Q3 2020 Tennant Co Earnings Call
[music].
Good morning, My name is Chris I'll be your conference operator today.
At this time I'd like to welcome everyone to Tennant company's 2023rd quarter earnings Conference call. This call is being recorded.
There will be time for Q1 at the end of the call. Please press star one if youd like to ask a question.
After the Kunaev. Please stay on the line for closing remarks from management.
If you joined the call today by telephone and logged into the conference call presentation on your computer please.
Please me the audio on your computer to avoid potential quality issues during the call.
Thank you for participating in Tennant company, 2023rd quarter Earnings Conference call. Beginning today's meeting is Mr. William Grade Senior director of Global financial planning and analysis and Investor Relations for Tennant Company Mr. Bates you may begin.
Thank you Chris.
Good morning, everyone and welcome to Tennant Company's third quarter 2020 earnings Conference call I'm, William freight senior director of Global financial planning and analysis and Investor Relations.
Joining me today are Chris Killingstad, Tennants, President and CEO and Andy similar our interim CFO, our chief operating.
Operating officer, Dave level is tending to a family matter today and is not able to join the call.
On today's call, we will update you regarding our third quarter performance and full year outlook, Chris will brief you on our operations and the progress we're making towards our enterprise strategy, then Andy will cover the financials.
After their remarks, we will open the call to questions.
Please note a slide presentation accompanies this conference call and is available on our Investor Relations website at investors that 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 the statements. These.
These risks and uncertainties are described in today's news release and the documents we file with the Securities and Exchange Commission we.
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 certain items.
Our 2023rd quarter earnings release includes the comparable GAAP measures and 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 investors that Tenneco dotcom.
Ill now turn the call over to Chris.
Thank you William and thank you everyone for joining us today.
We hope that you and your loved ones are managing to stay safe.
This pandemic.
As you may have seen in September we celebrated tenants 100 fiftyth anniversary.
Our current operating environment could not be more different than what our founder George tenet encountered Eighteenseventy. The company as always maintained a tradition of innovation and resilience.
Demonstrated by our ability to adapt and stay relevant to our customers.
When the pandemic starter, we were quick to respond and established three guiding principles.
To keep our employees and customers safe.
To manage our costs and cash flow and to stay in a position to ramp up quickly when markets recover.
At the same time, we honored our commitment to provide our customers with the innovative solutions they needed to keep their facilities clean and safe.
We continued with that approach in the third quarter and saw encouraging signs of recovery across all of our regions.
Our global teams have worked hard and overcoming the unprecedented sales and operational challenges, resulting from the pandemic and we've worked closely with our customers supply chain partners and carriers to avoid operational disruptions.
Furthermore, the execution of our enterprise strategy yielded improvements in our operating performance with third quarter EBITDA growth. Despite.
Despite a year over year coated machine related.
Decline in organic sales.
While the pandemic continues to pose considerable macro level uncertainty.
Especially as some markets see spikes in cold at night can cases, we.
We have a high level of confidence in our near term business outlook.
As Andy will speak to in a few moments we are re initiating our full year guidance for 2020.
Which not only reflects our revenue and profitability expectations, but also our commitment to investing in our business to support our long term enterprise strategy.
That strategy includes winning where we have competitive advantage.
Reducing complexity and building scalable processes and innovating for profitable growth.
While the global pandemic impact or the economic impact of the pandemic is nothing anyone could have predicted a year ago. It has not been diminished our ability to execute on our enterprise strategy because the key elements are all within our control.
For example, while innovating for profitable growth.
It sounds like a lofty ideal for tenant represents how we take customer insights and leverage our tremendous engineering capabilities to solve real world profit.
A recent illustration of this commitment is our October October 1st introduction of our new key Threeeighty am arm, which complements our current robotic offering.
By providing a smaller size machine that enhances maneuverability and navigation to help customers with smaller footprints. This new product and our continued partnership with brain Corporation enabled us to finalize agreements in the third quarter to provide two national retailers.
And a separate regional retailer with our full suite of autonomous or scrubbers.
Additionally, we are starting to achieve wins and additional verticals like logistics education and aviation.
Following our initial roll our rollout with Walmart earlier this year when it's like these demonstrate how we're continuing to lead with innovation and deliver value to a more diverse customer base.
In support of our enterprise strategy, we recently hired Dan who served as our senior Vice President of operations reporting directly to our COO Dave homeowner.
That has broad enterprise leadership and deep functional expertise across all aspects of manufacturing operations supply.
Supply chain management, and enterprise transformation and he brings more than 25 years of global operations leadership experience to tenant.
Dan isn't important higher and will play a critical role in the implementation of our enterprise strategy as we advance our supply chain and optimize our operations to support our product standardization and local for local initiatives.
In short this is an important area of focus as we position tenant for success in a post pandemic world.
Lastly, given the improving demand trends that we've seen since may and our confidence in the improved trajectory of our business. We recognize the need for strategic investments to support the continued execution of our strategy to backfill key leadership roles.
And to recognize and retain our best talent.
This is core to the guiding principles, we outlined at the start of the pandemic.
We began making such investments in Q3, and we'll continue to do so in Q4 they.
They are essential to how we can support our customers emerge strong as markets recover and continue to drive shareholder value.
With that I will now turn the call over to Andy.
Thank you, Chris and Hello, everyone. Please.
Please note that in my comments today any references to earnings per share in both GAAP and non-GAAP earn a fully diluted basis.
As Chris noted, while 10 third quarter results reflected the continuing impact of the pen dentek.
We did see some encouraging trends across all of our regions.
Overall for the third quarter of 2020, Tennant reported net sales of $261.9 million down 6.7% year over year.
Organic sales, which exclude the impact of currency effects declined to 7.1%.
This represents a significant improvement in our sales trajectory when compared to the 27% decline we experienced in the second quarter.
For the third quarter, we reported net earnings of $11.7 million or 63 cents per share down from $14.6 million or 79 cents per share in the year ago period.
Adjusted EPS, which excludes certain non operational items and amortization totaled 90 cents compared with 85 cents in the prior year.
Well now take a closer look at our third quarter sales results by geography, which we divide into three regions. 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 declined 9.9% year over year and were down 8.8% organically.
Declines in direct industrial business sales and distributor sales were partially offset by the continued success of tenants and aren't platform and strong growth in Brazil.
Sales in EMEA declined, 0.3% or down 4.5% organically in the quarter as a result of market weakness across the region.
The declines were mainly in the United Kingdom, and the Iberian Peninsula, which offset growth we experienced in France, Italy.
Sales in the APAC region declined 0.8% down 2.3% organically.
Declines in Southeast Asia, and Korea were partially offset by growth in direct sales in Australia.
Overall, the company's service and parts and consumables business trends continued to be a bright spot.
While equipment sales were down approximately 12% year over year for the quarter.
Aftermarket revenue was up 6% or the same period last year.
Reflecting our efforts in helping customers meet their rapidly evolving cleaning needs during the pandemic.
Now onto margins.
Adjusted gross margins during the third quarters of 2020 in 2019 were 40.2% and 40.8% respectively.
The year over year decrease reflects a number of strategic investments and de leverage on lower volume, which were partially offset by cost out actions driven by strategic initiatives.
Turning to expenses.
During the third quarter, our adjusted selling expenses were 29.8% of net sales.
Compared with 31.2% in the year ago period, mainly as a result of cost containment efforts and adjustments to management incentives.
This included a number of strategic investments that we made during the quarter.
Given the macroeconomic uncertainties created by the pandemic careful SNA management continues to be an important part of our response.
Combining these results our EBITDA in the third quarter of 2020 was $32.6 million or 12.4% of sales.
Compared with $31.4 million or 11.2% of sales in the third quarter of 2019.
The increase as a percent of sales was attributed to adjustments to management incentives and reductions in discretionary spending that were implemented in the quarter.
As for our tax rate in the third quarter. The company had an adjusted effective tax rate of 11.3% compared to 16.1% in the year ago period.
The lower tax rate, primarily resulted from an increase in discrete tax items in the quarter and a favorable mix of earnings.
Turning now to cash flow capital allocation and balance sheet items.
In the third quarter of 2020, Tennant generated $48.9 million in cash flow from operations, primarily driven by business performance and improvements in working capital.
Also in the third quarter, we repaid an additional $17 million of debt.
As of September Thirtyth, we had $124.7 million in cash and cash equivalents and approximately $172 million of undrawn funds on our revolver.
Lastly, turning to guidance.
As you May recall in April we withdrew the full year guidance. We had provided in February due to the uncertain nature of the pandemic.
While there is still uncertainty in the market, we do have a higher level of confidence in our near term projections and we are re initiating full year guidance for 2020.
And is included in today's earning announcement, our full year 2020 guidance is as follows.
Net sales of 995 million to 1.005 billion with organic sales declining 12.5% to 11.5%.
GAAP earnings of $2 to $2.20 per share.
Adjusted EPS of $2, an 80 cents to $3 per share, which excludes certain non operational items and amortization expense.
Adjusted EBITDA in the range of 116 million to $121 million.
Capital expenditures of approximately $35 million.
And an effective tax rate of approximately 17%.
It's worth mentioning that our guidance does include approximately 5 million to $8 million of government benefits, which is primarily driven by the wage subsidies, we received and mentioned in our second quarter results.
Also and as Chris noted this guidance incorporates continued investing in our business to support our enterprise strategy.
At the same time, while we believe the underlying business performance is improving and we expect our revenue will continue to increase sequentially quarter over quarter. It's important to note that organic sales will reflect a difficult year over year comparison as Q4 2019 was 10.
Tennants second highest revenue quarter ever.
As a result, we are anticipating that our implied fourth quarter organic decline will be greater than the third quarter and due to the continued strategic investments that I just mentioned, our anticipated EBITDA dollar and percentage of revenue will be lower than previous quarters.
With that we will now open the call to questions. Chris. Please go head.
Thank you.
As a reminder to ask a question. Please press Star then one on your telephone and to withdraw your question responder Heskey.
The first question is from Michael Salinsky with called Securities. Your line is open.
Hey, good morning, everybody.
Mike.
I wanted to ask first about the Q3 80.
How it's gone so far you you had mentioned there has been some adoption from several customers.
Sure are those just tests or are they going full scale for the entire chains.
And just give us a sense as to what the kind of more recent trial rates are.
On that process of Ceocs launch.
Yes, absolutely.
In the third quarter, we actually this started rolling these out.
And to the.
The retailers that we that we referenced so that we are in full sales mode. We launched on the firstly on October 1st all the demo when all that happened prior to that period. So we did have some sales of the.
Threeeighty TMR Alomar ended the third quarter and.
We're excited for the prospects of that product.
Going forward given that it is relevant and.
Facilities with smaller footprints requiring greater revenue.
We are building and we think that.
Hey aviation.
Logistics education.
Health care and retail with small footprints is really the core target market for the product.
Okay. Just to clarify you said this in the prepared remarks, which were finalized agreements with several national one reasonable of store for full scale suites of autonomous pharmacies that Vince all their stores or just for a couple of stores.
As a test.
Yes, so is this.
Well, that's where all the stores in the first phase it is for a significant number of their stores in the first day. So it's not just a couple of units test no. This is being rolled out rolled out broadly.
Excellent.
So if we also step back to last quarter I wanted to follow up on a on a.
Previously.
New product to be C, five and CS five you.
You mentioned those are also good though not autonomous chorus, but they are good products for small businesses as well curious as to how those efforts are.
Are going so far.
Yes, no. So they continue to perform well today, we did not have.
Right product growth for small space coating.
At the right price point to get people to proactively start switching from opposite bucket too.
Automated or to that.
Mechanize cleaning.
These broad products, both in China, and North America and in Europe are off to a great start.
So this is a market where that underrepresented and we're excited by the prospects going forward.
Okay.
Maybe.
Lastly for me over the last two quarters, you've been talking about how there has been a theory out there that.
This pandemic has.
We've had a lot of companies questioning or considering how they clean their spaces and there could be some this.
This appears to be had if they choose to go ahead and make a more intensified cleaning effort going forward any news as to whether you're hearing some big customers make some real permanent changes to their.
Sanitation policies beyond the pandemic.
No I mean, we've said over the last couple of quarters that really what the focus remains on high touch any areas disinfecting Incentivization, we do still believe that a more robust quoting protocol will be put in place holistically in.
And in the future, we're not seeing a dramatic move in that direction, yet, but what we would say is that in our service and aftermarket businesses. Andy indicated this up 6% in the quarter on a much higher than our equipment revenue, that's often a leading indicator of.
Of more cleaning activity happens because whatever customers do before they buy new equipment. They tend to use their existing equipment more intensely that requires more service and aftermarket. So historically I know where its been a leading indicator that more robust planting is starting to play take place outside the high touch center.
Disinfecting, we're monitoring that trend and also it also starts to lead and equipment sales growth.
In subsequent quarters.
Got it Chris Thats, great color I appreciate it ill pass it along.
Thank you.
Your next question is from Marco Rodriguez with Stonegate Capital Partners. Your line is open.
Good morning, guys. Thank you for taking my question.
Marco.
I was wondering if maybe we could talk a little bit more on the.
Cost reduction actions here.
Provided some nice color in terms of the way benefits you receive.
At this sort of.
This implies helping you obtain the that gross margin expansion you saw year over year, despite the volume declines.
I'm, just trying to get a little bit better of a handle here on.
Once we sort of clear the major.
Uncertainty related to the pandemic I'm, just trying to get a little bit better understanding of where perhaps you are normalized that's in a.
Run rate is at.
Also trying to kind of layer oriented some of the.
Issues are not issue, but the strategic initiatives that you're short of putting through to reduce costs as well. So just trying to get a handle on that.
Yes, we won't get specific on the numbers of improvements we had in both margin and SNA, but usually we talked about in past quarters. We certainly have seen our strategies thing is playing out nicely and we see certainly see benefits from that in incident, you Tucson again in Q3. So it continues to play out nicely.
Obviously muted by the pandemic right now and in the lower volumes that were experiencing and some of the investments were making frankly in both in both the cost of sales and as an area. So now getting specifics as rest assured we are making progress on our strategy and were you thinking we talked about the longer term, we talked about that 50 to 100 basis point EBITDA expansions and I think I'd focus kind of think about that.
With respect rather than getting specific on margin or SNH, just think about that as we exit. This pandemic. That's still our goal is to our commitment and that's something we think is it was it certainly within our reach.
Got it and then I know this is a difficult question, perhaps cut to answer but immunity. If you kind of try to strip away the.
The situation that everybody finds themselves in right now.
Is there any way you can sort of give us.
Measuring stick as far as where you are in obtaining that 50 to 100 basis point.
Leverage on the adjusted EBITDA line.
You're talking for 2020, as we've talked about in the past the a part of that is all volume dependent so we certainly can make.
Impacts for things to our two I believe the manufacturing side you get allow those benefits as the volume goes up so I'd say it we talked about last quarter I'd say, we certainly haven't slowed down on how we're focusing our improvement efforts in executing our strategies have resulted down we think we are positioning ourselves well to take advantage of the of the improvements we've made as as volume comes.
Back so I would say we're on track although.
No its muted for through 2020, because depend on it but we're certainly on track for how we feel about our strategy be implemented.
Got it and then just kind of switching onto or staying on the topic of the your strategic initiatives some specific to the.
Process improvement and reduction of manufacturing complexity.
To your business is there any sort of data or specifics.
Again, notwithstanding the pandemic and the issues that that has broadened term year volumes any sort of information that you can kind of point to investors that show or demonstrate that you're kind of moving in the right direction improving those areas.
Yes, the one thing I'd say is if you look at the bottom line impact you think of our EBITDA last year at 12.0% was a record and the guidance that we're implying certainly as resulting in a near near that level from up from a rate perspective, despite being down call. It roughly 12% at the midpoint of.
Our guidance so that to me is an internal way we can so we can point to that as you can see that in our guidance reflected there and you think about roughly we're guiding to tell a good point around $1 billion and you look back at history. The last $200 billion. Our EBITDA was substantially lower in terms of dollars. So there's just some some guide point you can point to a fax or just.
Say that we certainly made progress in the last year or two and how we're executing our strategy now we're focusing differently as it as a company.
Got it.
And then last question just kind of wondering if you could perhaps update us on any sort of supply chain issues or disruptions or kind of give us any color in terms of how thats working for you guys right now.
I think we stated.
The script that Thats, one of things Weve worked intensely on and to date we have.
No material disruptions in our supply chain.
With our suppliers in terms with our freight surprise providers and we are.
Are we able to deliver to our customers on time and on the quantities. They need so all of that is going extremely well and just just to build on that which other than prior quarters. Any initially as defend them enrolled out that was one of our first concerns obviously, one first of all heard about in China, but the team has done a wonderful job really mitigating that any kind of risk we have the suppliers funding.
Maybe multiple sources for for goods.
It's been done a really nice job site. So just to echo Chris is when we really haven't had any issues today. It is something we continue to watch closely and we'll monitor it to go forward, but so far no issues.
Got it thanks, a lot guys I really appreciate your time.
Thanks Mara National ethanol.
The next question is from Chris Moore with CJS Securities.
[music].
Hi, guys. This is Brendan on for Chris I, just wanted to ask about comparing this environment to 2008 to nine environment, obviously, it's a little different circumstances, but.
It took about three years ago 411, one revenue returned to year over eight level Im can you talk about similarities and differences and.
Is it reasonable thank you can return the.
Fine 18 revenue levels more quickly this time around and just like to hear thoughts there.
Asset so.
Today, obviously, we're not giving guidance for 2021, so it's difficult to predict it what we said that it used to be clear. It was we have greater visibility to near term. That's why we felt comfortable giving giving guidance for the rest of this year against its three months and were not got time between 21. So there's still a lot of uncertainty in the market and still lot that a lot of things that have to play out to undertake.
And there are some good trends like like Chris talked about and I mentioned in my remarks services off year over year for the quarter and that in eight or nine that was the way that guided us out of the out of that recession and so it. It's it's a problem possibility I should say that that could be the same same thing here. So were monitoring that but it's a positive sign for us.
Yes.
This is very different so.
Situation.
2008, but in arm and who knows what the results of that I'll look like in 2021 in.
Nobody really knows at this point given all the uncertainties, but what I would say is that if you compare us today versus 2008 on the input side of the equation, we have more positive good things going on with our GPS drives a strong.
Strategy.
A.
AMR so.
Small space cleaning.
And other initiatives that bode well for the future.
Yes markets recover.
Thanks.
Great that makes sense and then fourth.
Like our economists sales could you speak to how they impacted Q3, and then moving forward.
Like I said in my remarks, there it continues to be positive trends in satellite like in Q2 that was a bright spot for us even despite the large decline in Q3 that was a positive trend for us it was up year over year and not an easy comparison, but we won't get specific on that but it was certainly up over four year over year, we feel good about it and we feel good about.
Our future prospects in that with the new product launch and the position we have in the market.
Right and we're starting to diversify our customer base with them over to the good fundamental reason a lot of it's been capacity constrained on our parts, we focus mainly on retail and large retailers now that we now have a regional retailer.
Onboard and we are diversifying into some other verticals like.
Logistics and.
So I think thats, a really positive sign so it says that we have been able now to shift our focus a little bit continues to do well on the retail side, but we're seeing interest in other verticals starting to increase and.
We have those relationships and.
I believe that our our solution.
His area or you have the chances of winning many of those contracts as they are.
As they come up for bid.
Great. Thank you I appreciate it.
Thank you.
Again, if you like to ask a question. Please press Star then one on your telephone keypad.
Our next question is from current needs with Gabelli things will unfold.
Hi, guys. Thanks for taking my question and Great execution, and then obviously very difficult market environment here.
Thank you.
So I guess with the strength, you're seeing in the aftermarket part of the business and given.
How would that typically you guys guided.
In past recoveries could you provide any color on kind of how thats trending maybe geographically and then also.
At media and maybe at a high level.
What the profile of the service parts.
Thank you both.
Profile is of the AMR.
Platform.
And from a geographic perspective, you know it's fairly consistent.
Across the regions. So it's a positive trajectory across all regions, which is a good sign some a little more than others, obviously, but it's fairly consistent and you think AMR, there's certainly an opportunity for that down the road. It's still fairly early in that process and that MRV is relatively a new product still in last year or two so we haven't seen that fully.
Play out yet, but we think it's certainly an opportunity.
As we go forward.
Okay, great. Thank you so much.
Thank you.
Since there are no further questions at this time I'd like to turn the call back over to management for closing remarks.
Thank you, Chris So before we conclude.
I want to thank our guy.
Global TNM team members for their support and delegate dedication during this ever changing environment.
From our sales and operations teams to our service techs.
Everyone across the globe they.
They are the ones, allowing us to support our customers' needs and at the same time, helping us secure our leadership position in our industry.
We have a great team.
And I truly appreciate their dedication and support.
With that thank you.
Again for joining US today. This concludes our third quarter earnings call.
The well everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Hi.
[music].