Q2 2023 Tennant Company Earnings Call
Good morning, My name is Christian I'll be your conference operator today at this time I would like to welcome everyone to Tennant Company's 2023 second quarter earnings Conference call.
This call is being recorded.
There will be time for Q&A at the end of the call. Please press star one if you'd 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 in Tennant company's 2023 second quarter earnings Conference call. Beginning today's meeting is Mr. Lorenzo Bassi Vice.
Vice President Finance for Tennant company.
Mr. Betsy you may begin.
Good morning, everyone and welcome to Tennant Company's second quarter 2023 earnings conference call I'm.
Im Lorenzo <unk>, Vice President Finance and Investor Relations joining me on the call today are Dave Huml tenants precedent, then CEO and Fay West Senior Vice President and CFO .
We will provide you with an update on our second quarter performance.
Dave will provide you an update on 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 accompanies this conference call and is available on our Investor Relations website at investors <unk> 10 uncle 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 filed 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 2023 second quarter earnings release and presentation include 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'll now turn the call over to Dave.
Thank you Lorenzo and Hello, everyone on the call today I will be discussing highlights from the second quarter, new product innovations, our newest sustainability framework driving people healthy planet.
And our outlook for the remainder of 2023.
Before analyzing the details of this quarter. It is important to frame our performance in relation to the prior quarters.
In 2021 as the economy started to recover and reopened we experienced a spike in demand for our products and services and we have continued to benefit from a strong and resilient demand since that time.
Also beginning in early 2021, we started to experience supply chain issues labor shortages and high inflation.
<unk>, which have persisted for seven straight quarters, which impacted our ability to increase production to fully meet demand.
This led to a substantial increase in our order backlog, which reached unprecedented levels to address these circumstances. Our team took significant actions and made incremental investments to mitigate these short term disruptions and enable us to increase production.
Leveraging our enterprise strategy, we also implemented structural changes such as optimizing plant capacity and securing labor to support increased parts availability.
It helped address the immediate production and supply chain issues as well as position us for long term future success.
These actions and investments have started to yield results as evidenced by our performance in the last two consecutive quarters.
The availability of critical parts has increased and the impact of supply chain challenges and inflation has abated.
Lead times are reverting to normal and almost all of our locations and we have been able to reduce our backlog substantially.
Our elevated backlog is testament to the strength of our brands quality of our products and service and commitment to supporting our customers and we appreciate our customers' loyalty and patience during this extended period.
We will continue to work diligently to reduce lead times and satisfy customers with our exceptional products and services.
We anticipate that we will be able to reduce backlog further in the back half of the year. However, backlog will remain elevated specifically in North America industrial products.
Now moving on to some specifics about the quarter.
In the second quarter, we achieved record net sales of $321 7 million, which was underpinned by organic growth of 15%.
We expanded gross margins to 43, 4% and delivered adjusted EBITDA of $57 $6 million or 17, 9% of net sales <unk>.
Additionally, we converted over 100% of net income to free cash flow.
The drivers of our second quarter performance were a noticeable improvement in parts availability and in general a more stable and predictable supply chain environment, which resulted in an increase in volume and a reduction in backlog.
<unk> price realization and moderating inflation, which drove an improvement in gross margin.
And a cautious approach to SMA spending which benefited adjusted EBITDA.
Regarding supply chain, we have seen a significant improvement in parts availability and have experienced fewer line disruptions.
This allowed us to operate our plants more efficiently increase volumes and as I, just mentioned meaningfully reduce backlog.
We are pleased with the improving supply chain landscape and are cautiously optimistic that we will continue to see stability and predictability, but we do not think that we are fully recovered. Therefore this remains an area of significant focus continued action and necessary agility.
Strong price realization moderating inflation and careful cost control have benefited both gross margin and adjusted EBITDA in the quarter.
Based on our first half performance resilient demand and continued backlog reduction we are pleased to increase our full year 2023 guidance. We are cautiously optimistic that inflation will remain at moderate levels and that the global economy will continue to recover.
Turning now to recent product launches and our innovative technology.
We continue to see success in utilizing our global network of manufacturing design and engineering facilities. This quarter, we broadened our portfolio of innovative products and solutions by leveraging the Italy based IPC product platforms and launched the tenant branded S $6 80, and S $8 80.
These write on sweepers in our mid tier range are the right fit for light to medium duty tasks, requiring high manoeuvrability in both indoor and outdoor environments.
These products improve existing offerings of similar sized legacy equipment, but are presented at different price points.
This allows us to reach a broader set of customers across the broad array of vertical markets, we serve through our multichannel distribution approach.
Our acquired product platforms allow us to bring a diverse range of equipment to market at different price points for our customers with minimal financial investment and resources from tenants.
Turning now to our innovative technology products.
The most disruptive and innovative technology with the highest potential in our industry is the autonomous mobile robot for Ahmar.
This equipment operates in complex environments without the need for direct operator control.
Not only does this ensure consistent cleaning operations, but also reduces the cost of ownership by helping to minimize the impact of labor expenses for cleaning in today's tight labor markets.
These products work alongside cleaning staff and allowed them to focus on the difficult and variable cleaning tasks. While there are more repetitive in expensive floor cleaning can be handled by our equipment.
Tennant currently offers three autonomous mobile robots, including our most recent product the T 16, ALR for scrubber. This was the first autonomous scrubber designed for industrial applications like warehousing and manufacturing markets.
Tenant has been traditionally strong in these industrial vertical markets and our customers value our high performance equipment reputation for quality and durability as well as our ecosystem of support including our factory direct field service organization.
The <unk> is a natural progression for us.
Since 2022 about 30% of our key 2016 sales have been the ALR version of the equipment.
We believe autonomous equipment and large space industrial markets has significant growth potential and the adoption rate will continue to expand the industrial market has already adopted automation and robotics in the areas outside of cleaning and employees in these settings are accustomed to working alongside robotics.
We also believe that it is easier to manage and measure the ROI automation in the industrial space, allowing our customers to fully realize the value of our <unk> products.
We are excited about <unk> potential.
And believe we are uniquely positioned to enable customer success and drive <unk> adoption in these verticals.
Now turning to sustainability.
In April we announced the launch of our new sustainability framework thriving people healthy planet.
Along with our first set of goals and our commitment to reduce greenhouse gas emissions and achieved net zero by the year 2040 in the coming weeks, we will plan to release, our 2023 sustainability report, which will detail tenants progress on our goals and ESG metrics.
We also plan to announce our second set of goals under the thriving people healthy planet framework, specifically, we aimed to increase the percentage of women in leadership by 50% by the end of 2030.
Ultimately, we believe that there are opportunities to deepen the diversity of our organization and expand our perspectives on our teams. We believe that combining this objective with providing an inclusive work environment will positively support our business success.
With that I'll turn the call over to pay for a discussion of our financials.
Thank you, Dave and good morning, everyone. This morning, I am going to discuss our second quarter results cash flow and liquidity as well as our full year 2023 guidance.
In the second quarter of 2023 tenant delivered net income of $31 3 million, an increase of $14 $7 million from the prior year period.
<unk> operating performance was fueled by higher net sales and improved gross margin.
Net sales growth and gross margin improvement were driven by both volume increases and higher price realization.
Selling and administrative expenses were higher in the quarter as compared to the prior year period due to higher variable costs associated with the increase in operating performance as well as higher employee related costs.
As a percentage of net sales <unk> expense for the second quarter of 2023 decreased by 120 basis points to 27% from 28, 2% in the prior year quarter.
The decrease in the period was driven by the leverage attributable to our sales and gross margin growth as well as our cost containment initiatives.
Also impacting net income was higher interest expense and higher income tax expense.
Net interest expense increased to $4 million in Q2 up from $1 2 million in the prior year period.
The increase was due to higher debt levels, coupled with rising interest rates on our variable interest rate debt income tax expense of $8 6 million was $4 $9 million higher than the prior year.
The comparisons between periods was impacted by a decrease in discrete tax benefits recognized during the quarter, partly offset by favorable changes in the mix and forecasted earnings by country.
The second quarter's effective tax rate of 21, 6% is in line with our full year expectation.
Second quarter adjusted earnings per diluted share, which excludes amortization gains on the sale of assets and restructuring charges more than doubled to $1 86 per share from <unk> 92 per share in the prior year period.
For the second quarter of 2023, Tennant reported net sales of $321 7 million, a 14, 8% increase compared to the prior year period or 15% on an organic basis.
Approximately 60% of the year over year growth was attributed to pricing and the remaining 40% was driven by volume we.
We ended the quarter with approximately $255 million of backlog a reduction of $43 million from the end of the first quarter.
Increased parts availability allowed us to increase our production to service outstanding backlog and fulfill customer orders.
Net sales growth of $41 5 million in the quarter was primarily due to this backlog reduction.
Tenant groups is sales into three geographies, the Americas, which include North America, and Latin America, EMEA, which covers Europe , the middle East and Africa, and Asia Pacific, which includes Australia, China, Japan, and other Asian markets.
All of the geographic regions achieved year over year net sales growth.
Net sales in the Americas grew 21, 4% to $216 6 million or.
Or 21, 7% on an organic basis, while FX had a net unfavorable impact of approximately three.
3%.
This significant year over year growth in our largest region was driven equally by price realization and volume increases led by strong equipment and parts and consumable sales in North America.
Net sales in EMEA in the second quarter increased three 5% over the prior year to $80 million or two 4% on an organic basis.
This was driven by price realization in both equipment and service product categories across the region, partly offset by volume declines.
The region also had a net favorable impact from foreign exchange of approximately one 1%.
Net sales in the Asia Pacific region increased by two 4% over the prior year to $25 1 million or six 3% on an organic basis.
This was driven primarily by price realization in Australia and volume growth in China. However, it was partly offset by a net unfavorable impact from foreign currency exchange of approximately three 9%.
We also group our net sales into the following categories equipment parts and consumables and service and other.
We experienced growth in all categories in the second quarter of 2023 as compared to the prior year period, most notably in equipment sales, which grew 18, 1% year over year.
Turning to adjusted EBITDA.
Adjusted EBITDA for Q2 was $57 6 million, an increase of $27 $3 million versus the prior year period.
Adjusted EBITDA margin was 17, 9% an increase of 710 basis points versus the prior year.
Our sales growth driven by both volume and price and expanded gross margin were the most significant drivers of adjusted EBITDA growth.
Gross profit of $139 $5 million was $33 $4 million higher than the second quarter of last year gross margin of 43, 4% in the second quarter of 2023 improved 550 basis points compared to the same period in the prior year we have.
Successfully returned to pre pandemic gross margin rate based on strong price realization, which offset the multiyear impact of inflation on materials and labor.
SG&A expense of $87 million was up $7 9 million compared to the prior year quarter due to higher variable costs associated with increased operating performance, such as warranty costs and employee compensation costs.
As a percentage of net sales adjusted SG&A expense for the second quarter decreased 140 basis points to 26, 7% from 28, 1% in Q2 of the last year driven by both the leverage attributable to our top line and gross margin growth as well as our costs.
Containment initiatives.
Turning now to capital deployment net cash provided by operating activities was approximately $39 1 million in the second quarter compared to net cash used in operating activities of $13 5 million in the year ago period.
The increase was the result of improved operating performance coupled with a significant reduction in strategic inventory spend in previous quarters, we increased our inventory with targeted investments in safety stock as well as tier two components, which we procured on behalf of our suppliers.
Those direct actions are now reading through in our results as we have been able to increase our output and fulfill orders without further increasing our inventory position.
Capital expenditures of approximately $5 million were in line with our expectations and we are on pace to meet our full year guidance.
In alignment with our capital allocation priorities, we returned capital to our shareholders with dividend payments of $4 9 million and repurchased approximately 70000 shares of our common stock for $5 million.
Tenant's liquidity remains strong with a cash balance of $95 $8 million at the end of the second quarter and $261 $9 million of.
<unk> borrowing capacity on the company's revolving credit facility at the midpoint of our full year guidance range. Our net leverage was one times adjusted EBITDA lower than our stated goal of one five to two five times. We have remained focused on maintaining a strong balance sheet and given the current <unk>.
Interest rate environment, we have directed cash to reduce debt by $21 1 million in the second quarter.
Moving to guidance.
We are pleased with our second quarter results and based on the strength of the first half of the year, we are raising our full year guidance.
Our year to date results have benefited greatly from a significant increase in the availability of parts and.
We believe we will continue to see overall improvement in our supply chain.
The improvement in parts availability allowed us to increase our production to fulfill open orders and meaningfully reduced backlog.
While many of our locations are approaching normal backlog levels and lead times, our backlog remains elevated and heavily concentrated in North America, particularly in our industrial products.
We anticipate that we will be able to further reduce backlog in the back half of the year, but not at the same rate that we experienced in the first six months of 2023.
Overall demand has been resilient and we are monitoring global order rates very closely we expect that the third quarter will experience the same level of seasonality as it has historically, especially in our EMEA region and net sales will be slightly lower in the third quarter as compared to the second quarter.
We believe our pricing actions will continue to read out in the second half of the year.
We anticipate that gross margins will remain strong in the second half of the year as cost out actions, coupled with improved productivity and strong price realization will continue to materialize.
Based on the timing of spend we expect R&D expense will be slightly higher in the back half of the year.
As we have discussed in prior calls we have been very cautious on all discretionary spending specifically SMA as evidenced by our low SG&A percentage.
We will remain cautious and prudent in our spending but anticipate that SG&A will be higher in the back half of the year as we invest in employees strategic initiatives and revert back to normal travel, which will put some pressure on adjusted EBITDA.
Given these factors and our strong profitable growth in the first half of the year, we are raising our outlook for the full year of 2023, specifically, we now expect net sales to be in the range of one two to $1 billion to $5 billion.
Reflecting organic sales growth of 10% to 14% and adjusted EBITDA to be in the range of $175 million to $190 million with that I will turn the call back to date.
Thank you.
There was a record first half for tenant and I couldnt be more proud of the team who have worked diligently for years executing our enterprise strategy managing the supply chain crisis, and working tirelessly on behalf of tenant globally.
With that we'll open the call to questions. Operator. Please go ahead.
Thank you and as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
The first question is from Chris Moore with CJS Securities. Your line is open.
Hey, good morning, guys.
Amazing quarter, Thanks for taking a couple of questions.
So backlog $2 55 down $71 million year to date is going to come down a little bit further in the second half.
Sure.
Can you just remind me kind of what the is there an optimal backlog range that you look at at this point.
Thanks, Chris Thanks for the question and I'll stop here.
Kudos on the amazing quarter, it's really a testament to the entire <unk> team that delivered these results yes backlog.
We exited but the $255 million backlog normal backlog is in the $50 million range, obviously with the price we've put through the significant amount of pricing we put through in the past several years.
We are having to readjust, what our normal levels of backlog on average I would use $50 million as a normal backlog range. So with faced comments in mind, we exited Q2 with $2 55.
$255 million of backlog and given implied in our guidance second half is that we will reduce.
Down to around the $200 million range as we exit as we exit 2023.
Got it Thats helpful.
Im not sure face that or not but orders in Q2 year over year with today look like.
Yes.
Yes. The orders are surprisingly resilient is the word I would choose.
Sequentially orders orders are flat.
And so we've.
If you look at how that we didn't plan it that way and so we are we're closely monitoring orders.
An indication of underlying demand as we work diligently to reduce to reduce backlog.
We're kind of flat to plan on orders.
Year to date, we as Fay mentioned, we're expecting kind of normal seasonality as we outlook into Q3 Q3 is historically, our lowest our lowest quarter and then we will need to generate the orders to fulfill our Q4 and deliver on the.
Deliver on the full year.
Got it very helpful and just from a.
It sounds like it was 60 40 pricing versus volume.
Is there still much pricing kind of catch up coming in in Q3 and Q4.
I think youre referencing pricing thats trapped in backlog.
Yes, yes, yes.
Yes.
Yes, so we've got the <unk>.
Backlog reduces there'll be there'll be less catch up in pricing as a result of products and orders that are trapped in that are dropped in backlog.
If you just look at that component.
Important to note our future results were 60 40 price versus volume. So we are getting underlying volume growth in our results.
Backlog reduction in the first half was about $70 million and implied in our guidance is about a $50 million reduction in the in the second half so we'd expect a similar sort of impact.
Slightly lower second half, but similar kind of impact on the revenue line and as we get as we work backlog down. So we'll be building orders that were placed more add more recent pricing on so less.
Let's pick up on price.
Got it I'll leave it there I appreciate it.
Chris.
The next question is from Steve <unk> with Sidoti <unk> Company. Your line is open.
Good morning, Dave Good morning Sai.
Obviously huge record revenue quarter I'm trying to understand I think you tried to address this a little bit in your comments in terms of guidance.
Guidance implies second half revenue is lower than first half and obviously EPS.
And I'm, just trying to get I'm, just trying to understand.
Are there some capacity constraints at this point given how healthy the backlog in orders for me labor either on the labor on just plant size.
Yes.
Thanks, Thanks, Steve Let me take that and just comment on the assumptions underpinning our <unk> our second half.
And implied in the full year guidance, yes, it's not it's not.
Certainly capacity constraints as Fay mentioned that most of our assembly lines around the world have returned to a normal level of output in response to the demand signals that we're getting at a normalized level of backlog and I think we mentioned in earlier calls our backlog is overweighted in industrial products and in our.
North America region, and so as we reduce backlog our backlog becomes more consolidated and concentrated in fewer and fewer lines production lines.
Those are industrial products and primarily in North America and the reason that's important is it is it is more challenging to effect change because our backlog is so concentrated in fewer and fewer products and we've shown that when we can get parts. We've got the plant capacity in the labor to respond and productive drive productivity and get the <unk>.
<unk> out the door that becomes increasingly more challenging as it is fewer and fewer lines and fewer and fewer products that we're trying to affect change. It doesn't mean, we can't affect change. It just means it will take it will take longer time to work the remaining backlog down.
And Youre right EBIT in the first half revenue is higher than kind of what's implied in guidance for the second half part of that is seasonality which is normal.
<unk> in EMEA, which we anticipate Q3 will be down slightly versus Q2. The other piece is the rate at which we're going to be able to reduce backlog as Dave was talking about and Tim Heasley.
We said, we'll probably be right around the 200 range and so that implies roughly a $50 million reduction in backlog, which is a bit lower than what we saw in the first half.
And Steven Chatting to that you also had a question on EPS and I think.
Worth mentioning Fay mentioned that already during the presentation.
H one also benefited from some delivered restrictions on SMA and while we will remain cautious cautious we anticipate we will anticipate that some of the SNA will be higher in the second half as a result of investments in employees strategic investments and also reverting back to some normal level operational spend around travel so thats part of it.
The second notable items.
Okay that makes sense.
Asia Pacific Nice bump this quarter is that is that China opening up again or is it more widespread than that could you give us any kind of.
Color on the regional differentiation in order books.
Yes, I'd be happy to specifically on APAC and I think Dave mentioned this we're having a strong.
Here in Australia, New Zealand and our marketplace. There we have a.
Commanding position of the market, there and were really capitalizing on a strong macro economy to launch new products, including EMR and realized price as well China had a strong start to the year.
And so we're pleased with the early returns I will tell you that we're seeing some.
Softening in China.
Is there kind of the post COVID-19 surge appears to be stalling on a macroeconomic basis. The government is putting stimulus in place.
And to try to stimulate the broad economy, but we're cautious whether that will that will read through into into our markets and what we're hearing from customers as they're cautious as well so much of the the China economy is driven by exports and exports are down and you look at China exports June versus prior year June is down 12%.
So its not we don't think its need a quick solve for China on a macroeconomic basis, having said that we're still bullish on China, we like our position there look our go to markets and our brand our product portfolio and we've got line of sight and confidence in our ability to deliver China results in line with our full year full year guidance from an order.
Perspective, we've seen softening in EMEA, we believe it's driven by broad macroeconomic we've heard other competitors echoing the same sentiment we've seen it in our product portfolio on the lower end kind of commercial product categories, including high pressure washers.
<unk> seen some broad based softness across the geography of read across the countries within EMEA, but I would know Germany. In particular has seen a softening in demand in image driven by macroeconomic conditions hyperinflation within that within that particular country. So we are we are monitoring closely to make sure that we are positioned to capitalize.
Lies on the opportunities that present themselves, but also that we have right sized our cost structure and calibrated our spending given the opportunities we have and we have in the short term and America is both Latin America and North America are very robust.
Orders are holding up.
We're able to operate.
Productively when we have parts, we've demonstrated the ability to book orders when our lead times are extended but reduced backlog when we can get parts.
And we're getting strong price realization against.
Against a moderating inflation backdrop, so we're kind of hitting on all cylinders in those geographies.
While we are cautious about our outlook and we need that demand to remain resilient heading through Q3 and Q4, we have line of sight to the order pipeline to feel confidence in those geographies delivering to support our full year guidance.
Great. Thanks, Dave Thanks Man.
Thanks, Steve Thank you.
Again, Thats star one to ask a question. The next question is from Tim Moore with Es Hutton Your line is open.
Yes.
Thanks, and congratulations on the very strong organic sales growth.
Very very impressive guidance range for both growth and EBITDA this year.
Three questions maybe.
First I'll just start off a bit on the aftermarket aftermarket services penetration.
<unk> added some service trucks, I think that service truck count might have been up to 556 in March.
I've been estimating based on some other competitors that possibly maybe one third of your.
Equipment orders to be triggered from leads from your onsite technicians focus there and they're on they're telling the customer about new things so can.
So maybe just give us a little more color on the aftermarket service.
It will be more of a focus this year.
Thanks, Tim and thanks for the complements really proud of the results and focused on delivering the second half of the year up service remains a critically a critical component to the business and our view of service.
As not to run service just as a standalone business, we do measure it on its own P&L and its own metrics, but service as part of an integrated ecosystem and the value we provide to the customer over the lifecycle of ownership in the product.
And the reason that's important and you noted one facet of it we want you satisfied customers that are pleased with tenant getting the full benefit in ROI from our machines and bond coming back to buy more and by tenant the next time.
If you run or.
If you run serviced solely as a standalone business you run the risk of keeping customers in old products that require too much investment in service when they really should be in a new product that gives them better functionality better performance and a better ROI and so it's an integrated part of our go to go to market channel strategy and that's and that's how we that's how we are.
Broach, a philosophically we are investing in our service capabilities.
We have invested in training our service technicians, so theyre fully capable across our broad product portfolio, including EMR and Thats, an entirely new set of capabilities that our service technicians need to have an order for our customers to have the experience. So that we can drive adoption in that category, we've invested and you mentioned an additional <unk>.
Well that gives us additional capacity and coverage. So that we can deliver on service level agreements for all customers, but especially largest customers where we can go on and make a commitment to a large national or regional retailer in terms of response time, you need to have the service truck coverage in order to deliver on that commitment.
We believe we are uniquely positioned because of our factory direct service organization and we're adding the coverage in strategic areas to make sure that we can make differentiated commitments to customers and earn new business.
For the largest customers in each of the verticals and last but not least we're investing in the digital infrastructure that enables our service capability and thats broad reach and Thats everything from.
Working on telemetry as well as our protocols before dispatching as well as the actual infrastructure system, we use for processing orders and improving the efficiency and capability of our service technician. So they can spend less time sitting at a computer entering orders are part.
Orders or looking at customer data and spend more time hands on with equipment performing necessary maintenance and repairs to deliver uptime to our customers. So.
A significant investment in kind of the IC side of service as well to make sure that we can deliver a fantastic customer experience. The first time every time for our customers.
Well, thanks, Dave for those deep insights and color that that was very helpful. And my second question is on.
How is the equipment, maybe as a service model going for rental and leasing.
<unk> customers in South America, and Europe , I remember I think you had a reconditioning infrastructure in place.
This infrastructure are you seeing any notable uptick in sales or interest there or do you think maybe that's more of a story for next year.
Well I'll start with the.
We call equipment as a service kind of that.
That long term all in all and leasing model and I think I'll set the backdrop.
We have a variety of ways of transacting with our customer today from a capital purchase model from from a break and fix service to a full contracted service model, we partner with with banking partners for leasing models.
We serve as short term users through a rental channel relationship and treat them as strategic partners to serve people that need a machine for a day a week a month, we're not set up to do that directly so we partner with the industry's best rental channel partners and then we have this equipment as a service model, where it's really one price all in.
Equipment and service we've demonstrated success with this model in several geographies around the world, notably Latam in parts of parts of Western Europe , and it really we've used as a tool to get deeper with very targeted customers in very specific verticals, where we have the capability to provide.
To service the customer expects and if we can do it profitably and so the you have to have a significant amount of embedded infrastructure to support an equipment and service models. We've been successful demonstrated success in a few pockets and we're using that learning as well as leaning into some additional analysis to understand what it would take.
To scale that more broadly outside of within those geographies outside of other geographies, what we want to make sure that we can deliver a fantastic customer experience that is compelling to the customer to move this direction for all the reasons, it's appealing to us we want to make sure it's compelling for the customer as well and last but not least we want to make sure. We can do it profitably.
So we're spending time to understand what works and what doesn't what infrastructure, we need to support the model and then we will and then we'll look at scaling it in a very targeted fashion, where it makes sense around the world, It's an opportunity to differentiate ourselves versus smaller regional local competitors that don't have the infrastructure to support this.
And as well as so it is a differentiated offering versus competition and it is potentially a really compelling business model proposition value proposition to some some target customers in targeted verticals that could over time make us much more much more sticky and so we all know the appeal of our recurring revenue model and we will look to look to take advantage of that.
Where we're capable and where it makes sense financially for both us and our customers.
David that was great once again terrific color. So for my final question David.
I believe you might've started that inorganic study and review for larger targets and Adjacencies to leverage your core assets I don't want to steal your Thunder and Keith you detailed this maybe in a possible investor day early next year whenever it may be.
But is there any update on that review for acquisitions or is it still only maybe halfway completed at this point.
Yes. So thanks for the question we are actively engaged in that work now.
We're a little past halfway, but it's starting to come into view.
I don't think it's stealing Thunder at all we're really proud of the fact that.
We're heading in this direction and actually this this investments in defining our M&A strategy is one of the incremental investments that we're making in the business to set ourselves up for future value creation as a reason why you see the the first half second half.
Disparity kind of in terms of the in terms of the performance and results.
Early.
The reason we're looking at this is we think it's a really compelling value a value creation opportunity for us as an enterprise. We think that we've got some unique and compelling assets and capabilities that we can leverage that will make us a more rightful owner of some other companies.
Out there we believe that our strategy will be a hybrid of some close in near sort of core investments to support and accelerate growth and defend our core space and the mechanized cleaning cleaning market globally as well as some near and maybe even some.
Further out Adjacencies that we will find interesting and attractive from a strategic and financial perspective, so that so that we can lean into it and.
It adds to create some serious value for incremental value above just our core business for for our investors.
I don't want to fully unveil our strategy, yet and it's not that I'm holding and I just wanted to make sure that we're.
We're fully lined out I will tell you we are assessing our potential opportunities in terms of their strategic value there.
Their operational fit and their financial return and so across those three facets. We're taking we're opening the aperture very wide and we're leveraging our tier one consulting partner to help us make sure that we are really taking a solid look at the potential opportunities in the marketplace on a global basis, we do anticipate providing more.
A definition around our M&A strategy.
In upcoming quarters, and we do have an eye towards the Investor day.
Half of 2024 were not only unveiled a full strategy, but have more time to go into greater depth and take Q&A at that time.
Well, Dave Thanks for that sneak peak, that's it for my questions and have a well deserved nice weekend.
Thanks, Tim.
Since there are no further questions at this time I'd like to turn the call back over to management for any closing remarks.
Thank you it looks like to congratulate the entire global Tennant team on a fantastic quarter and a great start to the year on and thank everyone on the call for your interest in Tennant Company. This concludes our call today have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.