Q2 2021 Tennant Co Earnings Call
Conference call.
There will be time for Q&A at the end of the call. Please press star 1 if you would like to ask a question.
After the Q&A. Please stay on the line for closing remarks from management.
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Thank you for participating and Tennant company's 2021 second quarter earnings Conference call.
Beginning today's meeting is Mr. William Prate.
Senior director of global financing financial planning and analysis and Investor Relations for Tennant company.
Mr. Prate you may begin your conference.
Thank you.
Good morning, everyone and welcome to Tennant Company's second quarter 2021 earnings Conference call.
I'm, William Prate Senior director of Global financial planning and analysis and Investor Relations.
Joining me today are Dave <unk>, President and CEO.
And our senior Vice President and CFO, and Dan and Lucy our senior Vice.
Vice President of global operations.
On today's call, we will update you regarding our second quarter performance and guidance for 2021.
And they will brief you on and aberrations and interim price strategy.
And will cover the financials.
After their remarks, we'll open the call for questions.
Please note a slide presentation accompanies this conference call and is available on our Investor Relations website at investors Dot Tenneco com.
Before we begin please be advised that.
Our remarks this morning, and our answers. Your question 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 and 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 conference call, we will discuss non-GAAP measures that include or exclude certain items.
Our 2021 second 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 Dot Tenneco.
I'll now turn the call over to David.
Thanks, William and thank you everyone for joining us today.
Our second quarter results reflected the overall business recovery, we saw across our geographic markets. Despite widespread global supply chain constraints and commodity inflation and cut across.
And number of industries, and which impacted our ability to fully meet the Q2 increase and customer demand.
While the demand increase and exceeded our initial expectations for Q2, the impact of macro level headwinds such as parts availability material inflation price costs and labor shortages was also greater than we had expected.
In response, we've taken steps wherever possible to help minimize the effects of these challenges to our customers.
And most cases these action and build upon our otherwise benefit from the strategic improvements we have made to our operating model as part of our enterprise strategy.
I will now walk you through some of the actions our teams have and will continue to take to mitigate some of the macro challenges and the current environment, while serving the needs of our customers.
To address the issue of parts availability, which is the result of our suppliers managing their own production labor and logistical challenges our supply chain teams are leveraging our strategic partnerships to manage components and material availability.
We are also developing design alternatives and identifying additional sources to keep our manufacturing lines running.
All while maintaining strict product quality control.
To ensure a smoother process and securing parts and the second half of the year. Our teams have developed more robust sales and inventory operations plans to better align our supply and demand.
These plans not only help our manufacturing plans develop smarter strategies to meet increased customer demand, but also allow us to provide longer term demand forecast to our suppliers to secure the parts will need.
To address and material inflation and our teams are working diligently to find additional partners and where possible consolidating vendors to drive leverage and scale.
At the same time, we continue to use value engineering to help reduce the parts and material until into each machine.
Our R&D and operations teams are regularly finding ways to help address material inflation, while maintaining our value proposition of quality and innovation.
Today's pressures and the steel resin and led markets represents a significant challenge and has felt by industrial manufacturers around the world and 1 that we expect will persist for the foreseeable future.
To minimize the impact of higher freight costs, we are fortunate that as part of our enterprise strategy. We had already started to prioritize local for local supply chain and region for region manufacturing.
This allows us to manufacture our products closer to our customers, which helps reduce freight costs. This does not entirely offset current headwinds given the constrained and transportation market, but we are making every effort to ensure that our manufacturing lines remain up and running and that we can deliver products with appropriately.
Hi.
Regarding labor shortages, specifically and our manufacturing areas, we're staying competitive and the market by adjusted wages and making every effort to attract new talent by providing a safe and rewarding and fulfilling work environment.
We're also investing and our equipment processes and systems to drive increased productivity.
With respect to the overall challenges, we're facing and our cost of goods sold were also carefully and thoughtfully managing our SMA to a level that allows us to invest and the business.
Served the needs of our customers and deliver on our enterprise strategy, while also maintaining our ability to meet our full year financial targets.
At the same time, we are implementing price increases where appropriate and that will benefit the fourth quarter of this year and help offset some of the costs that we're not able to absorb internally.
While the price increase at this time of the year is not a normal practice for Tennant were compelled to take this action and response to the current macro market challenge.
The key improvements we've made internally as part of our enterprise strategy have helped facilitate our response to current market dynamics. These improvements include.
Value engineering and optimization, simplifying our product portfolio divesting noncore businesses and adjusting our go to market approach in specific regions.
I continue to be extremely proud of our global teams for their efforts and addressing these various operational challenges as countries and markets navigate and.
<unk> recoveries.
We are taking decisive actions to safeguard the customer experience and deliver on our financial commitments, while remaining focused on our longer term business.
As Fay will discuss our full year guidance assumes our continued effective management of a challenging supply chain and operations environment.
And reflects our growing confidence and a long term global recovery for commercial and industrial cleaning will continue.
While we remain vigilant and our overall cost management and the basic material inflation parts availability issues and higher freight costs, we will continue to execute against our enterprise strategy and stay focused on delivering the best possible customer experience.
With that I will turn the call over to pay for a discussion of our financing.
Thank you, David and Hello, everyone.
And the second quarter of 2021, Tennant reported net sales of 279.1 million up 34% year over year, including favorable foreign currency impact of 5.4% and a day.
Net impact related to the sale of the company's coating is net of negative 2.5.
Organic sales, which exclude the impact of currency effects and divestitures increased 27.
Yes.
Tennant group sales into 3 and geography, The America, Inc, and its all of North America, and Latin America and <unk>.
And you covered era, and Middle East and Africa, and Asia Pacific.
China, and Japan, Australia, and other Asian markets.
And the first quarter sales and the Americas increased 22, 7% year over year and organic growth of 25, 4%, including Foreign Exchange Act of 1.1% and a divestiture impact of negative 3.8%.
Sales were strong both in North America, and Latin America and growth across all channels and product categories.
And a decline and the companies and law robotics, this net which lapped a large quarter and a year ago Gary.
Strong customer orders resulted in higher than normal backlog level at the <unk>.
And of the quarter as the company managed parts availability related to global supply chain strength and labor shortages.
Sales and EMEA increased 55, 5% or 42% organically, including and foreign Exchange Act up 15, 3% with growth across all countries and across all product categories and endemic related restrictions ease.
Sales and the Asia Pacific region from 16, 6% or 9.6% organically, including a foreign exchange and backed up 7% and.
Our results were driven primarily by strength and Australia at all.
Product category.
During the quarter organic results and China were flat year over year, which was due to limited availability.
Turning to margin reported and adjusted gross margin for both 41 free cash.
And compared with 41, 8% and a year ago period, which included the impact and government credits received and cost saving measures taken in response and endemic and.
And as previously discussed and decline also reflects increased costs related to free materials, and labor, which were partially offset by favorable pricing and cost savings initiatives.
And are expected to continue for the foreseeable future.
And the pressure in the third quarter entering the fourth quarter of the year beef pricing and other actions to start driving a meaningful impact.
As for expenses during the second quarter, our adjusted SG&A expenses from 33% of net sales compared with 28% and the year ago period.
And year over year and kept leverage is a direct result of the cost saving actions taken and the second quarter of last year and response and data.
These actions.
Our loans reduced work schedules and <unk>.
Justin to management and incentive comp.
Credit and tighter project and travel spending.
Net income was $9.8 million from 51 per diluted share compared with $14.3 million from 77 cents per diluted share and the year ago period at.
Adjusted diluted EPS, excluding non operational items and amortization expense was $1.18 per share compared with 96 cents a.
Our share and the year ago period interest.
And primarily driven by lower engine.
Adjusted EBITDA and the second quarter of 2021 decreased slightly to $35.1 million or.
Our 12, 6% of sales compared with $35.3 million or 16, 5% sales and the second quarter of 2020.
As mentioned and our Q2.2020 earnings call, we estimated that $15 million of savings occurred and and in second quarter of 2020 due to the cost saving measures and actions taken in response and <unk>.
And for our tax rate and the second quarter Tennant had an adjusted effective tax rate, excluding the amortization expenses.
And 4% compared with 24% and the year ago period and.
The decrease was primarily related to a discrete tax benefit for a valuation allowance relief as a result, and a recent law change impacting Dutch tax loss carry overs.
Turning to cash flow and balance sheet items, Tennant generated $19.4 million and cash flow from operations and the second quarter of 2021, mainly due to strong business performance.
As of June 32021, the company had $135.1 billion and cash and cash equivalents, while managing our leverage within the stated guidance of 152 and half.
And April the company restructured its credit agreement to optimize the debt structure.
This change allows for greater flexibility with minimal covenants and no prepayment penalty.
And also reducing future interest expense.
Ultimately $1 billion per month, which is already reflected in our prior guidance.
Lastly, turning to guidance as Dave mentioned, our guidance reflects management's confidence any broadening economic recovery and our ability to implement our long term growth strategy and our effective management of the current supply chain and operational challenges.
And also standard there will be no significant and Dennis related restrictions and our major markets.
And as included in today's earnings announcement, Tennant affirmed guidance for the full year 2021 as follows net.
Net sales of 1.09 billion to 111 billion with organic sales rising 9% sales, 11% yes.
And earnings of $3.45 per share to $3.85 per share adjusted EPS of $4.10 per share to $4.57 per diluted share, which excludes certain non operational items and amortization expenses.
Adjusted EBITDA and the range of $140 million to $150 million cash.
Total expenditures of approximately $20 million and an adjusted effective tax rate of approximately 20%, which excludes the amortization expense adjusted net.
That we will open the call to questions. Operator. Please go ahead.
Maybe you would like to ask a question. Please press star 1 on your telephone keypad.
Again that is still wanted to ask a question.
Your first question comes from the line of Chris Moore with CJS Securities.
Good morning, guys. Thanks for taking a few questions.
Maybe just big picture.
And at the beginning of fiscal 'twenty 1.
Expectation was that revenue could approach pre pandemic levels by the end of 2022. Most recently you felt that you could get there perhaps by the middle of 'twenty, 2 and <unk>.
Just wanted to get your take.
And take on that is that still the case.
<unk>.
Further.
We drew some optimism from our Q2 experienced our demand snaps back and a fairly dramatic fashion across our geographic markets across channels and across our product categories. So we feel really good about the demand coming in above expectations within the quarter, having said that there is still short of 2019 within the quarter and so on.
And you look at it from a trajectory perspective, we're still anticipating the first half of 'twenty, 2 being the position, where we cross crossover into pre pandemic demand level.
Got it and I appreciate that.
Understanding no crystal ball, but how would you characterize the current visibility.
And the both the supply chain and the input cost for example.
At this stage do you expect improvement late in Q3 or.
Youre going to likely.
Continue to get more challenging into Q4.
Yes.
It's a great question. It's 1 that we think about on a daily basis I'll tell you the actions we've taken.
And relative to our guidance.
We are very close to our supply chain and working closely with our supply partners to understand what challenges. They are trying to overcome we've done our best forward looking forecast for demand as well as a backlog that we're very interested and working down as quickly as possible. We're acknowledging the reality of the constraints that we announced and our supply chain and operations.
And thats reflected in our guidance.
Forward looking view on when sort of recovery could occur we don't see recovery and the foreseeable future and so I don't want to get into projecting a quarter when things will improve its awfully difficult. So I'll just tell you that we are fully acknowledge the reality of the challenges we see today and our forward looking guidance and I'm really proud of the actions the team.
And was taken to address the issues that we're aware of and can anticipate being a challenge for us as we go forward.
Got it I appreciate that.
And maybe just in terms of kind.
Kind of the overall enterprise strategy.
And obviously standardization.
Products is a huge focus made a lot of progress. There can you maybe just talk to kind of where you are in terms of reduction on the skus.
And what really whats the longer term goal there.
Yes, so we've made fantastic progress across our enterprise strategy and Youre, highlighting 1 of the components, which is optimizing our portfolios. So you look at some of the move we've made at the enterprise level to exit.
Businesses divested businesses that were non core or not not accretive to where we're going as a business from a standardization process. We're standardizing across 2 facets, both and our model with and also standardizing across.
Our model portfolio and individual products themselves, where we're value engineering the product skus.
Harmonized and use more common components, we've made fantastic progress we've got some internal targets that we are that we are striving to achieve.
We have not.
And to that process and not sure if you're ever done with that process. We've made significant progress over the last over the last 18 months and we've been public about the progress. We've made it will continue to be a focus for us as we go forward. We've mentioned that we added 35, 35% reduction and our models within our product portfolio.
We're proud of that that was a step change and our product portfolio and we continue to refine that offering at the same time I think it's important to note. We are launching new innovative products, which represents new skus into our product portfolio. So it really is the balance of the lifecycle of our product the new innovative products, we're launching and then.
Answering our portfolio by pruning, those and streamlining our offerings and the port.
Julio.
Got it very helpful. I'll jump back in line I appreciate it guys. Thanks.
Thanks, Chris.
Again, if you would like to ask a question. Please press star 1 on your telephone keypad.
Your next question comes from the line of day for Ramsey with Sidoti and company.
Good morning, everyone.
And.
You talked about the supply chain and supply chain challenges youre dealing with.
Can you quantify that and anyway in terms of sales didn't generate in the quarter because of those supply chain challenges.
Pushing everything from the write up this year or how do we need to think about that.
Yes, it's a tough 1 to quantify all I will tell you this but obviously and a quarter, where our demand snapped back above expectations, and we're experiencing significant supply chain and operational challenges our backlog just growth and so just trying to dimensionalize that our backlog is about 2 times normal levels and so.
Think about that.
As a dramatic increase and that the number of customers that we would have hoped to have service and the quarter that we were not able to do to the due to the constraints on supply chain and the other challenges that we and that we spoke to and the script.
Okay. That's helpful and then in terms of.
No you have and wanted to raise prices and youre kind of Hudson H 2 so now it sounds like.
That's helpful and move forward with can you talk about.
Timing and that the response from customers.
And what that might do to margins by Q4.
So let me let me take that if after we haven't wanted to raise price, we're very respectful about raising price because price. So the couple of day 1 it impacts your customer relationship. It takes our selling organization for selling organizations time away from doing other activities like selling in new and innovative products and.
And.
And so it's a price was a great thing from a financial perspective, we have to make sure that the price increases we put through we're able to command that premium for a premium based products and we have a fantastic value proposition we have to make sure that we can command a premium that we published so it's not that we're hesitant to put and price we want to make sure that we can sell it in and make it stick with our cash.
And so having said that we have implemented a price increase was announced we just recently announced and so it is awfully early to gauge customer customer feedback.
Our debt increased I will tell you. This is just my opinion I don't think that anyone will be surprised the challenges that we're bidding things within our business our macro market challenges. So the market and our customers are broadly aware of these challenges so I think bill.
If they werent expecting and I don't think there'll be surprised we Havent Congress system.
Above the price increase and I'll, just add I'm really proud of our customer facing sales and service organization and then asked to carry this message to do a fantastic job of selling and the price increase demonstrating.
Demonstrating the value that we can deliver and having to sit with our customers. The 1 thing I would add is that while we've just recently announced price increases due to the current backlog.
Really expect a meaningful impact until the fourth quarter.
Alright, and so youre not re price, you're not repricing and the backlog.
Correct.
Okay fair enough.
And to switch topics, a little bit obviously the balance sheet.
Proving.
Given the environment. How are you thinking about uses of cash over the next co.
Quarters.
So our capital allocation priorities really remain the same haven't changed dramatically and first and foremost is free.
Reinvesting in our business and.
And to drive growth and <unk>.
Execute against our enterprise strategy.
That's priority number 1.
And we're also managing our balance sheet at 1 and EBIT stated leverage target of 1 and half to Q&A time.
The financial flexibility that we need and it might.
To maintain and all of Optionality.
We are always and supportive of our quarterly dividend and then we have a history of our dividends and will continue to return capital to shareholders by way of dividend and potentially opportunistic share repurchases.
Great cash flow and cash flow and then lastly, just opportunistically evaluating what our opportunities are to enhance shareholder value through M&A.
So from.
And our priority.
Yes, 1 more.
Last fall and then in terms of I know that you were lapping.
And the big sales and the autonomous product from Europe.
<unk> launch given that and the last year, you've launched 2 or more of the autonomous products can you provide any kind of color in terms of.
Marketing sales.
2 more recent products.
So let me let me put some color around and so we are lapping a significant order growth.
World's largest retailers last year were very proud of that order that that took the majority of our capacity and frankly, our time to make sure that.
Sold and really well and was deployed.
Due to the level of our customers expected I think it's worth noting that the large customers that the large customer orders were lapping a since reorders and I think thats an important proof point that the early adopters of the technology you have seen the benefits and.
And have bought back and they're doubling down on the on the technologies gives us it gives us confidence that we're on the right track. We since launched 2 additional products that you've noticed <unk> AMR and we are adjusted in the process of loans are 16 AOR.
I would say the customer feedback from both of those products has been fantastic.
The volumes that we're talking about don't approach the levels of the orders we left last year, but we still have a significant customer interest and both of those products.
Power and having a free product portfolio and so we can now address extremely broad range of vertical market application. We've trained up our global selling organization and have demonstration units third deploy.
On a global basis. So we can now engage customers and virtually all of our important vertical in the robotic discussed and was especially important.
Mostly excited about the 2016 MLR because it gives us an entre into the industrial verticals and when you think about robotics and <unk>.
Just real vertical it solves a very important compelling business problem flow customers, but being a labor shortage, while helping them keep a claim and athene and safe operating environment and and the industrial side and typically you don't have the dynamic of having to worry about.
Retail customers walking through your facilities industrial customers tend to be more at depth and are adopting automation and the robots elsewhere and they are in their facilities.
Friendly environment to try and sell in robotics, and we're getting fantastic customer feedback about the all the products, especially the 2016 and are more so we're very bullish on AMR. We're really proud of the fact that we had a couple of large customers and <unk>.
Kudos to our selling organization for landing a couple of large customers read out of the gate and now we're pursuing other customers on a global basis still very bullish about EMR or potential for the future.
Great Thanks, Dave and I appreciate.
Appreciate the time.
Thank you.
And you have a follow up question from the line of Chris Moore with CJS Securities.
It appears that my question was withdrawn.
Since there are no further questions at this time I would like to turn the call over to management for closing remarks.
Thank you and thank you again for joining us and for your interest and Tennant.
I want to thank our global Tennant teams for all of their hard work and dedication and this extremely challenging environment I couldnt be more proud of the team and how we're performing this concludes our earnings call have a nice day.
Ladies and gentlemen, you may now disconnect your lines.
Gross.
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