers. At the lower end, I mean that’s a different story. At the lower end, I mean, you would see in the quarter that our organic declines, they would -- we would have organic declines. We would also have reported declines also. At the higher end, our organic growth is between 1% and 2% at the higher end and would drive modest fiscal year organic growth for the full year. But a return to growth in the quarter for North America is very important.

So then if we were to -- let’s assume we do edge out some organic growth in the fourth quarter, but it would still, I assume, be below what your target range is. As you head into 2013, are you guys contemplating anything to help you get to the 12% margin even if it’s pushed back a little bit? But do you need to contemplate anything else structurally on the cost side to get to that level of margin in, let’s say, a prolonged weaker environment?

I’ll answer that a couple of different ways, Scott. We -- in order to get to that 12% by the fourth quarter, the key thing that we would like to see is a return to organic growth for the full year in the 5% to 9% range. And that’s what we're we are very focused again. We certainly recognize that, given the growth rates we’re seeing today, we can’t count on that and that we hope we see it. We hope our new products and all the other things are working for us in our business that allow us to return to that, but it is very economically dependent. The area that we’ll continue to monitor is -- as well as the entire world, but with particular focus is Europe. We’ve gone through now 4 quarters of organic declines. We’ve taken some actions to right-size our factories and we will need to continue to evaluate if we need to take additional actions in that geography if we continue to see organic decline. So it’s something that -- it’s just prudent. We have to monitor our business and you can’t sustain organic declines over an extended period without taking some level of action to shore up profitability.

Right, right. Okay. Thought so. Last question is this, you guys have an enormous new product pipeline and launches over the next 4, 5 quarters here. I was just kind of wondering if we’re -- I understand that we’re only a couple of weeks into the fourth quarter, but anything -- any news you can give us on the sell-in of some of these new products, customer enthusiasm, maybe what you’re seeing out there, even if it’s anecdotally from customers that are about to take shipments in the next 2 months would be helpful?

We don’t start really introducing them until later in the fourth quarter. So, the impact is really going to start in the first quarter of 2013. Now, anecdotally, the -- what I can tell you is that we just had our Annual Industry Trade Show in Chicago, where we presented many of the new products. I think that the feedback we got was that we have many more new product launches than any of our competitors going into 2013. And it’s the most that our -- especially our commercial customer base has seen from us in a long, long time, so there was a lot of excitement. So that bodes well I think for next year. Also, remember that we had no new product launches this year, right, so -- and so that’s going to be a big change. So, as we look into 2013, new products could be a significant driver of growth. We have some early signs that are strategic accounts business could be more robust next year than it was this year. Remember, this year we did not have very many new big deals in strategic accounts which we did in 2011 and our hope is that we’d return to some more big deals. I mean, there are some prospects out there that we’re working on right now. So, really what I think it comes down to is that we only really -- we succeed in strategic accounts and with our new products based on the strength of the underlying business, which is influenced by the economy. So, if you -- if we have a modestly improving economy next year with strategic account growth and with new product growth, we could see a relatively decent year from a top line growth perspective, but we just don’t have visibility to that now.

Your next question comes from the line of Joe Maxa from Dougherty & Company.

Along the lines of the new product introduction, how should we be thinking about the operating expenses as you roll these out through the year?

We will continue to create leverage on our operating expenses if we see revenue growth. So, if we -- and obviously the level of leverage is impacted by our growth rates, but if we return to what we would call normalized growth rates of 5% organic or higher, we will see meaningful expense leverage all through the year would be our expectations. But it is -- there is a growth dependence to it.

And remember that we have a philosophy at Tennant that all new products will have higher gross margins than the products they replace and we should be able to achieve that too next year.

So, if I look at your OpEx line, should we be looking at it relatively flat year-over-year assuming really no growth? And then if we assume a 5% growth, how does that OpEx line grow from there?

Yes. Joe, I’d say it’s just too early to be speculating on operating expense levels for next year at this time. We’re going to -- I wish we could give people some deeper perspective on next year, but we're really -- given the economic circumstances, we’re going to have to wait until our typical time in February when we release earnings to give people a more solid sense of what we expect in 2013.

Okay. I wanted to talk a little bit about what you are seeing here in October. Are you seeing an improvement in the large industrial equipment sales, as well as the government channel? Is this part of what you are seeing here in October?

Yes. Let me comment first on the government channel. It’s a bit of a strange one in that it's -- because of the end of the fiscal year in the government at the end of September, the third quarter is really a critical quarter. So, I couldn’t comment at all about whether the first quarter is having any change and what’s going on in the government side. It’s just -- we were surprised by the magnitude of what happened in the third quarter. But we are seeing some improvement in our large equipment order patterns in October. So, I mean -- and not just -- so that is part of why we’re able to say that we feel we have the ability to grow organically in the fourth quarter.

On the government side, Joe, it’s important to note that the vast majority of our government sales hit in the third quarter. So government sales in total is not all that material to our overall business, but it’s very material to our third quarter results because that’s when it all comes and it didn’t materialize in accordance with our expectations this year.

Oh, I see. Okay, that’s helpful. I want just a brief, maybe, update on the Orbio, what you are seeing out there in the market. I know there is a new competing product out there. Just give us some thoughts.

Yes. We’re still not talking about unit placements yet for competitive reasons. I think you can expect us to maybe come out with a report on that front early in 2013. But as we said, it -- the rollout in North America, Europe, and Australia continues on plan, customers who have been using the technology for at least 6 months absolutely love it and we’ve had no returns. And you mentioned that a competitive product has been launched, it’s the Hydris from Ecolab. We actually think this is a really good thing for us. It validates the technology. Here you have the major kind of cleaning chemical supplier in our industry coming out with a technology that is similar to what we have. And our sense is that this is not something that they want to push aggressively, this is more of a defensive strategy on their part, while for us, the technology is priority #1 and we’re pushing it aggressively. But most importantly I think it validates the technology and gets people to say, "ah, you know, if Ecolab is in this game too, then we -- Tennant must be on to something." I’m a believer that any industry segment that’s interesting will eventually attract multiple competitors and we’re beginning to see that happen. But remember, this is a huge market opportunity, very diverse market opportunity and there is room for both Tennant, Ecolab, and others to play very successfully.

Your next question comes from the line of John Rosenberg from Loughlin Water Partners.

Most of my questions actually were covered in -- but if you could expound a little bit on 2 things that I might have missed -- or that I likely missed. Your confidence in this quarter -- in fourth quarter for this year is based primarily on, I’m sorry, could you give me some color in terms of -- are you seeing that as -- were some sales put off in September that have fallen into the fourth quarter? Is that your sense or do you just see another source of recovery in the fourth quarter?

A couple comments there, I mean I would also say we’re -- we’ve given a pretty broad range for the quarter. So I’m not going to -- we have a confidence in our ability to grow organically. We also recognize that there’s lots of things that we can’t control. And I wouldn’t say that we consciously saw orders shift between the month of September and October. I can’t really get into the details of that. What we can say is our order patterns that we’ve seen and again we’re not that -- we’re getting close to being done with the month here, but -- so we’re relying on not a ton of data. But based on what we’re seeing, the order patterns do reflect an ability to grow in the quarter relative to history.

Great. And additionally, just a little bit more color on some of these new product offerings. Chris, you mentioned that you guys hadn’t rolled out a new product this year and that you are very excited or that a lot of your -- excuse me, a lot of your customers having seen these products are very excited. As someone who is not in your industry, could you give me more of a sense of like how quickly are the adoption rates for these things?

Well, I mean, I think the adoption rates on the products we just talked about, because they’re all part of our core equipment portfolio and this -- so this is not new technology, there's -- it’s not new cleaning applications. These are new and improved products from Tennant and a couple of them we haven’t ever had before in our portfolio, so they should be completely incremental. So we have customers who buy the scrubbers from Tennant, but haven’t been buying walk-behind sweepers and vacuums because we didn’t have offerings in that category that met their needs, we now do. So we have the relationships with the customers. They will then say, "Okay, these products are great, we’re going to buy those from you as well." Then you have the Orbital Scrubber, which is the chemical-free cleaning and stripping machine, and the ride-on burnisher, those are new to the portfolio. Those are actually very interesting and growing categories. Our competitors have products in those markets. So, they actually have made some inroads into some of our customers, where we still own the majority share because they were the only ones offering them. Now, our customers will revert to us so that they have a one-stop shop supplier, which is Tennant, because we can fill those needs with equivalent or in most cases better products than what they have today.

Your next question comes from the line of Scott Graham from Jefferies.

Just a question about Europe. We are reading like I am sure you guys are, the press that continues to come out from your large competitor over there. I don’t know what it’s going to take to verify the technology more than what you have it seems. I’m just wondering, do you think that their press is hurting your business there? And if so, what can you -- further can you do about that? Just, I’m sure it’s frustrating for you.

I don’t think it’s so frustrating anymore. As a matter of fact, this has gone from a front burner issue for us to a back burner issue at this point. We see no impact on our business. We don’t see our customers talking about it anymore. So I think that the press that’s out there is actually being projected into a void from what we can tell. There’s still some court cases, especially the German court case, that’s pending, and hopefully that gets resolved here in the reasonable future. And so we remain positive. But the point is, is that our competitors have -- yet again, because if they were going to launch a new technology, a new product to compete with ec-H20 they would have done it at the ISSA trade show last week, they didn’t. So all they’ve been able to do is to attack ec-H20 through the courts and other avenues and so far unsuccessfully. So I think it’s pretty much in our minds right now a non-issue. And as I said, we’re not hearing anything from our competitors anymore.

[Operator Instructions] Your next question comes from the line of Zahid Siddique from Gabelli Funds.

Just a couple of more follow-up type questions, one on the 12% margin goal by 2013. Shouldn’t really be independent of the macro of the -- sorry, the organic growth assumptions because if -- I mean, if you have those assumptions we might never get to that goal of 12%, shouldn’t really be -- shouldn’t it be 12%, that’s our goal?

I don’t agree with that, Zahid, to be really straightforward about my response. We -- it’d be different if we didn’t believe in our business model and our ability to grow under normal economical times. We firmly believe that in a more normal economic environment that we will grow very firmly within our 5% to 9% range. And, therefore it’s not the sole reason -- or not the sole way we create an operating margin up to 12% level, but growth is important to us. And we would not recommend running the business on a basis to hit a 12% target in early -- at the given time if we’re not seeing the kind of growth we expect. So, we’re not going to just hit a target in the quarter for the sake of hitting a target. We still -- if we don’t make it by the fourth quarter of 2013, we firmly believe that we’ll see a return to normal growth and we’ll hit it in some relatively reasonable period of time after that. But I would reiterate that if we do experience growth in range next year, we still believe we can hit the 12% by the fourth quarter. We just recognize that there’s a heck of a lot of uncertainty out there.

The other question I have is on ec-H2O. Did you say that you expect the sales to be up low-single to mid-single for the full year?

Yes, 2% to 5% for the full year. So, we’re disappointed in that on an absolute basis, but a couple of things going on. I mean, Europe is important to ec-H2O and we’re seeing organic declines in Europe and ec-H2O is not growing organically in that market. But overall, we firmly believe in the future of the business and exchange is affecting us right now too. But we do believe that we can see a significant growth into the future and we’re a bit below our expectations this year, but we feel it’s related to the economy.

Right. But we look at it -- we have a declining sales base. We tend to look at attachment rates because that tells you about the robustness of the technology. And the attachment rate, meaning the percent of scrubbers that have ec-H2O available on that are sold with ec-H2O, continues to increase across all of our geographies. And I think that bodes extremely well for when we start to get some economic tailwind in our sales recovery generally.

Okay. And what percent of your portfolio -- product portfolio actually has ec-H2O versus does not have ec-H2O?

I’ll just comment directionally on that, Zahid. If you look at our equipment business, scrubbers are close to 60% of our equipment business now where that was more -- that has increased our scrubber business as a percent of our overall equipment. But we have never commented specifically on the number of scrubbers that we sell, what percent of those have the ec-H2O. What I can say is there is 15 machines that we’ve openly stated that are in the market today that have ec-H2O on them, but we haven’t talked about what percent of our portfolio that is.

We have no further questions. I turn the call back to the presenters for any closing remarks.

We remain confident in Tennant’s future. Our commitment to deliver enhanced growth and profitability is unchanged. Although, we are mindful that global economic conditions currently pose a challenge, we will continue to pursue growth, innovation in our core equipment business, demonstrated by our upcoming launch of 42 new products in the 2012 fourth quarter and 2013 full year and advancing our water-based technologies. We remain focused on improving profitability through ongoing operational excellence, cost controls, and standardized global processes. Thank you for your time today and for your questions. And we look forward to updating you on our 2012 fourth quarter results in February. Take care, everybody.

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