Good morning. My name is Sean and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Tennant Company's Third Quarter 2016 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 Third Quarter 2016 Earnings Conference Call. Speaking on today's meeting is Chris Killingstad, President and Chief Executive Officer; and Mr. Tom Paulson, Senior Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

Thanks, Sean. Good morning, everyone, and welcome to Tennant Company's third quarter 2016 earnings conference call. I'm Tom Paulson, Senior Vice President and Chief Financial Officer of Tennant Company. With me on the call today are Chris Killingstad, Tennant's President and CEO; and Karen Durant, Vice President and Controller. Our agenda today is to review Tennant's performance during the 2016 third quarter and our outlook for the 2016 full year. First, Chris will brief you on our operations, and then I'll cover the financials. After that, we'll open up the call for your questions. We are using slides to accompany this conference call. We hope it makes easier for you to review our results. A taped replay of this conference call along with these slides will be available on our Investor Relations Web site at investors.tennantco.com for approximately three months after this call. Now, before we begin, please be advised our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations of future performance. Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement, for a description of the risks and uncertainties that may affect our results. Additionally on this conference call we will discuss non-GAAP measures that include or exclude special or nonrecurring items. For each non-GAAP measure we also provide the most directly comparable GAAP measure. There were no special non-GAAP items in 2016. There were special non-GAAP items in the third quarter of 2015. At 2016 third quarter earnings release includes a reconciliation of those non-GAAP measures to our GAAP result for the 2015 third quarter and also EPS for the 2015 full year. Our earnings release was issued this morning via Business Wire and is also posted on our Investor Relations Web site. 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 previously discussed the uncertain global economy and we saw continued economic volatility in the 2016 third quarter. The sluggish environment for industrial manufacturers led to lower 2016 third quarter sales in our EMEA and Asia-Pacific regions but our Americas region posted record revenues for our third quarter. Once again sales through strategic accounts and sales of new products drove our results in the Americas. Tennant's 2016 third quarter consolidated net sales were $200.1 million with net earnings of $0.64 per diluted share. Overall Tennant remains competitively well positioned and we are excited about our growth prospects. We expect to return to organic sales growth in the 2016 fourth quarter based in part on a larger than normal order backlog at quarter resend. Taking a look at our 2016 third quarter highlights. Part of our growth strategy has been to pursue add-on acquisitions that provide access to interesting products or broaden our global sales and service coverage. We completed two small acquisitions with this profile recently. Our acquisition of the Florock brand at Chicago expands our commercial floor coatings business. Florock offers a range of floor coating systems across a wide variety of industries and is a recognized leader in developing and installing flooring systems for commercial, industrial and institutional applications. The combination of Tennant coatings and Florock opens new markets for Tennant's coatings business and strengthens our value proposition to more customers. We also acquired the assets of Dofesa Barrido Mecanizado which has been a long time distributor of Tennant equipment based in Central Mexico. This acquisition represents a key investment for growth in Latin America and enhances Tennant sales and service capabilities in this important region. Combined with the other distributors in Mexico, the…

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 result of generally not comment on the year-to-date financials as those were detailed in earnings release. For the third quarter ended September 30, 2016 Tennant reported net sales of $200.1 million compared to sales of $204.8 million in the 2015 third quarter. The impact of foreign currency exchange on sales was neutral in the third quarter and the net impact of the August 2016 Florock acquisition and the January 2016 Green Machines divestiture decreased net sales by 0.1%. As a result organic sales decreased approximately 2.2%. Third quarter 2016 net earnings were $11.5 million or $0.64 per share. In the year ago quarter, Tennant reported adjusted net earnings of $12.1 million or $0.68 per share. As adjusted results in the 2015 third quarter excluded two special items the total the charge of $13.1 million after-tax or a loss of $0.73 per share. Turning out to a more detailed review of the 2016 third quarter. Our sales are categorized into three geographic regions which are the Americas, which encompasses all North America and Latin America, EMEA which covers Europe, the Middle East and Africa, and lastly Asia-Pacific which includes China and other Asian markets, Japan and Australia. In the Americas 2016 third quarter sales increased 2.2% or grew 1.2% organically excluding the impact of the Florock acquisition. The foreign currency impact on sales was neutral. As Chris said record sales for the third quarter in the Americas were once again feel by sales to strategic accounts and sales in new products. This record was achieved despite lapping the strong Americas organic sales growth of approximately 8.3% in the prior-year quarter. Organic sales growth in Latin…

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

Thank you and good morning. I wanted to ask a little bit more about the productivity challenges you've seen. Does it suggest you’ve had or maybe lost a few of these skilled laborers and if so have you rectified that?

We are in the process of rectifying. I mean, it is - and it’s not an uncommon issue that the ability to attract skilled labor as fast as you need to and not lose them due to the competition has frankly become tougher particularly in our factory here in Minneapolis. We have taken measures to shore things up and we are in the process of putting in additional robotics in the factory to take the place of some of the issues that we’re having with staffing up to the levels that we need to be staffed at. But we think we saw stabilization as we exited September. We're seeing our performance improving in October. We need a little bit of improvement but we do think we're going to return to a more normalized gross margin level in the quarter. But it's necessitated some change.

Okay, that's helpful. And then regarding the strong backlog to start the quarter, so that looks obviously good for Q4 but how has the order trends been compared to last year given that last year was a little bit weaker than expected if I recall?

Yes, what we’re seeing Joe and to put a little bit additive flavor on the back order position, it’s - the open order position that we exited with was about 24% above prior year, that’s really substantial and meaningful. It certainly doesn't guarantee you’re going to have growth in the upcoming quarter but it increases your odds for sure. And it’s also important to note that the order patterns that we’re seeing so far in the quarter and we’re about 22% or 23% through the quarter is we're seeing organic growth versus the prior year and it supports the guidance range that we’ve given for the fourth quarter.

Okay. And then I’ll ask one more, and this is on the Brexit impact. Can you quantify that somehow or what have you seen over that regarding just Brexit in general versus just the impact.

I wish I could, I mean, all I can really say Joe is we did see - the U.K. surprised us. We thought we’d see more stabilization but it’s clearly having an impact on how people are ordering and customers demand. There could be some additional rub off effect but broadly speaking what we're seeing is we really do believe that we’re going to see a return to growth in the fourth quarter. We don’t believe we’re going to see in EMEA, we don't think we’re going to see it in the U.K., and we’re not counting on it but we do believe we’re going see improvements in other areas.

And Joe it's important to remember that a part of the impact is due to just a general business slowdown and the other part is due to the currency devaluation. It’s pretty significant.

Of course, yes. Okay thank you.

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

All right, thanks guys. Can we talk a little bit about the SG&A level that was in Q3, trying to get a feel for if that’s sustainable on a percentage basis moving forward and kind of where some of that savings came from?

Yes, it is - the absolute level is not sustainable. I mean, we did really mange expenses pretty aggressively in the quarter while still investing behind the things that really matter for the long term but on a percent of revenue basis I think that it is sustainable. And in fact as you know our objective is we really want to see us as we go forward begin to create leverage relative to the prior year as we look at our operating expenses as a percent of revenue. So that's our expectation. You will see the absolute level of spending go up. It will more than likely be more closer to what you saw in a Q2 environment. We won't be able to maintain spending as low as we did in Q3 on an absolute basis.

Okay, that's helpful.

Go ahead Chris.

The other important thing to note though, it's so sure that we basically have to take our expenses down but we in no way have compromised any of our most important investments whether it be in products and technology, e-billing and e-commerce platform or expanding our sales and service coverage around the world. So we'd have to cut back a little bit but the most important investments in those areas are the integrity of those have been maintained despite the SG&A decline in the third quarter.

And we’re really doing all the classical things that you'd expect, Chris, I mean we're reducing travel to travel absolutely necessary revenue generating, we're much slower to replace - fill jobs that are vacant. We still are filling them in key jobs. We are not adding new positions. The discretionary spending has been deferred. It's nothing that - it's all the typical things you need to do in an environment of slower growth

Got you. Okay. With respect to Florock it sounds like it increased revenues 1% this year, no impact on earnings. 2017 is that - you expect the same perhaps a little bit of accretion to earnings from Florock or…?

Yes, we'd expect the accretion of earnings, we're not prepared to give you a specific number, but we would see - we expect revenue growth, all that acquisition we expect accretive - it to be accretive to our earnings. So it's early days, but we are really pleased with both Florock and Dofesa.

Got you. Okay. Last question on the ec-H2O scrubbers, obviously still growing 2015 was a big year, $157 million. Are you able to match that number in 2016? Is it still growing slightly declining just trying to get a sense?

Yes. We still hope that we'd see some modest level of growth on an organic basis. It's - we are not seeing as - it's not as strong from a growth standpoint as last year, but it remains - have a nice traction. It's making a difference with our sales guys to go back to customers that didn’t buy the technology in the past. So it is - it's mattering overall.

But the thing that is important is that you look at our equipment sales and it's performing better than our overall equipment sales. The other thing is that there are lot of products where we still have not installed ec-H2O NanoClean and so that's going to continue to happen over the next two, three years. So you will continue to see growth with this technology.

Got it. All right. Thanks so much, guys.

Your next question comes from Bhupender Bohra with Jeffries. Your line is now open.

Hi, good morning, guys. So just checking on the Europe and Middle East and Asia-Pac, I mean Asia-Pac was - you guys had difficult comp that's understandable on the EMEA. What was the - why was that below expectation and weakness over there?

In EMEA?

Yes.

Yes, I mean, in each of them -- I mean EMEA really was - we did have a much more negative impact on Brexit that we anticipated. I would say that the rest of the Western Europe in general other than distribution didn’t perform it quite as well. In our CMEA region, we see coming back in Q4 and we expect growth out of it. So, overall, we don’t see anything that's not working strategically. The only things that are affecting us we believe are the things that we can't control. I can't say we are as confident in the ability of EMEA to grow organically as we are in the Americas, but we do expect some modest level of growth in Q4. But again importantly strategically we don’t see any weakness in our operating. In the case of Asia-Pacific, we do expect to see improvement in Q4. We hope we see a modest level of growth. It's been top economically there and it's pretty broad based. There is really only one meaningful bright spot and that's our performance of Japan and Asia-Pacific and the other areas and we expect improvement in Q4, but it just might be not until next year that we see return to organic growth.

But we are in a short term, and there is only so many things we can do in the short term, but we are adjusting our sales approach and what we're focusing on because there's some vertical markets that are more robust than others and we're trying to adjust, so we go after the sales that are available. The other thing we've realized in situations like this is that we still don't have broad-based coverage whether it be in China or in the southeast Asian markets. So we've historically been very dependent on big deals when those big deals don't happen. And you do see a sales decline and of course that's happening also on a poor economic environment. So this is not something we are going to solve overnight, but our strategy is to continue to improve our sales coverage across the board in A-Pac so we have a more broad-based and stable business and we shouldn’t see the fluctuations that we have recently.

Tom, you mentioned about EMEA the Brexit impact now how big is U.K. for you?

It's actually less than 5% of total revenue. So it's an important market, but I mean globally it's not overly material to our business.

But it's a second biggest business for us in EMEA.

Okay. And did we see kind of deferred orders over there or was it pure cancelations or, what actually happened with the…

Its more deferrals than anything else, I can't say that we didn’t see any cancelations but I mean it is still more about uncertainty and deferrals then it is about outright cancelations.

Okay. And the second question on pricing, you have mentioned previously that it will be difficult for - in 2016, are we talking about like some organic growth here in the fourth quarter how should we think about pricing and what actually happened was pricing in the third quarter here.

We would say that we did not get measurable pricing benefits in Q3 or Q4. As a remainder we got about 0.5% through the first half roughly. We do think that will change as we go into next year, I can't say that we’ve announced pricing yet but we are starting to feel little bit of inflation and we think it given the fact we held the line this year did not price. We won't overly aggressive in the prior three years, we think there will be an opportunity to price in the upcoming year. We're not prepared to putting numbers on it but expectations will be we’ll take price.

Okay. And lastly just on the - just broadly on your customers like with the industry environment where we are right now and you can see all the major kind of reporting's out there, kind of sluggish environment. What are your customers thinking and how does that look for 2017 as we go into the first half of next year.

There is still uncertainty, particularly in a few verticals around oil and gas and agricultural and some manufacturing particularly if you look at the middle of the U.S. that’s - and we are doing things to offset that. I think we’re having some success and we still believe based on what we’re seeing from our sales and the order patterns that we are seeing and the pipeline that exist in Q4 that - at the current time we are not ready to get guidance for next year but we expect some modest level of organic growth in the upcoming year. That’s not going to be in our normal range right now but it's what our expectations are and we’re not ready to guide. And there are some areas of really that do matter education, healthcare are two verticals that matter to us and they remain pretty solid. So there are examples of things that are very different than some of the areas of the economy.

Right. And since we are - and this base business is very tied to kind of GDP, I mean global GDP estimates for next year are improved versus this year which should give us a little bit of a bump too.

And you can see Bhupender I mean, our range around Q4 organic is pretty broad, I mean it's 1% to 5% and there is a reason for that, we do expect growth and that will certainly have an impact on what our thoughts are as we give and typically would give guidance for next year later in February but how we finished and the way next year starts off is going to matter to us next year.

But I think one of the important things for all you to notice that as I said before we had not compromised any of our growth initiatives right, so if we get a little bit of economic tailwind, all of those things are in place and we will take forward that adjustment and they should give us nice leverage. So we feel that everything within our control is working just fine, we just need little bit of economic tailwind.

Right, okay. That's good. Just one more last question here on Walmart, that's one of your biggest customers. They had recently announced, I don't know if you saw their capital spending plan about like $11 billion and they talked about closing retail stores and putting some more efforts on the e-commerce side, so they would be opening like more distribution stores. How do you think about that like when these brick-and-mortars kind of they want to compete with companies like Amazon opening distribution, I think that's a good thing for Tennant, right I mean.

I mean yes certainly I mean the closing of retail space is we have to do things offset it, it is one of those times you're glad, you are diversified in many different vertical markets, and we do pretty darn good in the distribution for. So as the world goes more online, I can't say we can offset every dollar of concerning the retail sites but we sell a lot of equipment into the distribution world and that's a nice vertical for us and it has been and continues to be.

And if they may not have as many destruction centers but there are going to be large facilities and they also buy these higher end industrial equipments that we sell. So from a price point selling into them, it does benefit us.

Okay. Thank you, guys.

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

Good morning, everybody. Thank you for taking my questions. I just wanted to kind of follow-up on one of the prior questions on the productivity issues with the skilled labor here in the quarter. I'm not sure, I fully understood it, were those labors pouched if you will from a competitor or kind of what - give me a little more color on regard to what happened there?

Marco, our business model base in the factories is that we flex the factories with temporary labor, right, so we have a baseline of permanence and then during the certain times of the year, we flex with temporary labor and have been very successful with that business model over time. This is really the first time it has not worked the way we anticipated in two ways. One, it was difficult to find the number of temporary people that we needed. And what we are finding is that the quality is lower than what we've experienced in the past, so they come on Board, we try to train them and they are just not up to snuff. So it was a double whammy, fewer people that we're bringing in and then for every 10 people that we did bring in we had a slower - a lower hit rate than we had historically. We hadn't anticipated those things. We now realize this is probably going to be an ongoing issue. It's not going away. Everything we read says other manufacturers are experiencing the same. So we're kind of revamping how we go after this temporary labor and how we train them. And as Tom mentioned, I think that we are being much more proactive and aggressive in bringing robotics into the plants. We are already beginning to install robotic welders, because that's a key skill area that is in short supply. And we have our first two robotic welders in the plants now, they're not fully up to speed, they should be soon and we may have to bring out a few more in the future, but that's another thing that's going to help us mitigate the problems regarding labor in the years to come.

Very helpful. And is there any way you might be able to quantify the impact of the quarter from a revenue standpoint and how much of that kind of I guess, if you will believes into Q4?

I’ll give you a directional piece of it. I mean, we did comment on the productivity issue, but as far as the - so far as the revenue impact, what I would say is if we would have finished the quarter in Q3 at a normal kind of open order position, we would have seen modest organic growth in the quarter. So it was material and it's why we have a 24% increase in our open order position as we enter the quarter. So it did have a material impact and I mean some of that was productivity related and some of the lower gross margins was lower revenue too, but I mean it's mainly around productivity and we expect to be back in range in Q4 and as we said we do expect organic growth to return.

Helpful. And then I was wondering if you could talk a little bit more about the Dofesa acquisition. Maybe if you could kind of compare and contrast that with the acquisition that you made to kind of enter Brazil?

Sure. I mean there are some similarities, one of the differences in Dofesa as we've been partners for over 40 years, so we have a deeper longer relationship. In this case, we really were - we’re buying the distributorships, we’re guying the people predominantly, sales people and service folks and we're not getting that. We do get a brand certainly as important than Alfa. We primarily did the acquisition and to get sales and service coverage, but along with it we also got a great management team, we got a brand in Alfa that we continue to operate both Alfa brand and the Tennant brand on our equipment and we got a factory. So it's a bit different, we're buying a pure distributor, but we do believe that we're bringing in really good people and it's a nice platform that we're going to be far more aggressive in investing to drive off of that platform. So similarities, but some key differences, one of the real beauties is the person that came with the Alfa business that was the General Manager there, now runs our entire Latin American operation as he was integral in bringing on the team of Dofesa and as really instrumental in bringing that deal on Board and we're really thrilled to have [indiscernible] running the whole Latin America business for us.

And last quick question and I'll jump back in the queue, just kind of an update here on your guys' thinking on capital allocation. I know you kind of mentioned in your prepared remarks. If maybe you could just talk about given what your stock price is right now, just kind of ranking your R&D spend, additional acquisitions and stock buyback.

Yes, I mean what I would say is, I mean we won’t compromise our R&D spending, I mean we expect us to continued to spend at a rate of around 4% of revenue and we will protect our growth initiatives and the components of R&D are critical so that our dividend is protected at all - we’re going to protect our dividend. You might expect to see a dividend increase here in the future but can't commit to that but - and we will buy back stock at the prices that make sense and we will continue to evaluate - while we remain organically focused we will continue to evaluate acquisitions. Don’t expect anything real soon, we’re digesting the two that we did but we do have a pipeline and we are evaluating. So we would love to do some future deals after we'd digest it and have success with two that we have.

Thank you, guys. It's very helpful.

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

Thanks Sean. So we remain committed to investing for growth with disciplined spending. We continue to believe that Tennant is competitively advantaged with attractive growth prospects and a stronger global economy. In the short term, we remain vigilant on controlling costs and enhancing productivity across the organization while making targeted investments to reach our goal of a $1 billion in organic sales and a 12% operating profit margin. We look forward to updating you on our 2016 fourth quarter and full year results in February of 2017. Thank you for your time today and for your questions. Thank you everybody.

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