Good morning. My name is Denise and I will be your conference operator today. At this time, I'd like to welcome everyone to Tennant Company's 2019 Second 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 2019 Second Quarter Earnings Conference Call. Beginning today's meeting is Mr. William Prate, Director of Global Financial Planning and Analysis and Investor Relations for Tennant Company. Mr. Prate, you may begin.

Thank you, Denise. Good morning, everyone, and welcome to Tennant Company's second quarter 2019 earnings conference call. I am William Prate, Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Chris Killingstad, Tennant's President and CEO; Keith Woodward, Senior Vice President and CFO; Tom Stueve, Vice President and Treasurer; Andy Cebulla, Vice President of Finance and Corporate Controller; and Mary Talbott, Senior Vice President and General Counsel. Today, we will update you on our ongoing progress against our core strategies, our performance during the recent second quarter and our full year guidance. Chris, will first brief you on our strategies and operations, and Keith will cover the financials. After our remarks, we will open the call for questions. We are using slides to accompany this conference call. These slides, along with a replay of today's call, will be available on our Investor Relations website at investors.tennantco.com until August 31, 2019. 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 call, we will discuss non-GAAP measures that include or exclude certain items. Our 2019 second 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. Now, I'll turn the call over to Chris.

Thank you, William, and thanks to all of you for joining us today. For the past couple of quarters, we have begun to discuss how Tennant Company is in transition. We are moving from a period of strategic expansion, designed to extend and diversify our geographic and addressable market footprint to a more concentrated and deliberate focus on unlocking the benefits of this broader platform and driving profitable growth. This concentration on balancing reasonable growth with stronger EBITDA expansion forms the center of the strategic plan we are developing and will take us into the future. As indicated last quarter, we have already begun to implement certain initiatives from this plan. And while these efforts continue to develop and mature, they are already beginning to have a positive impact. We will have more to share with you on this plan in the coming months. But today, I want to provide you with some high-level insights into our approach and how it is starting to drive decision-making. We have a clear understanding of how we intend to shape the future of Tennant Company. Three growth pillars support our strategy and focus on profitable growth. The first is winning where we have competitive advantage. Within this pillar, we are deeply evaluating all aspects of our business portfolio, which includes our products, geographies, channels and customers to truly understand the components where we have the strongest value proposition. These insights will help us inform where to better invest our capital and better apply our resources, so we can pursue the strongest opportunities. They will also help us decide what products and services we need to move away from. This effort has already led to some early decisions in terms of portfolio refinement and targeted sunsetting of certain products. During second quarter, we made…

Thank you, Chris, and good morning, everyone. And my comments today, references to earnings per share, both GAAP and non-GAAP are on a fully diluted basis. As Chris stated, Tennant’s second quarter results reflect a blend of factors from mixed end-market conditions to our ongoing efforts to better balance our growth goals with profitability-enhancing initiatives. For the second quarter of 2019, Tennant reported net sales of $299.7 million, up 2.6% year-over-year. Organic sales, which excludes the impact of recent acquisitions and currency effect rose 3.8%. Our total organic sales exceeded our internal expectations and the makeup by region was different than we expected. We believe this performance showcases the value of our diversification of revenue streams and explains why we are pleased with the organic sales performance in the quarter, especially considering the difficult comparison to strong organic sales results in last year's Q2. On the bottom-line, our second quarter 2019 reported net earnings grew 16.5% to $14.8 million or $0.81 per diluted share. On an adjusted basis, net earnings grew 37.7% to $20.8 million or $1.13 per share. While we continue to strive for more progress in terms of profit expansion, we are encouraged by our margin and EBITDA improvements in the quarter. Now, let's take a closer look at our sales results. As you may know, we group sales into three geographies. The Americas, which includes all of North America and Latin America; EMEA, which covers Europe, the Middle East and Africa; and Asia Pacific, which includes China, Japan, Australia and other Asian markets. Sales in the Americas region were up 6.0% or 7.8% on an organic basis. Solid sales performance in the Americas reflects broad-based strength across the entire region, specifically, our strategic accounts channel, service, parts and consumables, the newly introduced T7 AMR autonomous cleaning machines…

[Operator Instructions] Your first question comes from Brett Kearney with Gabelli Funds LLC. Your line is open.

Hi, guys. Thanks for taking my question.

Hey, Brett.

Very strong cash flow generation in the quarter, further paying down debt. I think net leverage is close to two times now. Just wanted to ask, how you are thinking about capital deployment, I guess, in the back half of this year into 2020?

So, Brett, just to clarify, you are talking about just overall capital expenditures and investments?

Yes. Yes, debt pay down versus anything you might do, even on the M&A front as well.

Yes. Here is what I'd say is that, we've been fairly open about our goal to pay down our debt and our leverage, which we continue to do, is our first priority. We'll continue to be a dividend payer as we have been for 74 years. And we continue to make those investments, where we think we have the highest returns from a CapEx standpoint. We did make a slight adjustment in our overall capital expenditure guidance. We took that down $5 million just based on truing up our real estimates in that regard. But, I think you'll see more of the same in terms of where we're going in the back half with our capital allocation. We will speak to that more as part of our overall kind of longer term strategy when we come out with that and get more specific, Brett. But for now, the way we've been approaching it is, it will be very consistent in the back half.

All right. That's great. Congrats on a terrific quarter.

Thanks, Brett.

Thank you.

[Operator Instructions] Okay. Since there are no more questions queued up at this time, I'll turn the call back over to management for closing – oh sorry, we do have one question. Chris Moore from CJS Securities. Your line is open.

Hey, good morning, guys.

Good morning, Chris.

Good morning. Maybe go back to topic we talked about quite a bit on the gross margin side. Again, just trying to get a sense as to that new normal that we are heading toward, keeping in mind strategic account sales bring it down a little bit, low as the IPC gross margin although they tend to kind of add back on the operating margin side. Given some of these improved efficiencies that you are putting in place now and continue to, can you give a sense of what that – can we get back to the 42% gross margin level? Is that aggressive or?

Yes. Here is what I'd say, Chris, we've made the shift to really focusing on EBITDA margins given the nature of different businesses around the globe. But we certainly have our eye on gross margins and we know that's an important piece of this. What we are saying is, as our mix of business shifts a bit in the second half, that's a little bit of the pressure on EBITDA in the back half. And – but overall, we are just trying to navigate through what we see is just – the tariffs that we were anticipating in the first half got delayed a bit. Now, those are back to more of our expectations. So we don't see the upside there. And then it's just more of this mix of business that's coming through in our overall margins and what we expect. In terms of your question around longer-term, I would just put that in our overall just our EBITDA goals and where we are headed in the future and we'll get a lot more specific about that longer term algorithm as we come out and talk about that longer term strategy. But we need good gross margins to deliver good EBITDA. And so, it's really the totality of the P&L, EBITDA and the right mix, really good SG&A management and discipline around that and making sure that flows through to EBITDA on a consistent basis.

Got it. Yes. That was – I know that EBITDA is kind of longer-term goal is 15% up. I'll leave that alone for now until you guys talk further to it. Historically, you have kind of talked about the last six weeks of Q3 being really crucial to that quarter's results. Is that still the case? And then, kind of how much visibility do you have for the balance of Q3 and into Q4?

Yes. Again, because I am relatively new, Chris, I am not as familiar with that six weeks. What I would say is, the balance of this business across quarters is pretty consistent. So, from my standpoint, it's just consistent delivery across each of the quarters, each of the months and just making sure that we are focused appropriately. You might be talking about seasonality and buying cycles, et cetera. We have factored all that into our thinking and our planning. And so, we just need to make sure that we are doing – laying out and executing our plans as expected. And so, that's factored into our guidance.

Got it. And then the last question, somewhere in the commentary you talked about S&A and R&D shifts into the second half of the year. Can you just talk to that a little bit in terms of was there some delay on that front that that improved results a little bit in Q2?

Yes. So I talked specifically to R&D. We delayed a little bit of our timing of our investments there. And now we are ramping up as we really get after AMR. We see additional opportunities in the automated robotic area. So, heavier investments around that in the second half. And then we have a couple of other just kind of core platforms around these sustainable processes. Just in terms of our service platform and investing in that and getting that to the level that we expect around mobility, et cetera. And just IT investments is another key part of that S&A investment in the back half.

Got it. All right. Appreciate it, guys.

Sure.

Our pleasure.

There are no further questions queued up at this time. I'll turn the call back over to management for closing remarks.

Before we conclude, I need to thank our global Tennant team members, who are pushing forward on initiatives around each of the three strategic pillars and are helping to drive Tennant toward delivering higher levels of value to both our customers and our shareholders. We are pleased with our performance in the first half of 2019 and excited as we move into the back half. Thank you for your time today and for your questions. Take care, everybody.

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