Q3 2021 Tennant Co Earnings Call
Good morning, My name is Brent and I will be your conference operator today at this time I would like to welcome everyone to Tennant Company's 2021 third quarter earnings Conference call. This call is being recorded.
Will be time for Q&A at the end of the call. Please press star one if you would like to ask a question.
After the Q&A. Please stay online for closing remarks from management.
You have joined our call today via telephone and logged into the conference call presentation on your computer. Please mute the audio on your computer to avoid potential quality issues during the call. Thank.
Thank you for participating in Tennant company's 2021 third quarter earnings Conference call. Beginning today's meeting is Mr. William Prate Senior director of Global financial planning and analysis and Investor Relations for Tennant Company. Mr. Prate you may begin.
Thank you good morning, everyone and welcome to Tennant Company's third 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 level, Tennant's, President and CEO, and Fay West, our senior Vice President and CFO.
On today's call, we will update you regarding our third quarter performance and guidance for 2021.
Dave will brief you on our operations and enterprise strategy and Fay will cover our 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 Dot Tenneco Dot com.
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 from those contained in those statements.
The 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 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.
2021 third 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 Dot com.
I'll now turn the call over to David.
Thanks, William and thank you everyone for joining us today, our third quarter results reflect a return to pre pandemic demand across the majority of our geographic markets and verticals.
Our comprehensive and innovative product offerings are resonating with customers. During this broad based market recovery and we expect this demand environment to continue for the foreseeable future.
While we are certainly encouraged by these positive trends our financial performance continued to be impacted by the unexpected and prolonged global supply disruptions inflation and labor constraints that have affected virtually every industry and geographic market.
The increased demand for our products combined with the effect of macro level constraints on our production capabilities contributed to our record order backlog, but various by product category and region and is now three to five times our historical averages.
In response, we've taken actions wherever possible to minimize the impact on our operations. Our plants continue to remain open and operate due to the significant efforts by our global teams to maximize the output and to safeguard our customers experience.
While we expect that these macro headwinds will continue well into 2022, we remain confident in our ability to drive long term sustainable growth and improve our operational efficiencies to generate long term value for our shareholders.
We are doing so not only through short term mitigation actions, but also through the changes we've made and continue to make as part of our enterprise strategy.
To minimize the impact of higher freight costs and related supply disruptions, we continue to prioritize local for local in region for region manufacturing and sourcing to allow us to manufacture our products closer to our customers.
As an example, we are making the necessary investments to add production of our 2016 line to our China plant mid next year. The 2016 is a highly maneuverable battery operated ride on scrubber that has proven to be very popular with our customers within the APAC region.
By adding production to the local market, we can help minimize freight costs improved lead times and better leverage our global production capacity.
We have continued to make capital investments to drive greater efficiency and capacity in all of our plants. As just one example, we have invested in a new lays on our Minneapolis plant that will improve production flow reduced the amount of labor spent machining parts and will allow us to in source items that we would have otherwise purchased from vendors.
New tooling, specifically cooling related to a rotational molding machines is another example of how we are investing in our business to support our local for local initiatives.
This lets us manufacturer key components at the point of Assembly meeting, we can avoid situations, where we manufacture in one location before shifting to a second location for final Assembly.
These actions help avoid unnecessary shipping delays freight costs added time to manufacture and inventory carrying costs.
While our teams are taking every opportunity to find creative solutions to address the current supply chain environment. Each day brings new challenges in terms of parts availability.
Right now the lack of availability of hydraulic pumps chips and other electronic components, which are critical parts within our machines are main drivers of our increased backlog and are directly affecting our ability to deliver on our full year potential.
However, we will continue to control everything we can control and work diligently to capitalize on the strong demand environment.
An important component of our enterprise strategy as the long term move towards platform design and.
In the current environment. Our engineering teams are taking a balanced approach to this initiative as they weigh the long term benefits of platform design with the near term need to adjust our designs to allow for available parts into increased our sourcing flexibility.
Of course, our commitment to quality and safety and meeting the needs of our customers will not waiver.
Regarding labor shortages, specifically in manufacturing, we are staying competitive with wages and are making every effort to attract new talent by providing a safe rewarding and fulfilling work environment.
We're also supplementing and strengthening our talent acquisition teams by partnering with third party vendors to assist with our employment outreach through targeted marketing campaigns and professionally staged hiring of events.
We are encouraged by these actions, which are having a positive effect on our recruiting and helping to mitigate the ongoing labor challenges.
As favorable discussed while our revised full year guidance reflects what continues to be a challenging operating environment. Our team remains committed to meeting the needs of our customers and executing against our enterprise strategy to deliver on our long term financial commitments.
In particular, we continue to innovate for profitable growth, which is the third pillar of our enterprise strategy.
Over the past year, we've announced the introduction of new products to help address the evolving needs of our customers.
Earlier this year, we introduced a new mid tier products, which leverage our IPC product portfolio to meet the needs of a broader segment of customers by offering a wider range of performance on price points.
Our mid tier products have been well received by our customers and distributors.
While they leverage the same IPC platform.
Tenant branded products benefit from the broader customer experience associated with the Tennant brand, including the full ecosystem of application expertise technological innovations and best in class sales and service support.
During the past year. We've also introduced two key new products to our AMR portfolio, including the T. <unk> AMR and the <unk> AMR together with the T. Seven AMR. These products have created a comprehensive robotic portfolio to meet all of our customers' needs.
With the addition of these new products, we have been able to strategically enter new verticals outside of just retail, including manufacturing logistics and warehousing and education among others.
Our <unk> portfolio continues to be well received by an expanding number of customers and we look forward to updating you on a number of other AMR innovations has been materialize.
The one strategic pillar I haven't yet touched on is winning where we have a competitive advantage.
For example, we recently launched a value realization exercise in Australia building on our successful North American execution back in 2019 were reassessed all of our strategic accounts and distributor partners.
In Australia. This allowed us to realign over 40% of our strategic account customers and 80% of our distributor partnerships, ensuring that we have an optimized channel structure in place to serve this highly competitive market.
By adjusting our customer segmentation appropriately, we can better adjust lead times pricing and sales support across our customer base.
In doing so we are aligned with the customer experience with our profitability goals.
Moreover, we are relentlessly focused on providing our customers with high quality products and exceptional service as we execute on our enterprise strategy.
With that goal in mind, we will continue to take decisive and appropriate actions to maintain our customer experience, while remaining focused on our business objectives.
With that I will turn the call over to <unk> for a discussion of our financials.
Thank you, Dave and good morning, everyone for the third quarter of 2021, Tennant reported net sales of $272 million, an increase of three 9% over the prior year, which included a favorable foreign currency effect of one 2% and a.
Divestiture impact of negative 2% related to the sale of our coatings business in the first quarter of 2021.
Organic sales, which exclude the impact of these currency effects and divestitures increased four 7%.
As Dave mentioned, our revenue results were tempered by the continued global supply chain disruption and labor constraint with North America being the most affected.
Tenant group sales into three geographies the Americas, which include 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.
In the third quarter sales in the Americas decreased 6% year over year, which included a negative divestiture impact of three 1% organic growth of 2% and a favorable foreign exchange impact of 5%.
Strong customer demand in Brazil, and Mexico drove a year over year increase in sales in Latin America.
North America delivered modest organic growth as compared to the prior year due to the previously mentioned supply chain and labor challenges as well as the lapping of the significant AMR order in the prior year.
Additionally, the current year period benefited from an increase in our service parts and consumables business.
Sales in EMEA increased 16, 1% or 14% organically, including a favorable foreign exchange effect of two 1%.
The results, which were impacted by global supply chain challenges reflected growth across all countries and product categories in the region as demand returned to pre pandemic level.
Sales in APAC decreased 4% or two 9% on an organic basis and included a positive foreign exchange effect of two 7% and a negative revenue impact of 2% related to the sale of the coding.
The sales decline was partially attributed to pandemic related lockdowns and some regional market during the third quarter of 2021.
Supply chain disruptions and labor constraints impacting North America plants that supply APAC also limited our ability to meet orders across the region with the largest impact experienced in China and Japan.
Even so the region experienced strong results for parts and consumables and service with strength in the Australian market across all product categories.
Turning to margins.
Reported and adjusted gross margin in the third quarter were both 41% compared to a reported gross margin of 39, 6% and adjusted gross margin of 39, 8% in the year ago period.
Although the comparison to the prior year with favorable a year ago period was unfavorably impacted by certain strategic investments and pandemic related productivity challenges.
As we highlighted during our last conference call our third quarter adjusted gross margin was lower than the adjusted gross margin in the first half of 2021.
This decrease was primarily due to increased material and freight costs and productivity challenges caused by parts availability.
As for expenses during the third quarter, our adjusted SG&A expenses were 28, 3% of net sales compared to 29, 3% in the year ago period.
Year over year improvement in leverage was a direct result of the cost saving actions as well as the adjustment of management incentives in Q3 of 2021 to better reflect current expectation net income in the third quarter was $21 5 million or $1 14 per diluted share.
Compared to a $11 7 million or <unk> 63 per diluted share and a year ago period.
Adjusted diluted EPS, which excludes non operational items and amortization expense was $1 33 per share compared to <unk> 90 per share in the year ago period.
The increase year over year was primarily driven by lower interest expense and increased business performance.
Adjusted EBITDA in the third quarter increased to $36 million or 13, 2% of sales compared to $32 6 million or 12, 4% of sales in Q3 of last year.
The year over year improvement was driven primarily by increased revenue based on strong demand as we continue to lap the pandemic related slowdown at 2020 as well as improved gross margins and an adjustment of management incentives previously mentioned.
As for our tax rate in the third quarter Tennant had an adjusted effective tax rate, excluding nonrecurring expenses of three 8% compared to 11, 3% for the third quarter of 2020.
The decrease in the effective tax rate was driven primarily by a tax benefit resulting from an election to step up the tax basis of certain assets in Italy.
Turning to cash flow and balance sheet items, our long term capital allocation strategy is to first fund operations and investment in growth appropriately manage leverage pursue strategic and accretive M&A and then to return excess free cash flow over time to shareholders through dividends and share.
Purchase it we.
We ended the quarter with $146 million in cash and cash equivalents and our net leverage of <unk> 93 times adjusted EBITDA is lower than our stated goal of one five to two five times.
Cash flow from operations was strong with $25 $1 million generated in the third quarter and $62 $9 million generated on a year to date basis.
Additionally, capex is approximately $12 million for the first nine months of the year.
Our strong free cash flow generation allowed us to return capital to shareholders through the following actions.
First and as previously announced tenants board of directors has authorized a 9% increase in the company's quarterly cash dividend to <unk> 25 per share.
The increased dividend is payable on December 15, 2021 to shareholders of record at the close of business on November 32021, marking the 15th consecutive year that the company has increased its annual cash dividend.
Secondly, during the third quarter Tennant repurchased approximately 102000 shares of its common stock for $7 5 million under its existing share repurchase program. The increase in the dividend and our share repurchase activities are aligned with our long term capital allocation priorities and display continued confidence in our ongoing.
<unk> business performance and future cash flow generation.
Lastly, turning to guidance as included in today's earnings announcement tenant adjusted full year guidance for 2021 as follows.
Net sales of $1 <unk> 9 billion to $1 1 billion, reflecting organic sales growth of 9% to 10%.
Full year reported GAAP earnings in the range of $3 50.
$3 70 per diluted share.
Adjusted EPS of $4 20 to $4 40 per diluted share.
Adjusted EBITDA of $137 million to $142 million.
Capital expenditures of approximately $20 million and an adjusted effective tax rate of approximately 15% with that I'll turn it back over to Dave.
Thanks Fred.
The challenges, we're facing with global supply chain and labor shortages are not unique to tenants and are likely to remain for the foreseeable future.
These challenges did have a direct impact on our Q3 results and our ability to meet our full potential in 2021. However, we are encouraged by the strong response to our innovative suite of products and the market recovery that is now at pre pandemic levels of demand our continued execution of our enterprise strategy.
<unk> has enabled us to better navigate the continued macro challenges facing the overall economy.
But more importantly, the strategic actions we've taken over the past couple of years will ultimately drive long term growth and profitability and enhanced shareholder value.
We will now open the call to questions. Operator. Please go ahead.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile our Q&A roster.
Your first question comes from the line of Chris Moore with CJS Securities. Your line is open.
Hey, good morning, guys. Thanks for taking a few questions.
Good morning, good morning, Greg.
Good morning.
Record backlog a lot of that relates to the parts availability beyond that are you seeing much pre buying accelerated buying by customers.
Factor in the supply chain challenges.
Yes.
Yeah. Thanks for the question Chris.
We mentioned on our backlog of about three to five times normal rates.
They're at about a two to three time rates coming out of the prior quarter driven entirely by our supply chain challenges. Our demand has largely returned to pre pandemic levels and we're really encouraged by that.
And orders at a rate.
Similar to 2019 and the constraints on our plant output are driven by our permanently.
Permanent supply chain challenges.
The customer orders are seem to be driven primarily by demand in the period. We had a few instances of customers buying ahead is to get into queue, because they recognize that our long lead times are real and they want to they want to get their spot in line for production, but those are the exception rather than the rule we've had a few wins.
So as customers.
Customers and our distributors buying ahead of the price increase as well.
On on whole R&R in order demands are driven by demand in the period for the period.
Customers are buying ahead. So we're really encouraged by that as we look forward to Q4 and 2022.
Got it Thats helpful.
Supply chain labor freight not unique tenant almost all of the industries recover or in that boat.
You operate in a market with a few dominant players.
And kind of a unique part here is tenant is really the only U S player out of.
Out of that group a bigger competitor so just trying to understand.
How that impacts your competitive positioning both.
In Europe, I mean for example supply chain challenges.
And in North America are they <unk>.
Impacting you more or less than say a Neil fiske.
In North America, just kind of trying to see how that big picture looks given the fact that you did kind of alone U S player.
Yes, let me try to Dimensionalize that for you, Chris So less it's less important.
As to where we're headquartered what's the bigger determinant on our competitor our ability to react to the supply chain challenges a couple of other facets of our business and one would be how would platform our product has to be how local for local or supply chain issues and so when you look at us and our competitors those are bigger determinants of our ability.
To respond and react.
Within this environment and kind of where we're headquartered or where our predominant end market is from a sales perspective, having said that the supply chain challenges are really global in nature and macro in nature as well and it's across all facets of supply chain from parts availability.
The way through freight and labor.
In fact of these challenges it does vary by region and so some of these are what I would call.
More more notable in North America, when you think about some of the dynamics in our Labor Force for example.
What we've seen in our R&D infrastructure in our system and we have plants in every one of our regions, which we are expanding capabilities in our local for local strategy.
What we see as a variance and ability to react based on again on the platform.
Alex the local for local supply chain and then some of the regional differences relative to the supply chain challenges. So I think it's difficult to draw conclusions at this point about.
The extent to which these global supply chain shareholders would affect our U S based competitor versus the European based competitor I will tell you what we're hearing from customers as we're out booking orders at a very robust rate theyre, telling us that we are right in line from a lead time perspective.
With our competitors and that's not to say that on a given product line in a given situation one competitor or us may have an advantage, but largely speaking we believe based on what our customers are telling us is that we are on par with the competition. So time will tell as this wears on in his recovery comes I think.
Our success will largely be marked by how quickly we can respond as with macro market recovers.
Extremely helpful. I will jump back in line I appreciate it guys. Thanks, Chris.
Again, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Next question comes from the line of Steve <unk> with Sidoti Your line is open.
Good morning, Dave Good morning Kay.
Wanted to ask on your chart on your change to EBIT guidance Scott.
Tire lease supply chain related given the quarter was good.
Have you seen it get significantly worse and what would your thinking is timing.
<unk>.
Yes.
So great question, one that we've obviously wrestling with as we move through the quarter and really our decision to sell them.
Lower guidance to return and tightened the range reflects where we're at in the year and the trends we've seen in the business. The signals, we're getting from the supply chain over the last five months. When we spoke after Q2 results and if you recall, we really only had a couple of months about 60 days of kind of impact.
The impact on our business from supply chain challenges. We've now entered kind of five to six months impact as we move through the third quarter. We have seen the situation deteriorate from a macro perspective, and we are working hard to overcome those challenges, but we felt it was appropriate given the trend we saw from quarter to quarter to reflect that in our full year guidance.
I think it's worth noting though if you think back to the original guidance. We issued we were at $130 million to $140 million in EBITDA, we raised to $1 40 to 150 on the strength of our Q1 results and now we provided to $1 37 to $1 42, it's kind of split the difference between the original and raised guidance and when you.
At the guidance that we've given across the P&L and we're really within striking year within striking distance of delivering a fantastic year for tenant and so despite the supply chain challenges that we're facing and all of the teams efforts to attempt to mitigate those impacts and thus revising guidance, we're still very proud of the results.
We're communicating and what to look for the year.
And then in terms of I guess, your EPS with stronger too I think our estimates on SG&A.
<unk> does not necessarily year over year.
Change sequentially with SG&A, and how youre thinking about that fourth quarter.
Has the shift been entirely on an incentive.
So it's a two part but I think the big driver here is a change in guidance drive the change in management incentives and so we had a cumulative adjustment here that that benefited the quarter, but it's also reflective.
Cost savings initiatives as well.
Yeah.
Can you give a sense of how youre thinking about SG&A in Q4.
I think that we're not going to see that same kind of benefit come through that we saw in Q3.
When I look at Q4.
It will probably be more in line with kind of our normal run rate of about $85 million a quarter.
Okay, Great. That's helpful. Ken when we think about what's happening in the business. Steve. We're returning to work returning to the office business travel is picking back up and so from <unk> perspective, we expect to continue to support our customers and drive the demand, we're seeing and set ourselves up for 2022.
We'll be spending in SMA I think it's also worth noting that we're not cutting our way through M&A to deliver these full year results. These results are a direct reflection of the organization's ability to execute against our GPS strategy and drive the structural changes in our business that provide recurring benefit in the out years.
If I could get one more in terms of balance sheet continues to improve you raised the dividend actually more than we were expecting.
Small buyback when youre thinking about the balance sheet.
Debt repayments versus potential additional buyback given that you typically raise the dividend once a year, how youre thinking about those those those three buckets.
So our capital allocation priorities really have not changed our first of all is all in to invest in a business, where we think that largest return exists and then some.
At least amount of risk and to manage our leverage and our leverage.
And really below our targeted range right now at one five to two five times I think the balance sheet. As you say is very well positioned and we had generated approximately $50 million of free cash flow. During the first nine months of the year, which is very very strong so.
On the basis of our strong balance sheet and strong free cash flows. It really did allow us to increase our dividend and to execute against share repurchases and an effort to return excess cash excess cash to our shareholders without compromising growth.
How would you think about that over the next three or four quarters.
As far as share repurchases.
Yes.
Yes, it's going to be an integrated component of our capital allocation priorities and it is at the discretion of management.
But it will be part of this dramatic capital deployment strategy.
Okay.
So much thanks, Thanks Brent.
Thanks, Steve.
There are no further questions at this time I would like to turn the call over to management for their closing remarks.
Thank you and before we close please note that we will soon be posting on our IR website. The first in a series of videos to offer a deeper look into our business and growth strategy. You can be notified of each video by signing up for E Mail alerts at investors Dutch Tenneco Dot com.
I also want to take this moment to thank our global Tennant team for all their hard work and dedication from our sales and service teams, who are supporting our customers directly to our operations and supply team, who continue to find creative solutions to today's challenging environment and to our engineers back office and everyone else across our enterprise, helping to support our customers.
And our business a sincere. Thank you. This concludes our earnings call have a good day.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
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