Q4 2022 Tennant Co Earnings Call
To discuss our operations and enterprise strategy and Fay will cover our financials.
After our prepared remarks, we will open the call to questions.
Please note a slide presentation that accompanies this conference call and is available on our Investor Relations website at investors <unk> tenant 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 materially from those contained in the statements.
These risks and uncertainties are described in today's news release and the documents we file with the Securities and Exchange Commission we.
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 2022 fourth quarter and full year 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 <unk> Dot Com I will now turn the call over to David.
Thanks, Lorenzo and thanks to everyone joining the call today I.
I am pleased with the strong performance the team delivered in the final quarter of the year.
With revenues of $291 million Q4 was our highest revenue quarter since the fourth quarter of 2019.
Order demand in the fourth quarter of 2022 exceeded the average of the three preceding quarters by over 10%.
Demand was especially strong in North America, where orders were 22% higher than the average of the first three quarters.
Fourth quarter, adjusted EBITDA of nearly $42 million improved significantly over the prior year's Q4 of $28 4 million.
We executed targeted actions and initiatives throughout 2022 to address inflation parts shortages in labor availability. These.
These actions are starting to yield results and drove our strong performance in Q4.
Pricing actions and cost out initiatives continued to read through and covered inflation on a dollar for dollar basis in both Q4 and the full year.
Production output increased sequentially from third quarter and while we are pleased with this increased production is not yet at the levels needed to materially decrease our backlog.
The situation is showing signs of stabilizing but is not yet on a clear path to full recovery.
Moving on to our full year 2022 performance, we delivered adjusted EBITDA of $133 7 million on net sales of 1.0 $92 billion.
Which was within our revised guidance range.
Organic net sales grew four 2%, but results were adversely impacted by foreign currency effects, which decreased net sales by approximately $43 million.
Based primarily on strong pricing realization organic net sales grew in all regions, except APAC, where local COVID-19 related shutdowns continued to impact demand.
Our service business in parts and consumable sales were very resilient in 2022, which provided tenant with a hedge against equipment production constraints.
Despite the positive impacts of cost out initiatives prudent cost management and pricing realization our full year adjusted EBITDA was unfavorably impacted by $12 million due to foreign currency effects.
Looking back on 2022, driving short term improvements was top of mind for our entire organization as we work to increase production combat inflation and offset the impact of macroeconomic factors.
Throughout 2022, we enhanced many of our supply chain processes developed a new skills and strengthened our supplier relationships.
On previous calls we have discussed various actions and creative solutions. Our team has employee to secure critical parts and increase production.
These actions include working closely with our suppliers to increase predictability expanding dual sourcing supply options and continuing spot buy activity.
Designing products that reduce our reliance on constrained parts and supplementing tier one supplier efforts and directly procuring difficult to source tier two sub component parts.
These actions will continue to provide benefits into 2023 and beyond.
To combat historically unprecedented inflation, we aggressively managed costs and took meaningful price actions.
Our price realization was strong in 2022, which demonstrates the power of our brand and our leadership position in key markets.
Our customers' preference for Tennant products helped to drive record backlog of over $325 million.
Going forward, our focus remains on reducing backlog and satisfying customers.
We have confidence that we can convert our backlog to revenue over the next two years and believe our backlog provides us with a level of installation from future demand fluctuations.
Our fourth quarter performance provides positive momentum as we start 2023, while we face uncertainty about global macroeconomic challenges, we are cautiously optimistic and fully committed to delivering improved results by focusing on the recovery of backlog.
Launching innovative and new products.
Driving price realization and providing our customers with world class service.
For full year 2023, we anticipate organic sales growth between 3% and 7%.
And adjusted EBITDA between 140 and $160 million.
Fay will go through 2023 guidance in more detail later on the call.
I will now highlight some of the key initiatives, we launched in 2022 that will benefit us going forward as well as support our long term growth strategy.
In an effort to stabilize our supply chain increased predictability and unlock production, we made several investments in our procurement areas, including expanding our internal resources and partnering with third party experts that not only helped to triage current issues, but also improved our internal processes to address.
Supplier constraints.
Additionally, we made incremental investments in it infrastructure that enhanced our material planning.
We continue our localization efforts specifically in EMEA to streamline value chain.
<unk> enabled dual sourcing opportunities and reduced transportation challenges.
Yes.
As we have discussed in the past our first capital allocation priority is to invest in our revenue generating assets and we invested over $13 million in our plant operations.
These investments include automation to improve assembly productivity.
<unk> capacity to increase production output preparing for recovery and in sourcing parts for improved availability cost and quality.
Looking at new product launches in 2022, we accelerated the strategy of leveraging our IPC and Gal may mid tier product platforms by introducing tenant branded versions.
These product launches allowed us to fill customer demand gained share in less intense applications and compete profitably for price driven customers.
We exceeded our 2022 targets for these products and grew overall category margins with this tiered offerings strategy in North America.
With positive early returns in 2022, we will continue with the strategy in 2023.
We also introduced additional tenant branded extensions of our successful <unk> product, the <unk> light and I'm opex. So.
These highly maneuverable compact on handheld scrubbers allow our customers to achieve superior cleaning performance versus mop and bucket and other small space cleaning machines.
Our full range of <unk> products feature rugged construction to survive daily professional use and offer intuitive simple operation to enable even new operators to successfully clean.
These <unk> products are part of our growing portfolio of small space cleaning solutions that are gaining share in this attractive adjacent market with both new and existing customers.
When it comes to our customers their voice remains Paramount and guiding our new product innovation efforts.
We have focused our R&D efforts on sixth innovation vectors.
Robotics electrification data sensing customer experience and core products through.
Through these vectors, we are not only focusing on solving our customers' most pressing problems, but also addressing broader market opportunities, ensuring regulatory compliance driving our business growth and margin expansion.
And advancing our sustainability objectives.
Let me cover some business highlights in two of these innovation vectors robotics and electrification.
Lack of labor availability wage inflation and turnover are among our customers our biggest business challenges.
Our ahmar robotic cleaning machines reduced customer reliance on human labor freeing up scarce resources to perform higher value cleaning tasks.
We are continuing to expand our global sales and service capability to reach more customers with a compelling value.
The value proposition.
With our three product portfolio, we have a viable robotic cleaning solution for customers in each of our core vertical markets.
We've generated over $170 million in customer orders since 2019 and deployed over 6000 <unk> units to more than 200 unique customers in more than 20 countries worldwide.
Second electrification, which can simply be defined as replacing internal combustion engine machines with emission free power.
Sustainability goals and emissions regulations are driving a need for greener equipment.
The work, we are doing to electrify, our industrial machines aligns with our customer needs as they increase their focus on emissions free cleaning and seek out a lower cost more efficient solutions.
Electrification also contributes to our sustainability goals tenant.
Tennant continues to lead through our sustainability and ESG efforts and we recently received recognition from Newsweek for being one of America's most responsible companies our third time, receiving this honor.
To continue our ghd reduction and climate leadership, we are committing to become net zero by 2040 and have submitted goals to SB Ti for approval.
Lastly, you're all familiar with our enterprise strategy, which is based on three pillars to win where we have competitive advantage.
<unk> complexity and build scalable processes and innovate for profitable growth.
Despite all the potential for distraction in 2022, the team remained focused on our enterprise strategy.
As it relates to winning where we have a competitive advantage. Our work is largely complete and we've been still new disciplines into how we're managing the business going forward.
We invested significant time, and an 80 20 approach to rationalize our portfolio.
Since 2020, we have intentionally exited non core product lines and businesses accounting for more than $50 million in annual revenue.
Turning to the second pillar reduce complexity and build scalable processes.
As we have grown our business Inorganically, we introduced multiple ERP systems. These eight disparate systems introduced a level of complexity into our organization as processes are not entirely standardized.
This year, we plan on evaluating the benefits costs and risk of implementing a consolidated ERP globally.
We realize that an ERP implementation would be a significant undertaking.
But could also unlocks significant value we have not included any costs or capital in the current guidance for 2023 and anticipate that we will have our analysis completed in Q3, and we'll update you accordingly.
Overall, the implementation of our enterprise strategy is a continuous process, particularly with respect to the third pillar innovate for profitable growth.
To supplement our R&D efforts, we recognize that we have the unique opportunity to be even more intentional on inorganic growth.
Our IPC and gourmet acquisition demonstrated our ability to successfully grow through acquisitions close to our core.
In 2023, we will conduct a strategic review to determine the most attractive adjacencies to focus our investments for inorganic growth.
Before turning it over to Fay to review 2022 financial results and 2023 guidance.
Wanted to acknowledge the resourcefulness and perseverance our team displayed to deliver organic sales growth in 2022.
I'm very proud of the team's efforts and we are well positioned for future success.
With that I will turn the call over to say for a discussion of our financials.
Thank you, Dave and Hello, everyone.
Fourth quarter GAAP net income was $23 8 million.
Compared to $7 9 million in the prior year period.
Adjusted net income was $27 2 million in 2022.
<unk> to $13 5 million in the prior year period, and adjusted EPS for the fourth quarter was $1 46 per diluted share compared to <unk> 71 per diluted share in the prior year period.
The increase year over year was primarily due to favorable gross profit and lower income tax expense.
Partially offsetting this increase was higher interest expense and the impact of foreign currency.
<unk> margins improved year over year, as higher selling prices and an increase in volume offset inflation headwind.
Income tax expense was lower in the current period due to a noncash tax benefit on undistributed foreign earnings.
Interest expense was higher year over year due to rising interest rates and slightly higher debt levels.
Our average interest rate net of hedging for 2020, Q was 293% compared to $2 eight 5% in the prior year.
Foreign currency adversely impacted adjusted EPS by <unk> 14 per diluted share.
Full year GAAP net income was $66 3 million compared.
Compared to $64 9 million in the prior year period.
Adjusted net income was $76 $5 million in 2022 compared to $83 3 million in the prior year period.
Adjusted EPS for the full year was $4 10 per diluted share compared to $4 39 per diluted share in the prior year period.
Year over year decrease was primarily due to lower gross margins due to the broad effects of inflation on material labor and freight costs and higher income tax expense, partially offset by a decline in selling and administrative expense as the company continues to actively manage cost.
Foreign currency adversely impacted adjusted EPS by 37 per diluted share.
For the fourth quarter of 2020 to Tennant reported net sales of $291 million, a five 3% increase compared to the prior year comparisons between periods were significantly impacted by foreign currency fluctuation, which drove a four 4% decrease in net sales.
On a constant currency basis organic sales increased nine 7%.
Tenant group sales into three geographies, the Americas, which includes North America, and Latin America, EMEA, which includes Europe , the Middle East and Africa, and Asia Pacific, which includes China, Japan, Australia, and other Asian markets.
America's net sales increased 16% from the prior year period.
The increase was due to the impact of higher selling prices as well as volume increases in the region.
EMEA net sales decreased 10% from the prior year period, but increased two 3% on a constant currency basis.
Foreign exchange continued to be a significant headwind, resulting in a year over year impact of a negative 12, 3% offset by organic sales growth of two 3% driven by higher selling prices.
APAC net sales decreased 14, 2% from the prior year period, primarily driven by organic sales decrease of seven 5%, mainly due to volume declines in China stemming from the COVID-19 government action.
Foreign exchange continued to be a headwind, resulting in a year over year impact of negative six 7%.
We successfully executed several meaningful price increases during 2022 that is favorably impacted net sales.
The realization of these price increases was somewhat temporary throughout the year due to our elevated backlog, but we started to see increased contribution in Q4.
Geopolitical factors have moderated demand patterns, specifically in EMEA and APAC.
Moving to adjusted EBITDA adjusted EBITDA for the fourth quarter was $41 7 million or 14, 3% of sales compared to $28 4 million or 10, 3% of sales in 2021.
The increase in adjusted EBITDA was due to higher gross margin, partially offset by foreign exchange translation, which impacted adjusted EBITDA by approximately $4 million.
For the 12 months ended 2020 to Tennant reported net sales of 1.1 92 billion eight 1% increase compared to the prior year comparisons between periods were significantly impacted by foreign currency fluctuation, which drove a 4% decrease in <unk>.
Net sales.
On a constant currency basis organic sales increased four 2%.
Organic sales in the Americas increased seven 4% versus the prior year.
The increase in the Americas was primarily due to higher selling prices in all categories across the region and volume increases in Latin America.
Organic sales grew two 5% and EMEA, primarily driven by higher selling prices and equipment and parts and consumables across the region.
Partially offset by volume declines due to supply chain constraints and softening demand in the region.
Organic sales declined 11, 4% and APAC, primarily due to volume declines in China as government shutdowns related to COVID-19 unfavorably impacted demand. This was partly offset by volume growth, India, Australia and markets.
Adjusted EBITDA for the full year was $133 7 million or 12, 2% of sales compared to $140 2 million.
Or 12, 9% of sales in 2021.
The decrease in adjusted EBITDA was due to lower gross margins and unfavorable foreign exchange translation of approximately $12 million offset by lower SMA, which decreased approximately 5% year over year.
Turning to cash flow and capital deployment.
For full year 2022, net cash used in operating activities was $25 1 million compared to net cash provided by operating activities of $69 4 million in the prior year.
The increase in cash used was attributable to investments in inventory required to support an anticipated ramp in production.
Accounts receivable due to increased sales to customers with extended payment terms and the timing of a large volume of sales in the back half of the quarter.
As well as increased cash payments for employee compensation and benefits.
And income taxes.
The company continues to deploy cash flow toward operational capital needs and to return capital to shareholders in line with its capital allocation priority <unk>.
Capital expenditures of $25 million were in line with our overall guidance liquor.
Liquidity remained strong at approximately $319 million with a cash balance of $77 4 million and with $242 $2 million.
Of unused borrowing capacity on our revolving credit facility.
Our net leverage remains within our guided range of 167 times adjusted EBITDA, which is in the lower range of our stated goal of one five to two five times.
Turning to guidance.
Our full year 2023 guidance reflects what continues to be an uncertain business environment.
We believe inflation will persist, though we expect that it will moderate in the latter part of the year.
We are closely monitoring inflation, and we will take additional pricing actions as necessary.
We also continue to take cost out actions to help offset inflation and anticipate that carryover from 2022 actions coupled with additional 2023 projects.
Contribute to an increase in margins.
Labor, while largely solved and our plan remains a challenge in our service organization.
Although we believe that labor constraints will persist more broadly and specifically for our customers. We view this as an opportunity to drive incremental growth in EMR in 2023.
Foreign exchange was a significant headwind for tenant in 2022, and while it remains largely unpredictable we believe it will not having material impact on 2023 results.
As we look across our global markets Global GDP has slowed.
Expect the Russia, Ukraine conflict to continue to impact the European economy, and reflected the impact on costs Accordingly, and our 2023 plan.
In APAC China's economy is expected to grow in the low single digits and we are optimistic that the reopening of the Chinese market. After the elimination of the zero Covid policy will drive incremental demand in 2023.
Increasing output is a top priority and we remain committed to investing in the recovery efforts that are critical to reducing our backlog and returning to competitive lead times.
Our fourth quarter performance provide some momentum and cautious optimism as we enter 2023, but we anticipate that supply chain issues, specifically parts availability will continue to hamper our effort to significantly increase output.
We anticipate that backlog will decrease in 2023, but will remain at elevated levels as we exit the year.
As we work through our backlog, we expect to see accelerated margin recovery in the latter part of 2023.
In terms of profitability, we believe price realization strategic cost reduction initiatives and strong cost control measures will drive adjusted EBITDA improvement throughout the year.
We believe this coupled with changes in working capital will drive positive operating cash flow in 2023 for 2023 tenant provides the following guidance net sales of 1.15 billion to one <unk>.
155 billion, reflecting organic sales growth of 3% to 7%.
Full year reported GAAP earnings in the range of $3 10 to $3 90 per diluted share.
Adjusted EPS of $3 70 to $4 50 per diluted share, which excludes certain nonoperational items and amortization expense adjust.
Adjusted EBITDA of $140 million to $160 million capital expenditures of $20 million to $25 million and an adjusted effective tax rate of 20% to 25%, which excludes the amortization expense adjustment.
With that we will open the call to questions. Operator. Please go ahead.
At this time I would like to.
To remind everyone in order to ask a question press star one on your telephone keypad.
Our first question comes from Chris Moore with CJS Securities.
Hey, good morning, guys. Thanks for taking a couple of questions. Good morning, Chris.
Good morning.
Just to start with on the on the production level side. So obviously, it's not where you need to see I'm, just trying to get a little better sense in terms of.
How far away are you how much visibility in getting there.
Maybe ask a different way in your guidance is 3% to 7% organic growth. If there was no supply chain issues would that be meaningfully higher.
Thanks for your question, Chris I'll try to I'll try to put up some additional dimensions around the output plant's output.
And embedded in our Q4 and our full year results and then and then you are you a hypothetical scenario, where there's no part shortages is a really interesting one to us we'd love to operate in that environment. So while we don't anticipate that being the environment. In 2023, we would we would welcome that would be a welcome change for our business when you look at our.
Our fourth quarter performance from a revenue perspective.
Much of the result was driven by price realization as we as we gain the benefit of previously published price increases really through into our into our results.
Whats hidden underneath the headline in what's really a reason for us to have some optimism is that we can map. Some specific increases in production output to specific investments and actions that we took in calendar year 2022 to try to overcome the parts shortages and so the fact that we can point at.
Vic actions, we took with specific suppliers on specific components and how it read out to an increase in a specific product line in Q4 gives us a cause for optimism, believing that the investments and actions. We've taken are targeted in the right areas and that we are able to affect change. So it's a reason for optimism, but we certainly.
Not pivoted to a full recovery and so.
Not all of the actions we took in 2020 to read out in Q4, nor do they read out as fast or at the magnitude we had hoped for or expected. So some of the benefits of the actions that best actions, we took investments we've made.
It will bleed over and hopefully provide benefit in 2023 from an environmental standpoint, we don't expect supply chain shortages to quickly rectify themselves from a landscape perspective, we're taking lots of actions to try to overcome the challenges that we have with our specific suppliers are specific parts.
So our challenge, but we're not expecting nor are we baking into our planning assumption a significant recovery in the landscape of parts parts availability. So.
As I look at the Q4 experience I'm really proud of the efforts we took in 2022 and the investments. We've made we can map some of those actions to providing benefit in Q4, we're confident that some of those will continue to provide benefit out into 2023, we are far from having a clear line of sight to recovery in net.
I would say that Q4 is an important proof points, along our path to stabilization and so first we need to stabilize before we can drive recovery you asked I think embedded in your question, Chris was kind of line of sight, how re operating from a supply chain visibility perspective, if you go back a quarter ago or two quarters ago.
And I think we highlighted this on the call certainly talked about it in our in our <unk>.
One on ones.
We were largely hand them out.
So we didn't have a predictable supply of components from our suppliers they weren't delivering to their committed dates or in the quantity is a committed and so we were hand to mouth trying to keep the production lines running.
In some cases on some lines, we are still hand to mouth, but that that has gone down the number of lines of a hand to mouth has decreased and we gained better visibility to the supply of parts that we need for let's say the next month and so rather than make hand to mouth across the majority of our lines now we've got some visibility across the us.
Across the coming months and.
A reasonable confidence will receive the parts as they were committed from our suppliers and I think the other thing we see is more predictability better predictability from our suppliers our supply base, where in the past the middle of 2022, we are dealing with suppliers are committed and then didn't deliver on the on time or in the quantity. We expected we're still seeing some.
Predictability, but it seems to be improving from a predictability standpoint again, not getting all the parts, we need as fast as we'd like but becoming more predictable and thats why I would characterize this more as stability than than kind of a trajectory of recovery. Yes. When you think about recovery from a purely from a supply chain perspective, we think that it will.
We'll be continue to be choppy.
When we think that while we can take actions to overcome some of the challenges and have positive impact we are still seeing AD hoc disruptions caused by suppliers whatever their root cause is whether they have a lack of labor or the challenges upstream, we're still seeing sort of AD hoc challenges, we're having to manage.
In an elevated number of suppliers to make sure that to make sure that they can meet our requirements. So.
I would say we're on we're stabilizing.
And we expect to be on a path to recovery, but we don't have line of sight to it yet.
Got it all extremely helpful. Thank you for that.
So it looks like you guys have done a really good job kind of managing SG&A, while things have been kind of up and down it it feels like I'm just wondering if at this.
<unk>.
Necessarily be sustainable moving forward I mean, I think it was 28% of revenue in 2022.
Quite a bit lower than where you had been.
A couple of years back I'm, just wondering from an SG&A standpoint moving forward.
There is some some costs that.
Could come back in there in 'twenty, three or just kind of how you are looking at it.
So the way that I would characterize it is is we are challenging ourselves daily on how to best operate the Oregon, The company, including managing our cost on the SG&A line and and we saw significant improvement year over year.
Anticipated 2023 guidance, we've corrected for a certain number of things like travel, which is opening up or the reversion back to certain tenants.
Compensation.
And other areas, but in general.
Our goal is to manage our SG&A appropriately and to.
And to manage it to a percentage of.
Sale and I think what we achieved in 2022 is not is certainly within.
The realm of achievement in 2023.
Yes, Chris I would just add I think we've I think we've demonstrated over time and certainly in 2022 that we can manage SMA. Accordingly, so how the business is performing.
We took decisive action throughout the year to deliver the results that we were able to in some of those around the yesterday side I will tell you coming through Q4.
And into 2023, we are going to be very cautious with our with our <unk> spend to make sure that we don't get don't get ahead of ourselves before the business is signaling that weekend that we can afford the incremental investments.
Got it and maybe just last one for me.
Cash flow from operations $25 million, you went through the big drivers receivables inventory. Some other things just big picture kind of how are you looking at 'twenty three versus 22.
Yes, I think youre going to see a reversion back to normal in 2023, I think we had some significant investments in working capital primarily around around inventory.
And we anticipate that that will run by that that usage will revise in 2023, and so youll see a glide path down.
As we go through.
Yes, 2023, so we think we will go back to normal so certainly the improved performance.
From an operations perspective will drop through to operating cash flow as well kind of more normalized working capital.
Activity.
Got it.
It's probably worth noting in 'twenty and 2022 of these were really intentional investments that we made on the inventory side.
Given the situation we are operating in if you look at the year the increase in <unk>.
Inventory from Q4, 'twenty, one through to Q4, 'twenty two and just look at the components what drove the increase about a third of it is inflation about a third of it is intentional investments either in a constrained parts inventory or width and about a third of it is supporting new product launches like lithium ion batteries and our iron.
Product, we talked about on the on the call as well as well.
We allowed an increase in our service DUC inventory to support our customers and keep their machines running up to the service levels of these submitted to them. So I'd make the point because it's important to dimensionalize the increase the impact on cash flow in 2022 was intentional on our part given the environment we operate in.
Got it I appreciate it I'll jump back in line. Thanks, guys.
Thanks, Chris.
Our next question comes from Steve <unk> with Sidoti.
Good morning, Dave.
Thanks for all the detail on the call I just want to follow up the last question in terms of.
If we have that glide path to more of a normalized working capital it looks like the additional debt you took on through the year was to meet the working capital needs I'm, just trying to think about.
What you're expecting on the debt side and then in your guidance, what's the interest expense.
Yes, and so yes, youre absolutely right I think those investments and working capital were financed with our revolver.
We are we are always looking at how we manage our leverage and certainly at the midpoint of our guidance.
Next year, we don't have to meaningfully reduce our leverage to get to one five times or below and we do have some amortization on our term loan that we have to pay.
With any excess cash we could potentially.
Potentially pay down debt further if we need to.
And so I would say that in 2023.
<unk> is the increase in interest costs as we went through the year based on the increase in underlying rate.
On an average basis for 2023 net of hedging activities because they took some decisive actions in the fourth quarter.
To fix a portion of our floating rate debt about $120 million or 40% of our debts, just ex that out but in and then what we saw from an average rate in 2022 was about just shy of three 3%.
But that was raised that was increasing.
Throughout the quarters and in the fourth quarter was just shy of 5% I would say that if you look at fourth quarter interest expense.
That would be a good proxy for 2023.
And just.
Just based on kind of how we hedge and fixed out.
Fixed a portion of the debts our guidance doesn't assume.
A moderate increase in the underlying right now it's the same does something different than that.
Back to you.
Great. That's helpful. Thank you.
I do want to get back to the sales guidance to 3% to 7% I'm trying to think about.
How much of that is pricing.
Okay.
Our mix there.
Yes, I think I think if you just.
Dave I'll start and you can jump on I think if you look at just our midpoint of our guidance range, it's about a 5% year over year increase in organic sales.
And the way to characterize that is about 20% of that we think is coming from volume and about 80% of that is coming from pricing.
Okay.
Perfect.
So.
Obviously you've seen.
The expectation was we would see that.
Gross margin pick up here in the fourth quarter as we slowly you fully realize some of these price increases, but as you noted there is still some older price backlog, which we're working through do you have any sense of what that margin might have looked like without deals are priced backlog.
How youre thinking about margins, because youre getting youre really starting to make that move back to more historical levels. So I'm just trying to see how you get there given the fact that you have almost a quarter of backlog still built in.
Yes.
Didn't we didn't model the quarter on <unk>.
Margin impact from incoming orders versus.
Versus backlog, which didn't model. It obviously the more aged backlog is sitting prior to one two or three price increases and so that's right.
But the fact that we're not working backlog in our FIFO manner makes it really difficult to track what the impact was versus what would have otherwise been I'd say, we're encouraged by we're still getting strong price realization. So we're encouraged are encouraged by that we've got our price increases largely published.
Few spots in the world that are still yet to publish but major geographies, we published and we're getting we're getting good stick rate. Good realizations. So it's really credit to our selling organizations around the around the globe as theyre doing a fantastic job selling in multiple significant price increases over the year and making sure that we get paid back for the value we're delivering.
And also the inflation that we're that we're feeling in the business.
As I mentioned, we are counting on about our growth for 2023 is roughly 80 20 between price.
And volume is up.
The interesting and we're monitoring closely not only order demand patterns, but also price realization.
Inflation moderates and our planning assumption is that largely largely speaking inflation will moderate.
And so we're monitoring whether our realization sticks at the same rate that we've been able to achieve kind of coming through 2000 2022, but.
Our guidance does imply.
Some expansion of our gross margins, we don't guide we don't guide on gross margins, obviously, but yeah. It's embedded in our guidance maybe building on what Dave said, if you look at the.
Broadly over the course of 'twenty, two while we call it inflation with our price realization from a margin standpoint on a full year basis. It was actually dilutive from a rate standpoint. However, if you look at Q4, you'll start to see more of those price adjustments to significantly cover inflation slightly for margin at 39, 6%.
It was over the average by about more than 100 basis points over the average over the first three quarters.
So that can kind of give you an indication of how we're going to into 2023.
Great perfect. Thank you last one from me if I could squeeze it in just your thoughts on China.
Obviously, the expectation is we'll see more of a reopening is this year moves on how much that can impact you are you seeing anything yet.
Yes.
Watching it closely we were off dramatically in 2022 in China from a demand or demand perspective, obviously, the news that the government decided to lift the COVID-19 restrictions as well as the requirements for testing and allow freedom of movement around around the countries was welcome news to us as.
As we look at our business in China really the restrictions were lifted and then the country wins on holiday and so while we talk to our team and our channel partners as well as customers.
Some optimism about the reopening of the market I would say, we're all waiting to see it materialize into into orders and it's just too early to tell whether whether the promise of an opening and an increase in our business.
We will fully be realized is the only thing we're looking at youll really positioning ourselves to be ready to satisfy the demand.
When it comes so from our plant staffing perspective from a parts availability perspective, we're staying close to the channel partners and our customers. So that we're ready to react.
As the demand materializes.
Great. Thanks, everyone.
Thanks, Dave.
Our final question comes from Tim Moore with E F Hutton.
Thanks, and nice job with the 10% organic sales growth in the quarter and the sequential improvement.
From the September quarter on that front.
Just getting back to your 2023 guidance.
Just regarding the higher end of the range what factor or two factors might be the main swing factors.
<unk> more of the high end of the range is it really the supply chain or does it also depend on something else like more ahmar orders.
Yes.
Listen we have upside in our new products and there's no question and specifically <unk>, but if you think about the big lever that could.
Big thing that could be a change from our planning assumption and it allowed us to achieve the high end of the revenue range. It would be a loosening in supply chain. So that we could just get the parts and react until the not only incoming orders will meaningfully reduce our backlog.
We're working hard we've talked a lot about the actions we took in 2022 to position ourselves to overcome some of the most persistent challenges and while some of them started to read out in 2022, some of them have not yet begun to readout and so we really need that improvement in the environment as well as full traction from the actions and investments we took on too.
<unk> thousand 22 to deliver at the high end high end of the range and Thats. The reason for such a broad a broad range on the revenue line really is is where we're taking actions controlling what we can control, but much of much of the supply chain recovery is out of our hands.
Great that's helpful and I know, you've already elaborated and mentioned above.
About the component shortages.
Very good about giving detail on that every quarter.
I'm just wondering have you seen a good improvement in the last few months on specifically on your dual sourcing and your direct procuring for some difficult to source components is that much better than it was maybe in September October .
Yes, it's really a mixed bag, we talked a lot about on prior calls about circuit boards and electronic components that go into circuit boards. We made a number of targeted investments and took some targeted actions and some of those actions did read out and contribute to our Q4 Q4 performance.
Other hand, we made investments and actions on other constrained components and didn't see the benefit in the quarter, Although we're still confident that over time.
Over time those are all of those will read out and provide benefits. So it's kind of a mixed bag from our vantage point and we're mapping the improvement that we're seeing we're mapping more to the actions and investments we've taken that any kind of a broader recovery in supply chain.
Greg you mentioned earlier.
So I'm just trying to think about some of the innovation drivers for 2023, you mentioned earlier you took the mid tier products for IPC and even.
Gal Gamay under the Tennant brand.
The IPC.
Extensions recently is there anything else for small space cleaning or anything else.
Such as I don't know equipment as a service being being rolled out into more countries for 2023.
Yes, we're really excited about our small space offerings, not only that imap products, we highlighted in the script, but also we've got another product <unk>, which we launched which is.
A fantastic compact cleaning machine allows us to further penetrate that small space small space cleaning we're excited about that.
We're excited about the upside in AMR continue to be excited about the upside in EMR from our from our.
<unk> product portfolio and the fact that we can address customers across virtually all of our vertical markets and increasingly on a global basis. So we're excited about the upside that we can realize from from Ahmar you mentioned.
The rebranding of our ICC and Xiaomi branded products into the Tennant brand.
That's a really interesting proposition it was not the original intent when we made the acquisitions.
It was a secondary benefit that we would harvest over time and given the situation. We found ourselves in from a supply chain perspective, it makes sense to accelerate that strategy and we're really pleased with how successfully we position those products at a compelling price point in the marketplace, where it's not dilutive to the tennant brand or dilutive to <unk>.
<unk> and I think a large part of the value proposition is that we can take a product thats designed to a different performance spec wrap the entire tenant ecosystem support around it and sell a mixed fleets to our customers and so customers in North America are familiar with the Tennant brand.
They rely on us for our service and aftermarket support now they can buy a product.
In the Tennant brand that they know and trust with the ecosystem of support they expect at a price point that is warranted for the application and provides them a fantastic alternatives. So really excited about the early returns on that strategy and expect to continue to accelerate with that strategy in North America in 2023 and beyond.
Yes, that's very helpful to hear my last questions about.
Have you seen any.
Order cancellations over the past few months our customers.
Starting to maybe downgrade to some of the lower lower tier price models and then if you could maybe elaborate also on our equipment as a service I know you were doing that in some countries and do you think youll continue rolling that out to sort of lean this year.
Yes, so I am just topic of order and I apologize you brought up equipment to service in the prior question.
From the order cancellation perspective, we have not seen any material order cancellations, it's kind of the rare exception I attribute I attribute that to the fact that we're booking orders and the customer has full knowledge of our lead times. So they are fully aware of how long they're going to have to wait to get the product. So it's not like it's a bait and switch situation where they are.
They believe one thing and then they're surprised so we're seeing very few cancellations.
I'm sure there's some percentage of our order bookings that are.
Higher hedge the price increases as well as <unk>.
Trying to get in Q4 for future demand.
We will tell how much of that is is kind of a pull forward in demand versus versus real in periods of demand because I'm sure I'm sure that that dynamic.
From a sell down perspective, there are some instances, where we just couldnt get a tenant branded product and the lead time, the customer needed and so Luckily we had the IPC or the gourmet branded mid tier products to slot in and satisfy the customer.
I would say that was again that was an exception rather than a rule. So we haven't seen the market sort of trading down because of economic pressure or inflation pressure on their business.
We've largely seen it hold as the mix that we would expect from from a tenant brand versus kind of other branded products in our in our portfolio and an equivalent as a service is a really compelling value proposition for some customers.
We've been very successful with it in specific targeted geographies.
It provides a lower entry point for for example for our building service contractor and they can link their operating expense to the contract with cleaning contract revenue and be more in control of their profitability by assigning not only the <unk>.
Title of the asset, but also the responsibility for keeping it running from a service perspective over to tenant we're learning a lot in those geographies about which customers find it most compelling.
As a business model or as a value proposition and then as importantly, because the burden the risk shifts to us to make sure that thats a profitable venture we're learning a lot about how to set ourselves up from a service perspective, and an aftermarket support perspective to make sure that that's a.
A very compelling proposition for us from a profitability perspective, so I would say we're learning a lot we're modeling to make sure that we're very pleased with.
Not only the market share gains, but also the profitability profile and then we're optimistic I think I think equipment as a service in some targeted applications targeted geographies that could could make a lot of sense, both for tennant and for our customers.
Yes.
Great Thanks for that detail and Thats it for my questions.
Thanks, Tim.
There are no further questions at this time I would now like to turn the call back over to management for closing remarks.
Thank you all for your participation today and thank you for your continued interest in tenant company. This concludes our earnings call have a great day.
Okay.
Okay.
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