Q3 2019 Earnings Call
Great you may begin.
Thank you Jesse good morning, everyone and welcome to Tennant Company's third quarter 2019 earnings Conference call Im William freight director of Global financial planning and analysis and Investor Relations. Joining me today, our Chris Killingstad tenants, President and CEO , Keith Woodward Senior Vice President and CFO , Tom Stuebe Vice President.
And Treasurer, Andy Sybilla, Vice President of Finance and corporate controller and married Talat Senior Vice President and General Counsel.
Today, we will update you regarding our progress against our core strategies, our third quarter performance and our full year guidance, Chris will first review on our strategies and operations and Keith will cover the financials. After our remarks, we will open the call up for questions.
We are using slides to accompany this conference call. These slides along with a replay of todays call will be available on our Investor Relations website at investors Dot Tenneco dotcom.
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 these 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 affect our results.
Additionally, on this call we will discuss non-GAAP measures that include or exclude certain items.
Our 2019 third quarter earnings release include a reconciliation of these non-GAAP measures to our GAAP results.
Our earnings release were issue was issued this morning via business wire and is also posted on our Investor Relations Web site at investors that Tenneco Dotcom now ill turn the call over to correct.
Thank you William and thanks to all of you for joining us today.
Our third quarter results reflect our commitment to delivering consistent profitable growth.
In order to create long term shareholder value.
During the quarter, we once again delivered positive organic growth and EBITDA expansion, while navigating mixed economic and market conditions worldwide.
Specifically, our organic growth was 2.8%.
And we expanded EBITDA margins by 50 basis points over the prior year quarter to 11.2%.
As we've shared with you in previous quarters Tennant company is moving from a period of strategic expansion.
During which we extended our geographic footprint and addressable market.
And we're now focused on on unlocking the value and profitable growth potential of our broader platform.
This will involve balancing the balancing of reasonable growth with stronger EBITDA performance.
Yes represents the core of the strategy we've been implementing.
And we're encouraged to the initial results of that strategy can be seen in our performance thus far in 2019.
And our year to date and third quarter results signal that we're on the right track as we move forward and improving our operating model.
As you May recall from our last earnings call. Our strategy is based on three pillars in support of profitable growth.
The first strategic pillar is winning where we have competitive advantage.
We are evaluating all aspects of our business portfolio.
Including our products geographies channels and customers.
The truly understand where we have the strongest competitive advantage.
Tenant is a much larger and more diversified organization than it was three years ago.
This gives us many strengths and advantages.
But also underscores the importance of refining our business portfolio to optimize its capabilities.
The second strategic pillar is reducing complexity and building scale across our products and operational and business processes.
By focusing on the most popular machine configurations.
And the highest demand options.
We will create efficiencies that flow through our plants and supply chain and.
And help simplify our selling processes.
Equally important is our effort to simplify and standard to standardize key business process.
Across the entire organization to enhance the quality.
Speed and efficiency of our decision making.
These actions are designed to increase the overall profitability of our business and are completely within our control.
The third pillar is building on our position as an innovation leader.
By finding creative ways to bring new compelling solutions to our customers as they face challenges associated with labor pressures.
Health and cleanliness standards and sustainability goals.
Our three strategic pillars are highly interconnected and mutually reinforcing.
In implementing our overarching strategy, we are identifying where we have the strongest competitive advantage.
Simplifying our product offerings and adjusting our go to market strategy Accordingly.
Doing so will enable us to further innovate in the areas, where we can generate the greatest value for our customers.
And shareholders.
With that in mind similar to last quarter, we are announcing additional product. This discontinuations in the industrial category that tied directly to our first strategic pillar.
Specifically, we are discontinuing our 80 Lv all terrain outdoor vacuum.
And the Sentinel a ride on outdoor vacuum sweeper.
Both products have experienced declines and customers unit volumes and margins and have required operational support and investment not detract from tenants growth plans.
Winning with these products would require significant significant investment that does not fit within our profitable growth strategy.
These changes our customer centric and our about optimizing our portfolio and allowing us to refocus our investments in order to deliver the greatest differentiated value.
In doing so we are executing on our second strategic pillar.
By eliminating overlapping products older models, and reducing machine configurations, we're simplifying the decision making process for our sales team and customers.
That same simplification will also reduce manufacturing lead times and make us a more agile manufacture.
It remains ready to meet the dynamic and evolving needs of our customers.
Simplification can also drive innovation.
Our third strategic pillar.
Optimizing our product portfolio will enable us to increase our efforts and bring new high value products to market.
To that end, we're investing in technology that directly addresses the biggest pain points for our customers.
As we highlighted last quarter.
Great example of our industry, leading innovation is our T. seven AMR.
Our autonomous robots.
Which directly addresses the labor challenges faced by an increasing number of customers.
This time last year, we were excited to announce the commercial commercialization of this new product in North America.
We are equally excited to introduce this innovative product to our customers in the EMEA region, starting this month.
In all this is just scratching the surface of where we are going as a company and what we can accomplish.
We look forward to sharing more with you.
In the months ahead.
Now with that I will turn the call over 60.
Thank you, Chris and good morning, everyone.
Please note that in my comments today references to earnings per share, both GAAP and non-GAAP R&D fully diluted basis.
Tenants third quarter results reflect a number of factors from mix and market conditions to our ongoing efforts to better balance our growth goals with profit enhancing initiatives.
For the third quarter of 2019, Tennant reported net sales of $280.7 million up 2.7% year over year.
Organic sales, which exclude the impact of recent acquisitions in currency effects rose 2.8%.
Our total organic sales growth demonstrates the value of diversifying our revenue streams.
This growth is especially encouraging in light of the tough comparison to strong organic sales growth in Q3 of last year, which rose, 6.1% lashed versus last year as well softness across the European and Asia Pacific markets This quarter.
On the bottom line, we reported net earnings of $14.6 million or 79 cents per diluted share.
On an adjusted basis net earnings grew 15.8% to $11.7 million or 63 cents per diluted share.
We are encouraged by our results for the quarter, which we believe reflect our ongoing operating model improvement efforts to expand our profitability.
We'll now take a closer look at our sales results.
We group sales into three geographies, the Americas, which includes all of North America and Latin America.
EMEA, which covers Europe , the middle East in Africa and.
And Asia Pacific, which includes China, Japan, Australia, and other Asian markets.
Sales in the Americas region were up 6.2% or 6.7% on an organic basis, reflecting strong performance in North America and Latin America.
The growth in North America was driven by demand for tenants autonomous cleaning machine.
Ranked in the direct channel related to industrial equipment and continued growth in the service and parts and consumables businesses.
In Latin America strengthened demand for industrial equipment in Mexico, and South America drove what was the ninth consecutive quarter of year over year organic growth for the region.
Sales in EMEA declined, 6.2% or down 2.8% organically.
This was the result of persistent market weakness across the region with notable sales weakness in the United Kingdom and Simia regions.
While this continued weakness as industry wide spurred by general market uncertainty and purchasing delays by customers. Our long term plans for the region remain on track.
For the Asia Pacific Region reported sales were up 5.1%, but declined 9.4% organically.
This was primarily due to significant softening in China combined with a difficult comparison with Q3 2018, when we reported 10.6% organic growth in APAC.
Now on the margins.
Our strategic strategic pillars are focused on EBITDA enhancing growth.
We are still in the earliest stages of implementing key changes, but we believe our third quarter performance demonstrates that we are on the right path.
Adjusted gross margin in the third quarter improved 180 basis points year over year to 40.8% as a result of pricing actions favorable geographic and channel mix lower freight costs and cost reduction efforts that more than offset the impact a material inflation and 10.
Yes.
Turning to expenses.
During the 2019 third quarter, our adjusted SNA expenses were 31.2% of net sales compared with 30.3% in the year ago period.
The increase was the result of higher compensation and benefits costs, given the stronger anticipated 2019 performance.
In total our profitability enhancement initiatives continue to drive improvement in the quarter.
Our adjusted EBITDA increased 7.2% to $31.4 million or 11.2% of sales and improvement a 50 basis points.
As for our tax rate during the third quarter tenant had an adjusted effective tax rate of 16.1% compared to 5.6% in the year ago quarter.
The increase is primarily due to the mix and expected full year taxable earnings by country and a decrease in discrete favorable tax items.
Turning now to cash flow capital allocation and balance sheet items.
Tenant generated $35.3 million in cash from operations for the quarter.
Primarily with improved collections of outstanding accounts receivable on top of strong overall operating performance.
During the same period the company reduced its outstanding debt by $12 million and paid $4 million in cash dividends to shareholders.
Lastly, as included in today's earnings announcement, we've revised our full year 2019 guidance, which is as follows.
Net sales of $1.135 billion to 1.14 or $5 billion with organic sales growth in the range of 1.8% to 2.6%.
GAAP earnings of $2.40 to $2 in 50 cents per diluted share.
Adjusted EPS of $2.80 to $2.90 per diluted share.
Adjusted EBITDA of $134 million to a $136 million.
Capital expenditures in the range of $30 million to $35 million.
And our effective tax rate of approximately 16%.
We expect Q4 sales growth to be consistent with Q3 growth rates.
This lowers our topline expectations due to soft in global market conditions.
However, given the success of our operating model improvements, we've raised our EPS and EBITDA guidance ranges.
As a reminder, and as Chris noted our goals are delivered to deliver reasonable topline growth and to improve EBITDA margin in order to drive shareholder value.
Overall, we believe our guidance reflects this commitment and the progress, we're making and executing on our growth strategy.
With that we will open the call to questions. Operator. Please go ahead.
Thank you as a reminder, if you like to ask a question. Please press Star then one on your telephone keypad.
Pause for just a moment to compile the kuni roster.
Your first question comes from Chris more with CG CJS Securities. Your line is open.
Hey, good morning, guys.
Good morning, Chris Good morning.
To start with C. the DMR.
No Walmart I talked about 1500.
MS Scrubbers by the end of January 2020.
Is that from your perspective does that still look likely or might be a little bit aggressive for from kind of the pace that you're seeing.
No I think we're on track with the with both Walmart and our expectations regarding the rollout of.
They amar.
For this year and moving into next year. Good news is that we're also beginning to sell am our units to other customers in North America and.
Interest continues to build we've commercialized in Japan and are looking at expanding.
In other parts of Asia Pacific and as we said in the call. Today, we are introducing am are in Europe . This month.
So we are extremely pleased with the progress we're making so far with AMR and we think we are on a leadership position.
Got it is it reasonable to think that Theres additional.
Sales to Walmart coming in 2020, you too early for that to know that.
Chris We don't comment on on customer orders that was a fairly unique situation with Walmart when they announce their initiatives. So we as a general we do not comment on that.
Got it.
R&D expense.
Roughly 8 million a quarter. So is that kind of the level that we will be at moving forward or is there kind of additional expenditure coming there.
Yeah, it's a it's a bit of timing, Chris and its related to just kind of the ramp up on a lot of our innovation efforts, which had been more backend loaded this year.
I will tell you it's in the areas, we want to continue to innovate on <unk>.
A lot of work and novel robotic space, and we continue to like that space and invest accordingly.
Got it.
The two products that you talked about just continuing.
The Hcl and since we.
Good day contribute significantly to revenue for the first nine months this year.
Yeah. It's you know it when it's not a huge amount for us Chris it's a in the $15 million to $20 million range on an annual basis.
We will still be in the market with those partially through 2020.
And out of those businesses really in the back half of 2020.
Got it it's helpful.
And we've been through this a little bit, but so if the.
I understand the longer term.
EBITDA target.
Lets just say say this 15% gross margins were were improved this quarter.
Im still trying to get a sense, even though even I know even as the focus is there kind of that mix between improved gross margin improved.
Better absorption better on on the operating expense side is there.
Oh level on the on the gross margin that you that you're targeting as well.
You know I I've talked about this before Chris we have to get it in all parts of the piano. So in terms of our focus on efficiency efforts in kind of our cost out making sure. We're handling any increases it come asset at us and the way it tariffs inflation et cetera, we have to make sure our gross margins are right and.
We will continue to focus on that but also all the way through the piano.
So it's safe to assume it's going to come from both areas and we like the performance that we're seeing on gross margins for the year and we're going to keep focusing on that as well as our SNA costs going forward so to be a combination of both got it. Okay. I appreciate it I'll jump back in line.
Alright, Thanks, Chris.
Again, if you like to ask the question. Please press Star One. Your next question comes from Marco Rodriguez with Stonecap Stonegate capital market. Your line is open.
Good morning, guys. Thank you for taking my questions.
So I'm wondering if.
Hey, I was wondering if you could maybe talk a little bit more about the Americas and the growth you saw they're pretty strong organic growth I just shy of 70% can you had a pretty nice organic growth rate in the prior year quarter as well.
You've kind of.
Pulled out the T. seven to direct channel services, maybe if you can kind of rank.
Where are the shrinks was that kind of drove that that organic comp there would be helpful.
Yes, no I would say that it's across all those categories. I mean, we've said that the the T. seven am our I was a significant contributor.
Two sales in the third quarter and most of it or all of its still in North America.
But we were pleased to see kind of.
Strengthen the industrial direct channel, which is our historical sweet spot and also has the highest margins.
Part of the business also tends to draw the most parts and consumables, which also are high margin businesses from that in through.
As as well what I would say about North America. It has been the vaults robust market for us.
Through all quarters this year and how you saw the declines in EMEA and APAC. So those markets I think just.
Holistically across all markets in Europe bar are fairly weak right now.
Whether its short term a long term I think thats anybody's guess, we have seen a significant drop often.
And activity in China.
In North America. Its revenue remained robust, but I think we are signaling that there is a little bit of a slowdown that we're seeing in the north American market to again based on.
What's happened over the last two three years, we've seen slowdowns and then they ramp back up so theres no way for us to tell at this point, if it's just a level and the action or.
In our north sustain.
Stepdown in business activity as we move into 2020.
What I'd add to that to Marco is just you know innovation continues to be the driver and the demand for innovation and robotics is a very positive.
I should have certainly in North America, but certainly globally as well so that will continue to be a a big support and focus for US Yeah, I think thats been a differentiator for us versus our competition you may have seen the the only a company in our industry that publishers.
Results publicly is nilfisk and and they're struggling in all geographies, including North America, and I think that puts our performance in a much more favorable light we like our position.
Got it that's very helpful. Just wondering as well, though and I know that obviously nobody had no one has a perfect crystal ball.
But from what you're hearing from Nick your clients in North America and in in Asia on specific to China.
I think this is the first time you guys have called out China as far as starting to see some weakness there and you're obviously, saying that the Americas seem to be kind of softening a bit I mean, what does the feedback that you're receiving point is sort of a a change in outlook. If you will.
Well in China, we are businesses split into two we have an extensive dealer network and we have an emerging kind of a direct sales and service business.
And.
The two parts of that perform differently, but the.
Dealer business is still by far the biggest that's where we we saw the slowdown where dealers felt they had enough inventory and.
And really pretty much stopped ordering and the third quarter.
To draw it down that end that inventory in these more uncertain conditions, so whether that's to be sustained or not I don't know, but the good news is that the direct sales and service channel we're building.
Is growing and.
Continues to gain momentum so thats.
A positive sign for us going forward and we very much like to see that be a bigger and bigger part of our sales mix in China over time now having been a tenant since 2002 and seeing a lot of ups and downs and recessions and all of that for US. The key signal historically has been when are you.
US customers start to delay their orders meetings that they've placed them and then they keep delaying them, we're not yet seeing that one of the things. We're facing is that we are coming off a period of a lot of really big deals.
That of.
Positively impacted our sales so I think that when it is is that there are customers out there that are being a little more cautious and deciding when is the right time to pull the trigger on on replacement of law of large.
Fleets.
Big deals that could come to us so thats. The one piece, we're watching carefully but the kind of day to day up or down the street business. So far we're not seeing the traditional signals.
Pre C.
Past market downturns.
Got it very helpful. Then shifting down here to the gross margins you guys brought out a positive pricing mix lower freight costs and an overall reductions of of manufacturing expenses.
Can you talk a little bit about the pricing aspects I think you kind of touched on the mix, maybe with the direct channel being a higher percentage of your overall sales.
But did you push through some significant increases in prices across the border and you guys kind of help us. Thanks to these these different buckets.
Yes, I mean, we took pricing this year Marco on what I'd say is we've got ahead of it at the beginning of the year, where if you go back to 2018, we are a little bit behind we didnt see the tariffs coming we didnt see the inflation. The freight costs are going to hit us in 2018. So we took midyear pricing in 2018 and I would.
Tell you that we got ahead of it and ticket in January for 2019, so that's carrying through.
That first half of the air which really helped our gross margins and were sustaining that in the back half and on a relative basis pricing a little bit more in 2019 than 2018.
Got it helpful.
And then last last quick question here, just trying to understand a little bit more on the machine a side and your comments earlier to an earlier question, obviously you needed to take.
Actually this year on your gross margin level, and then your opex side too to hit those even a margin targets.
With the add back of the contingent consideration you are running around 88 million in the prior two quarters, you're 1992, just trying to get a sense. If if if how much more can you take out of the SGN a line, assuming obviously you don't want to take too much away from R&D given the innovation.
Part of your strategy.
Yeah, you know, it's like I said before Marco I'd, just tell you I think there continued opportunities in all parts of the piano.
I like what we're doing on our cost out and just kind of productivity initiatives and cleaning up our portfolio and really getting focused on the gross margin side and then I'd say on SNA I think as Chris said in his earlier comments that will start to streamline our processes and feeds through so I think there are additional opportunities there.
We continue to just how do we grow into being kind of this this larger organization and getting more efficient processes across the organization really getting focused on where things matter and and taking more of a disciplined approach to a lot of our professional services et cetera, So I still see opportunities for us in that space and we'll continue to focus on it.
And get after it.
But I would also say that to get after that add to actually get to the efficiency levels that we think are possible, it's going to take some short term investments.
In areas like service.
And and IP.
Sure we have the appropriate enablers to make that happen.
Yeah, I know in the way, we're going about that as we're just being very thoughtful about as we see that.
End of appear if you will throughout the PM. Now then we earned the right to invest in those things and do it in a disciplined fashion.
Got it I understood appreciate your time guys.
Thanks Marco.
Since there are no further questions at this time I would like to turn the call over to management for closing remarks.
Thanks Jessica.
So thanks again for joining us today, so as a final note.
We will be hosting an investor day on March 10th 2020 in New York City.
We're looking forward to providing investors with an in depth and comprehensive look at our strategy operations and goals and we look forward to seeing many of you there.
So this concludes our third quarter earnings call. Thank you and have a nice day.
This concludes today's conference call you may now disconnect.