Good morning. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's Fourth 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 Fourth Quarter 2016 Earnings Conference Call. Beginning today's meeting is Mr. Tom Paulson, Senior Vice President and Chief Financial Officer for Tennant Company. Mr. Paulson, you may begin.

Thanks, Rachel. Good morning, everyone, and welcome to Tennant Company's fourth 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 and Tom Stueve Vice President and Treasurer. Our agenda today is to review Tennant's performance during the 2016 fourth quarter and our preliminary outlook for the 2017 full-year. 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. We are using slides to accompany this conference call. We hope this makes it easier for you to review our results. A taped replay of this conference call along with these slides will be available on our Investor Relations website at investors.tennantco.com for approximately three months after this call. Now, before we begin, please be advised 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 and fourth quarters of 2015. Our 2016 fourth quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP result for the 2015 fourth quarter and full-year. Our earnings release was issued this morning via Business Wire and is also posted on our Investor Relations website. At this point, I will turn the call over to Chris.

Thank you, Tom. And thanks to all you for joining us this morning. We are excited to be talking to you today on the heels of our IPC Group acquisition announcement. This will be the largest acquisition in Tennant's history and it will more than double our business in the Europe, Middle East and Africa or EMEA market. Please note that you can find the link to a detailed factsheet on the acquisition of IPC in the IPC release in the About IPC section near the end of the release. And this factsheet is also available on our Investor website at www.investors.tennantco.com. I will tell you more about IPC Group and update you on our other strategic plans in a moment. We have a lot of ground to cover on this call. First, as you saw today's earnings release Tennant executed well against our strategies in the 2016 fourth quarter and we made further progress towards our goals. We are pleased with Tennant's results in the 2016 fourth quarter; consolidated net sales grew to $211.7 million with increase net earnings of $0.85 per diluted share; organic net sales rose 3.2% in the fourth quarter. Contributing to our results were sales in the Americas which had a strong order backlog coming into the quarter; we also returned to organic growth in EMEA. Tom will provide more detail on our performance by geography. Overall, Tennant posted a solid finish to a challenging year for the industrial manufacturing sector. Our commitment to production innovation again served us well in 2016; we introduced 10 new products and product variants including five large next generation cleaning machines for the industrial market. These new products have been well received by our customers. Our product vitality index was very strong for the 2016 full-year, with sales from…

Thanks, Chris. In my comments today, I will reference as earnings per share 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. For the fourth quarter ended December 31, 2016, Tennant's reported net sales at $211 million - which increased 2.9% compared to sales of $205.9 million in the 2015 fourth quarter. Excluding an unfavorable foreign currency exchange impact of about 0.5% and a net impact of August 2016 Florock acquisition, and the January 2016 Green Machines divestiture, that increase net sales by 2.2%, organic sales increased approximately 0.2%. Fourth quarter 2016 net earnings were $15.4 million or $0.85 per share. In the year ago quarter, Tennant recorded adjusted net earnings of $14 million or $0.78 per share. As adjusted results in the 2015 fourth quarter excluded two special items that totaled a charge of $0.8 million after-tax or a loss of $0.05 per share. Turning now to a more detailed review of the 2016 fourth 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 fourth quarter sales increased 7% or grew 4.8% organically, excluding about 0.5% of unfavorable foreign currency impact and the 1.7% impact of the Florock acquisition. Record sales of our fourth quarter in the Americas reflected strong sales through distribution and demand for new products in North America as well as increased sales in Latin America. Organic sales growth in Latin America was approximately 13% in the 2016 fourth quarter despite continued economic headwinds. In…

[Operator Instructions] Your first question comes from the line of Rosemarie Morbelli with Gabelli and Company. Your line is open.

Thank you. Good morning everyone.

Good morning, Rosemarie.

Good morning.

Congratulations on the acquisition.

Thank you.

The revenues and then how much are you paying for it. But I was wondering if you could share two things with us. The EBITDA generation in 2016 as well as the growth rate over the past few years of IPC?

Yes. We, there is information in the fact sheet that Chris commented on earlier at the beginning of the call, the EBITDA is in 2016 was on an adjusted basis, was €28 million, and so that's approximately a 14% EBITDA margin. And we haven't publicly showed any of the specific growth rates. I can say though they haven't been growing the last couple of years the newer owners did a nice job of turning the business. And they have been growing in the low single-digit area. So - but nice solid sustained growth across the last couple of years.

Okay. That is helpful. Thank you. And I was, if I may ask, another question. Do you see any disruption in your market and the equipment area obviously, from the pending there?

We do not. We really, we welcome diversity to be a standalone business and to compete with them. I don't really think that the competitive mindset will change. You know, we go ahead brand past few brand in all parts of the world. It's a nice business, but we don't see anything changing competitively due to the ownership change.

You have to remember they are primarily, a chemical company and they dabble on the equipment side. It has gotten a little bit more important over the years. But we still don't look at them in most of our markets, as being a primary competitor.

And the robotic area, which they are pushing, are you making progress with your own project?

We have been working at this for a while. We have publicly disclosed that we are working with a partner, who is in a higher excellence of a robotic development. They have been around for many, many years. They have commercialized a number of products successfully across different industries. But we like the partner, we like the development that we have done so far in the pace that we are going at it. We said that we have identified a number of very key customers around the world, who are also quoted out in partners with us on this effort make sure, that we are doing it right in meeting their needs. And so we think we are right on track, and we will have as good in our judgment, anyway, as good or better solution both from a technical standpoint and from a business model standpoint when we finally introduce robotics.

Okay. Thank you.

You are welcome Rosemarie.

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

Good morning, Guys. Nice acquisition here after a long. Starting with the quarter here, just wanted to get a sense on, I mean, Tom, you did say about the gross margins, which if you look at 44% in the quarter. Were there any one-time, I mean, you did relate to that as a better mix and on the industrial side, any other things within the quarter, which kind of drove the margins a little bit higher than what we have seen recently?

Yes. No real one-time piece, Bhupender. I mean, we would emphasize that we would like to get to the point where margins are sustainable. But in North America, as is the fastest growing and their margins generally are tend to be a bit higher and we did have a good product mix. Even though we did see some inflation begin to come in. I wouldn't say that had any major negative impact and we performed better operationally. And that showed up in the numbers too. So just all around solid quarter, we are still guiding to be in the range of 43% to 44% going forward, but we would like to get [indiscernible] like this under our belt.

Yes, my next question was on that. When you guided like 43% to 44% in your 2017 guide, with the cost restructuring, you just announced like in the fourth quarter. Do you think with the organic top line of 1% to 3%, which you did like in 2016, do you think that's a little bit conservative? Or we don't have the IPC number in that, and you are thinking maybe, when IPC kind of flows down, I don't know what the gross margin for IPC is, it's mostly distribution business, but with that kind of caps the gross margin number slightly below than what you have at Tennant...

I will comment in a couple different way there. I mean, one, we like to be conservative as we guide to gross margins and you need to remember that the negative that's going to be happened in the year end, we are beginning to see is we are going to see inflation, we haven't seen much of it for the last three years, we will see that. We fully intend to offset that through price. But that's always a bit challenging. We think we are up to the task, but we will see both of those ups and downs. And I can tell you our internal objective is we don't want gross margins to go backward, we want them to be better than 43.5% that we had in the last year. So our objective is to modestly improve in every year. We can't guarantee that, which is why we gave a range and then, directionally, IPC has gross margin structure that is a positive. I mean, it's very similar to ours, we are not prepared to be specific yet. It's one of the things we like. And then I would remind you that their EBITDA - the revenue is better than Tennant's. and I mean they manage a tight ship and we will have a situation that even excluding any synergies that we gain, it will be beneficial to our EBITDA margins. So that's a positive overall.

Okay and as you said, this transaction is a total cash transaction. What kind of a debt rate or interest rate on the under debt you raised for this deal?

Yes, as we look at it I mean at a really simple level will be a little bit above on our pro forma EBITDA basis, will be slightly above three and that will quickly go down. I would remind you that we generating a lot of cash and so does the company that we are buying. So we will and we fully intend to be able to pay that down quickly and be below a three leverage rate, pretty darn. And the interest rate environment is favorable to us and we are not prepared to give you any specifics on that regard, but we do have a fully committed credit situation with our current lead bank JP Morgan, and also Goldman Sachs is advising us and they fully are committed to the financing and we haven't finalized what that structure will look like, but we are certainly putting a lot of energy into it.

And I would remind you that this information, again, it is in the factsheet that's attached to the release. We have a page in there which is the summary of the transaction terms that gives you a lot of this information. I apologize, we didn't make it easy to find it initially. That's why we brought it up in our talk here, but a lot of other information is there. So I would invite you to go back and look at it after we finish the conversation here.

Yes, I have that sheet in front of me. I did actually find that and I'm looking at like net debt to EBITDA is going to be below three, I think that's what Tom was relating to. Just wanted to get a sense on the interest rate on the…

Yes. We are not prepared to give you any specifics around that, but it will be overall, interest rates are pretty darn favorable. We are going to take a full advantage of that and we will certainly give you a specifics around that when we release our earnings after Q1 and give you a far more details on the forward-looking financials on pro forma basis for the rest of this year. And the only thing that we are really fully committed to at this point is that we believe it, we really anticipate will be a fully be accretive on a GAAP basis for the full-year 2018, and we will give a lot more details on what 2017 will look like depending upon closing date and there is a lot of variables that we need to factor in. We are anticipating to close in early of April as we can, but we also know that anticipation is it will certainly be in Q2, but we don't know for sure what the date is right now.

Timing is often important in deals and we feel pretty good about the timing of this one, given that the dollar is extremely strong, interest rates are low and if you start reading the economic press, the Europe is beginning to see some positive signs of recovery. So, we are cautiously optimistic about the future.

I mean, really important the timing for Europe standpoint for us is their business has been performing nicely. Our business is improving now. We have had three of the last five quarters our business was growing organically in Europe. And we anticipate organic growth in Europe in the upcoming years. So we do think the timing is nice.

Okay. Just two more last questions here. One on the IPC. Can you just talk about some of the competitors for IPC in Europe? And what are some of the large end market verticals for Europe and Middle East as you said those are the big markets for them?

Yes. I mean, the competitive set is, I mean, they compete more honestly day-in and day-out with the tasks of the world [indiscernible], we don't see much, much competitively. So some of our competitive is that, we compete more as a premier level. We do see them in the market, but there frankly is not that overlap from both distributor standpoint and end-user. so we think there is really positive side on both, for us to sell their products to our channel, and for them to sell our products to their channels, but we are going to manage the brands very independently and we really want them both and maintain our identities in the marketplace.

One of the really exciting things about the acquisition is that we view them because we are the premium player the market as a mid-tier band, so the brand and the price points are differentiated and it gives us a lot of opportunity with customers both their customers and our customers, for example, if you are a BSC in Europe, and you bid for a retail piece of business, where you have thousands of retail stores, not every retail store has the exact same requirements. Some retail stores require the premium offerings and some are happy to take a mid-tier offering. Some are smaller and require smaller products, some require bigger. We are only able to satisfy a of portion of that need today as Tennant. With IPC, we can go to big customers and offer them the entire spectrum of products that they need and we will be able to differentiate by the different types of retail establishments that they are trying to serve. So this is why we say the cross-selling of business both within our channels and their channels is very, very interesting.

Okay. I mean, you did gave like cost synergies of €12 million by 2019. You haven't talked anything on the revenue synergies here, especially what you just mentioned, and can you give us some color on the €12 million cost synergies, especially how they are going to play out in 2018…

Yes, I will give you a directional sense of it. I mean, we have obviously - as you financially model these things, you need to make your assumptions on synergies. We have gone very deep. We are assuming, we are going to be methodical as we drive those synergies and we are going to deeply assess that. We will give you a lot more detail, when we talk about this, late April. But they will be the classical types of synergies, certainly there is revenue opportunities for that we see. We are not counting on that happening real fast. But there are absolutely some synergies on the top line side. There should be synergies on the sourcing side. We do buy from the lot of the same suppliers. And we will certainly believe that there will be opportunities as there should be in transactions like that. There will be some back office synergies and there should be some from infrastructure synergies, I mean we do have multiple offices and multiple sales offices. Again, We will be measured and smart as we bring those synergies forth and we will give you more detail on the specifics, around the timing across the year, as we get a deeper into this. But, you can look at the synergy level of this and what we are committing to is a number that relative to other industrial deals as a percent of revenue, is certainly at the low end of what you would hear most people talk about. So we would like to think once again we are being conservative and creating a situation where we hope we have upside to it.

The most value in the short-to-medium term will be to maintain the integrity of the IPC business and have them continue to grow and hopefully accelerate that growth, expand with Tennant's business, and then to figure out where the cross-selling opportunities are. That is going to drive the most value for the deal in the short-to-medium term.

It's a really nice business that we will be pretty complementary to each other, both can help each other in how we compete in the market, and how we provide value propositions to end users. So we are very excited about it.

Okay. Thanks a lot guys.

Your next question comes from the line of Joe Maxa with Sidoti and Company. Your line is open.

Thanks you guys and good morning. Just thinking on, as you talk about synergies, any thoughts of manufacturing consolidation? Or is it way too early to even think about that?

Never say never, but it's not built in our current thinking. They have five very nice factories. One of them is a bit smaller, but they do have five real nice factories that we have obviously spent time around in Italy. And we are not anticipating that we would do any combination of those and it's not in our current thinking, and like a said, never say never, but it’s not in our current thinking.

Okay. Any sense on what we should be thinking for as far as dilution initially?

We are just not ready to go there in 2017. I mean, what we will say on a GAAP basis, it's not going to be accretive. And we know that. As you factor out and do what most companies will do and report on a pro forma basis, we are not prepared. We would certainly like thing it could be positive. We will give you the details later, but it's really early around what is going to end up being the intangible levels on this, the timing of the close, the timing of the savings, the cost of what we are going to pay to get the savings and inventory step up will be a real number that we will talk about. So there is a lot of moving parts and we will look forward to providing all those details at the end of April

Definitively, accretive.

The portfolio in 2018, we are, we believe, we commit to that.

Is that on a GAAP basis or pro forma basis 2018?

That's a GAAP basis.

Okay. And then, just quickly on order trends in Q1 as compared to last year at this time?

We would say our order patterns have been consistent with the guidance that we have given. And the way I would reiterate that would be, our organic range is between one and three. And if we are going to get to the three or get fortunate enough to do better, the improved growth is going to come later in the year. This isn’t instantaneously going to get better. But I would say that we anticipate to see growth in Q1 and we would say that the order patterns that we are seeing are consistent with what we would need to see organic growth.

And how about just in APAC, I know it’s a smaller region now, but as far as it's been weak all of last year, do you see any signs of turnaround as far as getting back to organic growth?

I think, if you look at our three geographies, we think that we are in a great shape in the Americas markets with a stable economy, with acquisition of IPC, we are obviously very bullish on EMEA. And what we think would be an improving economy in business. In APAC, we are just not seeing that now. I mean, I think it's still a slow growth macroeconomic environment. And in a slow growth environment in APAC, we suffer a little bit because we still don't have a broad enough footprint from a direct sales and distribution standpoint. We see years where we do great where we have a lot of big deals. And then in other years those big deals don't translate into top-line performance, we struggle a little bit. So we are looking for their economies to improve, but we are also working across our key markets to ensure that we have the go-to-market footprint necessary to generate not just big deals, but up and down the street business, a foundational business that's consistent year-in and year-out. And I think, that hopefully happens here over the next two to three years. That will put us in better stead, but right now we need the economies of China, Australia and Japan to improve for us to see dramatic change in our sales growth profile.

Thank you. That’s all I had.

All right, Joe.

Thank you.

Your next question comes from the line of Marco Rodriguez with Stonegate capital.

Good morning guys. Thank you for taking my question. Wondering if you could talk maybe a little bit more on IPC. You guys talked a little bit about the brand idea, the differentiation that they have in their market. Can you maybe talk about the what is their specific value proposition to the end customer? And then, also if you can may be share what sort of market share data that they have for their European area?

Yes, I will give you a couple of pieces there. I mean, one, they bring a very relevant value proposition to end users. I mean, they have a nice aftermarket organization, also they do a higher percent of it through distributors. So their overall aftermarkets are a smaller percent of their total revenue. But they do bring in overall value proposition and great quality products, innovative, do a lot of the same things up, they tend to be at price points that are a bit lower. And I would also say that, if you look at the vertical markets side of things, we compete in a lot of the same verticals. They are going to do better in some verticals that are smaller size spaces. We tend to do better in big size retail spaces, and that's an over simplification, but bigger factories, bigger retail sites, we do particularly well in mid-sized walk-behind machines, and ride on machines, they tend do better in the mid-size, walk-behinds and smaller walk behinds. So there is some differences in general in size of products. And as far as share goes, that's a complicated one. They compete in two categories that we don't include in our market data in the case of power washers and tools, there is a lot of blurring in those two categories across the consumer side and the professional side. And we really honestly need to get better information around the size of those respective markets. We don't think our competitors do a good job of sizing what they are. And that's about 37% of the revenue. We are excited to be there. We know many of our current customers buy all those things from other people. So we think it is an opportunity. What we can say is if you back out those two categories and look at the global share position, this should improve our share position from where it is today by about 2.5 percentage points roughly. So it is a meaningful piece. We are not ready to talk about shares in Europe, but Chris has commented earlier that it more than doubles our European business is a really big deal for us.

Yes, it more than doubles European business, remember that 80% of their sales are in Europe, and then 10% in Asia Pacific and 10% in the Americas. This product category - now we are going to take our time to figure it out, but they are relevant in Asia Pacific and the Americas too. And that's not something we have really factored into the deal either. That's pretty much an upside to the modeling that we have done. But our focus has to be to get the European integration right at the same time that we slowly start to look at the opportunities to take these product lines to Asia Pacific and the Americas. As Tom said, we don't have three out of their four product lines, in any big way today. So it's exciting. The one that may be the most exciting on a global basis is the tools business, which many of you probably look at and say well - that's boring, but the fact is, they have these great and innovative modular carts, the window washing systems. They have proprietary antimicrobial, antibacterial microfiber products that are winners in the European marketplace. Rubbermaid is the dominant player in the U.S. right, there is really no competitor to them, the sense that They have always had is that they had a bigger partner, a bigger player in North America and market they can make headway. The other thing I love about this business is, this stuff is purchased every day, every week, throughout the year by all of our customers. So if we can figure out how to bring this into our portfolio, and form it in a way that it is compelling to our existing customers, it could be of a big deal for us in the future, and it's a very nice margin business, which was also surprised was, but it does the case. so a lot of upside here that we still need to figure out with some of the product categories that we don't have a lot of experience with historically.

Got it. Very helpful thank you. Then I just kind of wondering if you can talk a little bit more about the cross-selling synergies, I guess that you guys have discussed earlier on IPC. And you guys obviously been a distributor type model. I would assume that most of those distributor will be familiar with your guys products. So, maybe you can talk about how are you going to attack that market and get more of a products from those distributors?

Yes. First of all, there is the cross-selling opportunities within IPC's business, right, they have just started that. Remember, they have the scrubbers and sweepers and the vacuum cleaners and the power washes and the tools business in most parts of Europe today, they still operate separately with very little cross-selling. So that's an opportunity. They figure that today they cross sell about 25% of the time. And they should be cross selling at 75% of the time, with their existing channels. So, that's one area of focus. The other area of focus as their distributors don't have access to Tennant products today. They would love to have the larger commercial ride-on on scrubbers and scrapers and some of our industrial products to sell to their customers. But the biggest deal is with strategic accounts, as I said, building service contractors serving for example, retail strategic accounts, BSC will come and say us I needs some big products and need some small products, I need a mixture right, because not all of our customers in this bid are the same. Tennant would come in and say, well we can only provide you on the premium end. And IPC came in and said, well we can provide you the small stuff. So we were only a partial solution so they have to go with other suppliers. Now, we can combine the product portfolios of the two companies and walk into a [indiscernible] or a Tesco and other retailers and say we can provide you the whole shooting match right, from pressure washers and the tools, all the way up to largest rider sweepers and scrubbers to clean their warehouses and their bigger footprint retail stores. This is a big deal for us.

I would add one thing to that. We are going to go slowly, but surely. I mean, we have two channels, respectively in each of our businesses that operate very well and satisfy a lot customers. We want to do a better job of satisfying our existing customers and we want to provide a little disruption in the market, and we need to stay focused on. This is about the end user experience and enhancing and going deeper with existing and garnering new customers and we want to not disrupt a respective channel, so I think that’s really important.

That's important. And so the way we would do it, initially, as Tom said, we are to be thoughtful and measured in terms of going after any new business opportunity. We actually have the luxury of doing that in this deal. And it wouldn't be that we would just give the IPC products to Tennant or vice versa, if there was a big deal, we would bring the IPC management team in to really basically, present their side of the portfolio in conjunction with their Tennant counterparts, to make sure we maintain the integrity of both organizations in both businesses, because I think that's where the value lies.

Got it. Thank you. Then switching gears here on the cost-saving initiatives for Tennant, you announced. Can you get roughly 7 million in savings during fiscal 2017? In response to a prior question, it didn't sound like a lot of that was going to be in cost of goods. So I'm assuming this is all going to be coming out of SG&A, can you talk a little bit more about that? And then also, are you going to be eliminating positions, and people are currently doubling up on responsibilities? Or is there some sort of automation that is kind of limiting positions, just kind of help me understand that?

Yes. I mean, it's important to note that it is a net headcount reduction of approximately 3%. And it will be global. We are making changes around the world, there won't be any one singular place that its centered on. There will be a portion and we will provide more details as we go along here. We really focus on that the total level of the savings, but there will be some that will flow through in our S&A spend. There will be some that will fall through cost of goods also. A higher percent will clearly be through S&A. And a portion of this is we are upgrading some talents in areas and we are changing spans of control. And we have been through a heavy investment period in five quarters of slower growth. We felt it was a very important to adjust our overall cost structure, it was a bit high. And it will certainly accelerate our capability at getting to our 12% target faster. But it will affect a broad array of areas.

Got it. Thank you guys. I appreciate your time.

You are welcome.

A pleasure.

[Operator Instructions] and it looks like we have no further questions at this time. I would like to turn the call over to management for closing remarks.

Thanks, Rachel. We are making progress against our growth aspirations. Our acquisition of IPC Group will put us over $1 billion sales target on an annualized basis. Additionally, our combined acquisition and restructuring actions will move us closer to our 12% operating profit margin goal. Looking ahead, we believe that Tennant is competitively advantaged with attractive growth prospects in a stronger global economy. We are focused on creating value for Tennant's shareholders and we are excited about the Company's future. We look forward to updating you on our 2017 first quarter results in April. Thank you for your time today and for your questions. Take care everybody.

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