Good morning. My name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's First Quarter 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 First Quarter 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, Casey. Good morning, everyone, and welcome to Tennant Company's first quarter 2018 earnings conference call. I'm Tom Paulson, Senior Vice President and Chief Financial Officer of Tennant Company. Joining me today are Chris Killingstad, Tennant's President and CEO; Tom Stueve, Vice President and Treasurer; Andy Cebulla, Vice President of Finance and Corporate Controller; and Jeff Cotter, Senior Vice President and General Counsel. Today, we will review recent milestones achieved against our core strategy, Tennant's performance during the 2018 first quarter and our updated outlook for 2018. First, Chris will brief you on our operations and then I'll cover the financials. After that, we'll open up the call for questions. We are using slides to accompany this conference call. We hope this makes it easier for you to review our results. A replay of this conference call along with these slides will be available on our Investor Relations website at investors.tennantco.com following this call until May 23, 2018. Now before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations of future performance. Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in the statements. 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, especially 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 certain items. For each non-GAAP measure, we also provide the most directly comparable GAAP measure. There were non-GAAP items in both the 2018 and 2017 first quarters. Our 2018 first quarter 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 our Investor Relations website. At this point, I'll turn the call over to Chris.

Thank you, Tom and thanks to all of you for joining us. For the 2018 first quarter, overall consolidated net sales grew nearly 43% to approximately $273 million, primarily reflecting the contribution from IPC and organic growth across all geographic regions. On an organic basis, sales grew 6.5% and our adjusted net earnings totaled $0.27 per share. Overall, we are very pleased with our performance during the period, which exceeded both our guidance and internal expectations. We entered 2018 with an intense focus across all of Tennant on making further progress on each of our strategies to generate growth, operate efficiently and position the business for long term success. We are devoted to achieving our previously stated goals and I am pleased to say that we made progress on several during the first quarter 2018. The first involves our commitment to sales execution. During the first quarter, Tennant drove expansion across all three geographic regions. This is the second consecutive quarter that all three regions have delivered organic growth. It is also our highest quarterly organic growth since 2015. As indicated last quarter, we anticipated we would begin to realize the benefit of strategic account growth in the early parts of 2018 and we are excited to share that those benefits contributed to our performance this quarter. In addition, our service, parts and consumables business experienced good growth in the quarter, particularly in North America. Second is our integration work with IPC. Just over a year ago, we announced the acquisition of IPC, a move that expands and diversifies our revenues in multiple ways by region, product category and sales channel. This acquisition also broadens Tennant’s growth platform. Since causing that transaction, we have thoughtfully, but aggressively pursued our integration plan. To date, we remain on track to capture our…

Thanks, Chris. In my comments today, references to earnings per share on a fully diluted basis except for the 2017 GAAP result, which were calculated with the basic weighted average shares outstanding due to the as-reported net loss. However, non-GAAP 2017 earnings per share are calculated on a fully diluted basis. Note that our financial results in 2017 include the financial performance of IPC Group, which was acquired at the beginning of April 2017. This is the last quarterly reporting period where IPC will be excluded from our organic performance. As Chris highlighted, our performance during the period is beginning to reflect the outcome of our efforts to improve sales and earnings growth. We're optimistic that we’ll continue to benefit from these efforts as we move through the year. For the first quarter 2018, Tennant reported net sales of 273 million, approximately 43% higher year-over-year with organic sales improving 6.5%. Each of our geographic regions contributed to this organic growth for the second consecutive quarter. Our organic sales results exclude a favorable currency impact of about 3.1% and the impact of the IPC acquisition that increased net sales by 33.2%. Turning to the bottom line, first quarter 2018 net income was 3.3 million or $0.18 per share. Our reported results in the quarter reflected the impact of two items totaling 2.3 million in pretax charges or $0.09 per share. Excluding these items, Tennant reported adjusted net earnings of 5 million or $0.27 per share. By comparison, Tennant’s reported adjusted net earnings of 5.4 million or $0.30 per share in the year ago quarter. It's worth clarifying that the first quarter 2018 results include a pretax charge of 5.5 million or $0.22 per share and amortization expense of the intangible assets related to the IPC acquisition. Taking a closer look at…

[Operator Instructions] And your first question comes from Marco Rodriguez from Stonegate Capital Management.

Good morning, guys. Thank you for taking my questions.

Our pleasure.

I was wondering if you could talk a little bit more in detail with regard to the sales execution, specifically on the strategic accounts here in North America. Were the results that you saw in Q1, did they kind of surpass your internal expectations? And then if maybe you can talk a little bit about what some of the drivers you saw in this quarter for strategic accounts?

Yeah. Well, you got to remember that we talked about strategic accounts throughout 2017 and that we were working on a number of large deals. We anticipated that some of them would come to fruition earlier than they did, but we’re happy to report that they are starting to hit and they’re impacting our results. We’d say that in the first quarter, they probably did exceed our expectations. We've indicated that in our remarks and the good news is, is that if you look through the rest of the year, we should continue to have pretty solid strategic accounts growth momentum.

Got you. And in regards to the strategic accounts, I mean I do recall the conversations we had through ’17 that it kind of had the feeling that the strategic accounts, a lot of the deals you were working on were kind of delayed and being pushed to the right if you will. Maybe you can give us a little bit of a sense as far as that, for a lack of better word, that backlog of accounts, strategic accounts that may have gotten delayed somewhat? Are we through all of those yet or are we halfway through? Just any sort of color there to give us an idea.

Yeah. I can provide a little bit of insight there. I mean, we knew that last year that we felt that the renewal business that was coming for it would start to give us some benefits in the back half of the year. That didn't really happen and we didn't ship where we hoped to in Q3. We then began to see some wins in Q4 that accelerated in Q1 and we believe will continue into Q2 and in the back half of the year. We still haven’t won [ph] all the business, I mean we do have a fair amount of business that's coming up for renewal in the current year and even into next year. So we still have to get some more wins. We certainly anticipate that we will. We’re off to a great start, but you still got to win one at a time and, but we do anticipate that we'll see further success in the year. It’s frankly one of the things we’re really good at is winning back the business of where you have and ensuring that we get it again.

Got you. And then in regard to the actual execution of sales for strategic accounts, have you changed any of the methods or processes that you're taking to win those accounts and maybe if you can talk a little bit, if whether or not you started to add in the IPC part as well.

No. I don't think we made any substantial changes to our processes. Over the last four or five years, we’ve spent a lot of time and effort on building what I think is the best strategic account organization in the industry and that's paying dividends for us here going forward. I mean, the thing is the process was the same. We can't always control how long the bid process goes and that is the customer decides that they took longer than normal in 2017, which is why we're beginning to see the benefits accrue only now in the first quarter of 2018. And really we have not yet seen any material impact from our work with IPC on this front. That's all in the future still.

Got you. Then in regard to the IPC integration, I’/m not sure if I caught this correctly in your prepared remarks. I thought I heard that you said that you identified some potential additional synergies above what you had already communicated. Did I get that correctly?

That's correct. I mean, we identified $10 million worth of cost synergies. We've exceeded that total number by a modest amount, but we have -- we do have identified savings in excess of 10 million. We're not ready to commit that we're going to deliver in excess of 10 million, but it gives us more confidence that we in fact will deliver that amount and we hope there's upside. As we commented before, it's going a little bit slower than we like, but we still -- we have not de-committed from this level of savings this year or next year, but if anything, it might come in a little bit slower, but we also have the opportunity to overdeliver.

Got it. That's helpful. And last quick question, just on the new product side, the autonomous machine you’re making here with the launching in late ’18 with Brain, can you maybe talk a little bit about the -- how you're looking at the launch in terms of the marketing efforts you will undergo and then how you're thinking about the rollout to the rest of the geographies?

We will be very targeted. We're not going to do a great big splashy rollout, but we're going to really stay focused on ensuring where the first to perform. We wouldn't be going to market or announce that if we weren't confident that we could roll out, but we'll be measured about the pace with which we do it. We know there will be -- it's not simple and we know the business model is very different than our typical business model, it's going to need more support, both on that equipment side and the software side, but we will roll out on a controlled basis. But we will begin and it will be a couple of years before we're going to get the revenue that's really meaningful, but we believe we will get started at the end of this year.

And the other important thing to note is that we have been working with a handful of large early adopter customers on the whole autonomous guided vehicle strategy from the beginning and continue to do so with the second generation product with Brain and that's where we're going to focus a lot of our initial sales efforts, because that's where we have the connections. They're really interested and they also can generate strong volumes for us in the short term and going forward.

[Operator Instructions] Your next question comes from Jon Fisher with Dougherty & Company.

Thank you. Good morning. Very good quarter. Just kind of focusing still on the revenue line, the Americas’ organic growth rate of over 8%. The year ago quarter was a little over 4% and obviously the rest of the year gets easier since you have a negative organic growth rate and you've spoken very positively about the outlook for the rest of the year for strategic accounts and renewal momentum and renewal pace. As I guess, I’m trying to figure out why the increase in revenue guidance was less for the year, was less than the beat in this quarter, given what to me would seem to be a pretty attractive Americas in and of itself organic growth outlook for the rest of this year.

Fair question, Jon. I mean, we hope we're being conservative and we did, I hate to remind us but we did only grow 1.4% organically last year. We did finish the year stronger and that trend has continued and increased through Q1, but we don't want to be overly ambitious in taking our numbers up on the basis of the first quarter. I'd remind also folks that it is our least important quarter of the year. It's not that everyone is unimportant, but it is typically the lower point of the year with Q3 being the next low point, Q2 and Q4 is where you really make and break the year. And we -- again I hope we’re being conservative, but I think that's prudent at the current time.

Okay. Sure enough. And then just because we have had now two quarters in a row where all three major geographies have put up positive organic growth, is that a trend that you think is sustainable for the rest of this year and into next year or would you expect that to change in one of the non-North American geographies over the course of this year?

We actually are confident that we're going to continue to see growth in all of our geographies, not only in the geographies, but also in the IPC acquisition. We do feel that we’ll see accelerating growth in Asia Pacific. We did have organic growth. We do think we'll see a bit of acceleration in that area. We think we’ll continue to see the trend in Europe and I think it's very notable that we grew it a couple of percent in Q1 on top of 14% in the prior year. So we're seeing momentum across the world and we hope it continues to get a bit better.

And remember last year we said, we did the restructuring partly to rightsize our cost structure, but maybe more importantly was to realign resources against the biggest opportunities in our geographies and what I'm proud to say is I think we probably have the best management teams in the key countries, both in EMEA and in APAC that we've ever had. And they are -- they get in and getting traction and so while nothing's guaranteed, we are extremely hopeful that this is a trend that's going to continue for some time to come.

Good to hear. Good to hear. Moving on down to the gross margin line and with the significant beat, I know kind of the math is a little bit different, but you did kind of come in under my gross margin target for the quarter. You mentioned strategic accounts and IPC and you've mentioned before that both of those categories of revenues are lower gross margin. I just, I guess I want to explore beyond that mix drag, just price cost with, it sounds like you kind of didn't raise prices as much as you could ever should have last year and then obviously with input costs on raw materials increasing this year again year-over-year, just want to get a comfort level that from a price cost standpoint, there's no -- there was no kind of drag in Q1 because you're underpricing or costs are worse than maybe anticipated for this year?

Yeah. We remain confident in our ability to get adequate pricing. We've executed pricing. We do -- we feel we're being successful in the market. We need to get it due to -- there is inflation and we're seeing that particularly in steel and resins and lead. But we remain confident in our planning assumptions that we'll get adequate pricing to not have that be a drain to the gross margins. The only additional piece, we commented on strategic accounts, putting a little bit of pressure on our margins. That's okay. I mean, we'll take the revenue. We do feel that it will be additive to the profitability for the full year obviously. The one surprise that we did have in the quarter is we did have an inventory write-off that that was one-time in nature. We think we had adequate controls in place. We don't see any future issues, but it did affect gross margin by 40 basis points. All of our other underlying assumptions are holding true. We're improving our two factories where we struggle last year. We're seeing our sourcing organization get stronger and we're seeing our service organization performing right on expectations relative to plan. So we feel all of our other assumptions are holding true so far as the year has gotten started.

Okay. Great. And then just touching on the interest expense, that was less than I had modeled. You mentioned you had paid down 4 million of debt in the quarter. Just wondering from a fixed variable standpoint, again, with interest rates increasing here, is your entire interest cost base fixed or what's the fixed variable mix on interest expense?

It's not completely fixed, I mean, and the credit facility is a LIBOR plus, but the vast majority of our debt is fixed. It is fixed in nature. So we don't feel that we’ll suffer the vagaries of, if we continue to see inflation on the interest rate side of things. We feel we're very well positioned to have -- not have our interest expense move much.

Okay. Great. And then last question from me is share count. Is that a function of what the stock price had done during the quarter or I guess how much should we assume going forward 18 plus million for a fully diluted share count [Technical Difficulty]?

Modest movements in our share count. So we don’t see any significant movement for any reason as we go forward. We're not all buying back shares at the current time even though we do have an authorization, but we don't see a significant move in our share count as we're going forward through the year.

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

All right. Thank you, Casey. So before we leave you, it's worth reemphasizing that over the past year, we committed we would work toward improving revenue diversity and growth. In Q1, we demonstrated encouraging organic growth across every global region and believe we have significant momentum as we head further into 2018. We also committed that we would refocus our resources toward growth opportunities and for enhanced efficiency. Not only did we post solid organic growth in Q1 in all regions, we captured significant revenue growth with strategic accounts and expanded our aftermarket revenue, while still keeping S&A in line with internal expectations. We also committed that we would maintain our investment in new product innovation. Over the past year, we've kept our vitality index far above our 30% target and developed new relationships that will help Tennant meet the growing needs of our customers. And lastly, we committed we would accomplish all of these items with a capital allocation strategy that continues to balance important investments and deliver shareholder value. Tennant Company has maintained its commitment to its dividend, debt reduction and ongoing investments to pursue organic growth and the flexibility to consider non-organic opportunities. Overall, we are excited with the momentum we've created and believe we’ll experience throughout the remainder of the year. Finally, I wish to thank our team members across Tennant whose efforts have and will continue to be central to our success. And also thanks to all of you for your time today and for your questions. Take care everybody.

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.