Q3 2023 Tennant Co Earnings Call

Good morning, My name is Krista and I'll be your conference operator today at this time I would like I would like to welcome everyone to Tennant Company is 2023 third quarter earnings Conference call. This call is being recorded there will be time for Q&A at the end of the call. Please.

Star One if you would like to ask a question after the Q&A. Please stay on the line for closing remarks from management. If 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 potentially quality issues during the call.

Thank you for participating in Tennant company's 2023 third quarter earnings conference call beginning.

Beginning today's meeting is Mr. Lorenzo Bassi, Vice President Finance and Investor Relations for Tennant Company. Mr. <unk> you may begin.

Good morning, everyone and welcome to Tennant Company's third quarter 2023 earnings conference call.

Im Lorenzo Vasquez, Vice President Finance and Investor Relations.

Joining me on the call today are Dave Huml, Tennant's, President and CEO, and Fay West Senior Vice President and CFO.

We will provide you with an update on our third 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.

An earnings press release, and slide presentation that accompanies this conference call are available on our Investor Relations website.

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 or.

Our 2023 third quarter earnings release and presentation include the comparable GAAP measure.

A reconciliation of these non-GAAP measures to our GAAP results.

I'll now turn the call over to Dave.

Thank you Lorenzo and Hello, everyone on.

On the call today, I will be discussing highlights from the third quarter our outlook for the remainder of 2023, our performance against our current enterprise strategy targets and the framework and transition to our new planned enterprise growth strategy.

I am very pleased to report our strong Q3 results, which built on the momentum we generated in the first half of the year.

This was the fourth consecutive quarter, our global team delivered strong organic net sales and adjusted EBITDA growth above our expectations our.

Good morning.

Christa: My name is Christa and I'll be your conference operator today. At this time, I would like I would like to welcome everyone to Tennant company is 2023 third quarter earnings conference call. This call is being recorded. There will be time for Q and A at the end of the call. Please press star one if you would like to ask a question. After the Q and A, please stay on the line for closing remarks from management. If 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 potentially quality issues during the call.

Our performance puts us on pace to deliver a record setting year.

I cannot be prouder of the teams who have worked diligently to execute our enterprise strategy manage the supply chain crisis and serve tenants customers around the world.

In the third quarter, we achieved net sales of $304 $7 million bolstered by organic sales growth of 13, 9%.

Orders have remained resilient and reproduced backlog meaningfully for the third consecutive quarter.

We continued to reduce lead times and deliver the exceptional products and services our customers expect from tenant.

Backlog levels have returned to normal in nearly all product lines, except for those industrial products that are exclusively produced out of our Minneapolis plant.

Lorenzo Bassi: Thank you for participating in Tennant company's 2023 third quarter earnings conference call beginning today's meeting is Mr. Lorenzo Bassi vice president finance and investor relations for tenant company.

We expanded gross margins to 43, 3% and delivered adjusted EBITDA of $45 $9 million, our price realization efforts, along with a moderating inflation environment drove our strong operating performance. Additionally, we converted over 100% of net income to free cash flow as we continue to make.

Lorenzo Bassi: Mr. Bassi, you may begin. Good morning everyone and welcome to tenant company's third quarter 2023 earnings conference call. I'm Lorenzo Bassi by president finance and investor relations. Joining me on the call today are Dave Huml, tenant president and CEO and Fay West, senior vice president and CFO. Today, we will provide you with an update on our third quarter performance. Dave will provide you an update on our operations and enterprise strategy and Fay will call our financials.

Lorenzo Bassi: After our prepared remarks, we will open the call to questions. An earnings press release and live presentations that accompanies this conference call are available on investor's relations website. 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 defer materially from those contained in the statements.

Improvements in working capital.

This enables us to focus on making strategic investments and return capital to shareholders through dividends and share repurchases.

Based on our performance during the quarter and outlook for the fourth quarter, we are increasing our full year 2023, net sales guidance to between 123 billion to $1, two 5 billion and adjusted EBITDA guidance to between $190 million and $200 million.

Both of these established record highs for the company, we expect that order rates will remain resilient and that parts availability and inflation will remain at current levels, allowing us to deliver exceptional results for 2023.

Fay will talk about our new guidance in more detail as she discusses our financials.

Lorenzo Bassi: These risks and uncertainties are described in today's news release and the documents we file with the securities and exchange commission. We encourage you to review those documents, particularly our safe harbor statement for a description of the risks and uncertainties that may affect our results. Additionally, on this conference call, we will discuss non-gab measures that include or excludes certain items. Our 2023 third quarter earnings release and presentations include the comparable gap measure and a reconciliation of these non-gab measures to our gap results.

Over the last several years, we have provided regular updates on tenants enterprise strategy developed in 2019. This strategy focused on driving structural improvements into our business to deliver expanded profitability.

Its three pillars are one winning where we have a competitive advantage to reducing complexity and building scalable processes and three innovating for profitable growth.

These pillars were designed to drive shareholder value and increase adjusted EBITDA margins to 15% by 2024.

I am happy to announce that based on our anticipated full year results. We believe we will meet each of our key financial targets by the end of 2023.

David Huml: I will now turn the call over today. Thank you Lorenzo and hello everyone. On the call today, I will be discussing highlights from the third quarter, our outlook for the remainder of 2023, our performance against our current enterprise strategy targets and the framework and transition to our new planned enterprise growth strategy. I am very pleased to report our strong two three results, which built on the momentum we generated in the first half of the year. This was the fourth consecutive quarter, our global team delivered strong organic net sales and adjusted EBITDA growth above our expectations. Our performance puts us on pace to deliver a record setting here.

We targeted annual net sales organic growth rate of 2% to 3% net of divestitures, we expect.

To deliver an organic growth rate of approximately 3%.

We targeted annual adjusted EBITDA growth rate of 6% to 10%, we expect to deliver 9%.

We targeted annual adjusted EBITDA margin improvement of 50 to 100 basis points and we expect to deliver on average approximately 75 basis points of adjusted EBITDA expansion per year, achieving an adjusted EBITDA margin of greater than 15%.

David Huml: I cannot be prouder of the teams who have worked diligently to execute our enterprise strategy, manage the supply chain crisis and serve tenants' customers around the world. In the third quarter, we achieved net sales of $304.7 million, bolstered by organic sales growth of 13.9%. Orders have remained resilient and re-produced backlog meaningfully for the third consecutive quarter. We continue to reduce lead times and deliver the exceptional products and services our customers expect from Tennant.

All of this was achieved a year ahead of schedule amidst the global pandemic and unprecedented global supply chain disruptions.

It is a compelling demonstration of the strength of our global team as well as our organizational agility.

As we successfully conclude our prior enterprise strategy, we have been planning the next chapter for our company our pivot to growth.

Over the last four years, we have built new execution capabilities and rigor and have implemented structural changes that provide a solid foundation for tennant.

We intend to leverage this foundation as we move forward the long term prospects for Tennant company are very bright and our new growth focused enterprise strategy, which we will launch in 2024 is centered on strategic pillars for growth performance and people.

David Huml: That flood levels have returned to normal in nearly all product lines except for those industrial products that are exclusively produced out of our Minneapolis plant. We expanded growth margins to 43.3% and delivered adjusted EBITDA of $45.9 million. Our price realization efforts along with a moderating inflation environment drove our strong operating performance. Additionally, we converted over 100% of net income to free cash flow as we continue to make improvements in working capital.

Our growth pillar, we will target differentiated sales growth in the mid single digits and above market growth rates.

We will expand profit margins and maintain operating efficiency through pricing discipline prudent expense management and investments in productivity.

Our performance pillar will elevate how our business is run in order to optimize cost structure accelerate decision, making deliver an improved customer experience and embed our sustainability ambitions into our enterprise strategy.

David Huml: This enables us to focus on making strategic investments and return capital to shareholders through dividends and share repurchases. Based on our performance during the quarter and outlook for the fourth quarter, we are increasing our full year 2023 net-sailed guidance to between $1.23 billion to $1.25 billion and adjusted EBITDA guidance to between $190 million and $200 million. Both of these establish record highs for the company. We expect that order rates will remain resilient and that parts availability and inflation will remain at current levels, allowing us to deliver exceptional results for 2023.

We will achieve this by standardizing and optimizing global processes informed by our customer value proposition.

Investing to modernize and consolidate our existing ERP systems to a best in class SAP cloud based solution.

Over the next two years. This initiative will build a digital infrastructure for tenant that will scale as we grow driving incremental operating efficiency and resulting in incremental cost savings and.

And accelerating our sustainability progress by embedding our thriving people healthy planet framework across our enterprise to deliver results for our customers employees and other stakeholders.

David Huml: Faith will talk about our new guidance in more detail as she discusses our financials. Over the last several years, we have provided regular updates on tenants enterprise strategy. Developed in 2019, this strategy focused on driving structural improvements into our business to deliver expanded profitability. Its three pillars are one, winning where we have a competitive advantage, two, reducing complexity and building scalable processes, and three, innovating for profitable growth. These pillars were designed to drive shareholder value and increase adjusted EBITDA margins to 15% by 2024.

Our performance goals can only be met if our organization attracts and retains talented people, who can drive change and help deliver our exceptional products and services to our customers. Our people pillar, we will achieve this by investing in our employee value proposition. So that we can deliver a clear consistent and compelling promise.

Two employees and prospects about reasons to work at Tennant company, and accelerating our <unk> roadmap and representation and ambitions to create an inclusive environment in which all of our employees can thrive.

David Huml: I am happy to announce that based on our anticipated full year results, we believe we will meet each of our key financial targets by the end of 2023. We targeted annual net sales organic growth rate of 2-3% net up to vestitures. We expect to deliver an organic growth rate of approximately 3%. We targeted annual adjusted EBITDA growth rate of 6-10%, we expected to deliver 9%. We targeted annual adjusted EBITDA margin improvement of 50-100 basis points and we expect to deliver on average approximately 75 basis points of adjusted EBITDA expansion per year, achieving an adjusted EBITDA margin of greater than 15%.

Through our growth strategy, we will proactively supplement organic growth with strategic acquisitions that enhance shareholder value.

Based on our financial strength compelling value proposition and extendable and winning business model. We believe we are well positioned to drive growth through acquisitions.

<unk> has a solid position in an attractive and growing core market with 13% share of an $8 5 billion addressable cleaning market.

Our first area of focus will be to grow the core through bolt on acquisitions closing product gaps and strengthening our channel position in attractive geographies.

David Huml: All of this was achieved a year ahead of schedule amidst the global pandemic and unprecedented global supply chain disruptions. It is a compelling demonstration of the strength of our global team as well as our organizational agility.

We will also look to leverage our strengths capabilities and unique assets to explore attractive adjacencies and expand into non cleaning mobile equipment.

We will focus primarily on mobile equipment companies that have similar supply chain and manufacturing characteristics, similar end markets or channels and potential cross selling opportunities with the legacy tenant footprint.

David Huml: As we successfully conclude our prior enterprise strategy, we have been planning the next chapter for our company, a pivot to growth. Over the last four years, we have built new execution capabilities and rigor and have implemented structural changes that provide a solid foundation for Tennant. We intend to leverage this foundation as we move forward.

Our ideal targets will provide opportunities to extend autonomy.

And leverage our service infrastructure and expertise.

Lastly, we will focus on the connected autonomy technology stack by identifying products and services, we want to either develop internally source on the open market or acquire directly.

David Huml: The long term prospects for tenant company are very bright and our new growth focused enterprise strategy, which we will launch in 2024 is centered on strategic pillars for growth, performance and people. Our growth pillar will target differentiated sales growth in the mid single digits and above market growth rates. We will expand profit margins and maintain operating efficiency through pricing discipline, prudent expense management and investments in productivity. Our performance pillar will elevate how our business is run in order to optimize cost structure, accelerate decision making, deliver an improved customer experience and embed our sustainability ambitions into our enterprise strategy.

Our disciplined M&A process will focus on those opportunities that provide the right strategic value operational fit and financial returns. We are shifting our M&A approach from reactive to proactive and our Resourcing our organization accordingly.

With that I will turn the call over to pay for a discussion of our financials.

Thank you, Dave and good morning, everyone.

In the third quarter of 2023 tenant delivered net income of $22 $9 million.

An increase of $7 3 million from the prior year period.

David Huml: We will achieve this by standardizing and optimizing global processes informed by our customer value proposition investing to modernize and consolidate our existing ERP systems to a best in class SAP cloud based solution. Over the next two years, this initiative will build a digital infrastructure for tenant that will scale as we grow, driving incremental operating efficiency and resulting in incremental cost savings and accelerating our sustainability progress by embedding our thriving people, healthy, planted framework across our enterprise to deliver results for our customers, employees and other stakeholders.

Wrong operating performance was fueled by higher net sales and gross margin expansion.

Net sales growth and gross margin improvement were driven by both higher price realization and volume increases.

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 a percentage of net sales SG&A expense for the third quarter of 2023 increased by 170 basis points to 28, 9% from 27, 2% in the prior year quarter.

David Huml: Our performance goals can only be met if our organization attracts and retains talented people who can drive change and help deliver our exceptional products and services to our customers. Our people pillar will achieve this by investing in our employee value proposition so that we can deliver a clear, consistent and compelling promise to employees and prospects about reasons to work a tenant company and accelerating our DE&I roadmap and representation. This is a great opportunity for our organization to create an inclusive environment in which all of our employees can thrive.

As we discussed during the second quarter, we anticipated an increase in SG&A expense and focused our incremental spending on employees and strategic investments to fuel growth opportunities.

Higher interest expense and higher income tax expense.

So impacted net income in line with our expectations net interest expense increased to $3 3 million in Q3 up from $2 2 million in the prior year period.

David Huml: Through our growth strategy, we will proactively supplement organic growth with strategic acquisitions that enhance shareholder value based on our financial strength, compelling value proposition and extendable and winning business model. We believe we are well positioned to drive growth through acquisitions. Tenet has a solid position in an attractive and growing core market with 13% share of an $8.5 billion addressable cleaning market. Our first area of focus will be to grow the core through bolt on acquisitions, closing product gaps and strengthening our channel position in attractive geographies.

The increase was due to rising interest rates on our variable interest rate debt.

Our interest rate net of hedges was approximately four 4%.

Income tax expense of $7 million was $2 $8 million higher than the prior year.

Parison between periods was impacted by a decrease in discrete tax benefits recognized during the quarter along with unfavorable changes in the mix and forecasted earnings by country.

The third quarter's effective tax rate of 23, 4% is in line with full year expectations.

Third quarter adjusted earnings per diluted share, which excludes amortization increased to $1 34 per share from 98 per share in the prior year period, driven by our strong operating performance.

David Huml: We will also look to leverage our strengths, capabilities and unique assets to explore attractive adjacencies and expand into non-cleaning mobile equipment. We will focus primarily on mobile equipment companies that have similar supply chain and manufacturing characteristics, similar end markets or channels and potential cross selling opportunities with the legacy tenant footprint. Our ideal targets will provide opportunities to extend autonomy and leverage our service infrastructure and expertise, last week we will focus on the connected autonomy technology stack by identifying products and services we want to either develop internally, source on the open market or acquire directly. Our disciplined M&A process will focus on those opportunities that provide the right strategic value, operational fits, and financial return. We are shifting our M&A approach from reactive to proactive and are resourcing our organization accordingly.

Turning to slide nine.

Net sales for the quarter were $304 7 million, a 15, 9% increase compared to the prior year period or 13, 9% on an organic basis.

Approximately 65% of the year over year growth was attributed to pricing while the remaining 35% was driven by volume we ended the quarter with approximately $214 million of backlog a reduction of $41 million from the end of the second quarter.

<unk> parts availability and a relatively stable supply chain environment allowed us to increase our production.

This helped us service outstanding backlog and deliver customer orders net sales growth of $41 8 million in the quarter was primarily due to this reduction in backlog.

Fay West: With that, I will turn the call over to Fay for a discussion of our financials. Thank you, Dave, and good morning, everyone. In the third quarter of 2023, Tennant delivered net income of $22.9 million, an increase of $7.3 million from the prior year period. Strong operating performance was fueled by higher net sales and growth margin expansion. Net sales growth and growth margin improvement were driven by both higher price realization and volume increases.

As a quick reminder, tenant groups had sales into three regions. The Americas include all of North America, and Latin America.

EMEA covers Europe, the Middle East and Africa, and Asia Pacific includes Australia, China, Japan, and other Asian markets.

Each of our regions achieved year over year net sales growth.

Fay West: 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 a percentage of net sales, SNA expense for the third quarter of 2023 increased by 170 basis points to 28.9% from 27.2% in the prior year quarter. As we discussed during the second quarter, we anticipated an increase in SNA expense and focused our incremental spending on employees and strategic investment to fuel growth opportunities.

Net sales in the Americas grew substantially 21, 4% to $211 2 million.

Or 28% on an organic basis, while FX had a favorable impact of approximately 6%.

This significant year over year growth in our largest region was well above expectations.

It was driven by an approximately equal mix of price realization and volume increases led by strong equipment sales in North America.

Net sales in EMEA in the third quarter increased four 3% over the prior year to $72 million.

Fay West: Higher interest expense and higher income tax expense also impacted net income in line with our expectations. Net interest expense increased to $3.3 million in Q3 up from $2.2 million in the prior year period. The increase was due to rising interest rates on our variable interest rate debt. Our interest rate net of hedges was approximately 4.4%. Income tax expense of $7 million was $2.8 million higher than the prior year. The comparison between periods was impacted by a decrease in discrete tax benefits recognized during the quarter along with unfavorable changes in the mix and forecasted earnings by country.

A favorable FX impact of approximately seven 1% was partly offset by an organic sales decline of two 8%.

The organic sales decline was driven by volume declines in both equipment and parts and consumables.

We offset by price realization in all product categories.

EMEA volumes were impacted by weaker than expected market conditions.

Net sales in the Asia Pacific region increased by 8% over the prior year to $21 5 million.

Or 11, 8% 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 8%.

Fay West: The third quarter's effective tax rate of 23.4% is in line with full year expectations. Third quarter adjusted earnings per deluded share, which excludes amortization, increased to $1.34 per share from 98 cents per share in the prior year period driven by our strong operating performance. Turning to slide 9, net sales for the quarter were $304.7 million, a 15.9% increase compared to the prior year period. Or 13.9% on an organic basis approximately 65% of the year over year growth was attributed to pricing while the remaining 35% was driven by volume.

We also grew up our sales into the following categories equipment parts and consumables and service to another.

We experienced growth in all categories in the third quarter of 2023 as compared to the prior year period, most notably in equipment sales, which grew 23, 2% year over year, well above our expectations.

Turning to adjusted EBITDA.

Adjusted EBITDA for Q3 was $45 9 million and.

An increase of $12 $1 million versus the prior year period.

Adjusted EBITDA margin was 15, 1% an improvement of 220 basis points versus the prior year.

Fay West: We ended the quarter with approximately $214 million of backlog, a reduction of $41 million from the end of the second quarter, continue parts availability and a relatively stable supply chain environment allowed us to increase our production. This helped us service outstanding backlog and deliver customer orders. Nest sales growth of $41.8 million in the quarter was primarily due to this reduction in backlog.

Our sales growth driven by both volume and price along with expanded gross margins were the most significant drivers of adjusted EBITA growth.

Gross profit of $132 million was $31 $3 million higher than the third quarter of last year.

Gross margin of 43, 3% in the third quarter of 2023 improved 500 basis points compared to the prior year.

Fay West: As a quick reminder, Tennant groups its sales into three regions. The Americas include all of North America and Latin America. Amaya covers Europe, the Middle East, and Africa. And Asia Pacific includes Australia, China, Japan, and other Asian markets. Each of our regions achieved year-over-year nest sales growth. Nest sales in the Americas grew substantially, 21.4% to $211.2 million or 20.8% on an organic basis, while FX had a favorable impact of approximately 0.6%.

We have successfully returned to pre pandemic gross margin rates based on strong price realization, which offset the multiyear impact of inflation.

SG&A expense of $88 $2 million increased $16 $8 million compared to the prior year quarter due to higher variable costs associated with increased operating performance and incremental spending on strategic investments, we anticipate SG&A expense as a.

<unk> sales on a full year basis will be comparable to the prior year.

Turning now to capital deployment.

Fay West: This significant year-over-year growth in our largest region was well above expectations. It was driven by an approximately equal mix of price realization and volume increases led by strong equipment sales in North America. Nest sales in Amaya in the third quarter increased 4.3% over the prior year to $72 million. A favorable FX impact of approximately 7.1% was partly offset by an organic sales decline of 2.8%. The organic sales decline was driven by volume declines in both equipment and parts and consumables.

Net cash provided by operating activities was approximately $54 million in the third quarter compared to net cash used in operating activities of approximately $15 million in the year ago period. The increase was the result of improved operating performance, coupled with a significant reduction and strategic inventory spend.

Capital expenditures of approximately $4 million were in line with our expectations and 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 $5 million and repurchased approximately 22000 shares of our common stock for $1 7 million.

Fay West: Partly offset by price realization in all product categories. Amaya volumes were impacted by weaker than expected market conditions. Nest sales in the Asia Pacific region increased by 8% over the prior year to $21.5 million or 11.8% 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 3.8%.

We also announced a five 7% increase in dividend to <unk> 28 per share marking the 15th consecutive year. The company has increased its annual cash dividend payout.

Tenants liquidity remained strong with a balance of $97 million in cash and cash equivalents at the end of the third quarter and $316 9 million of unused borrowing capacity on the company's revolving credit facility at the midpoint of our full year guidance range, our net leverage was approximately $6.

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, given our robust cash flow generation.

Fay West: We also grew our sales into the following categories. Equipment, parts and consumables, and service another. We experienced growth in all categories in the third quarter of 2023, as compared to the prior year period, most notably in equipment sales which grew 23.2% year-over-year well above our expectations.

And in the current interest rate environment, we have directed cash to reduce debt by $56 2 million in the third quarter.

Moving to guidance.

Fay West: Turning to adjusted EBITDA. Adjusted EBITDA for Q3 was $45.9 million, an increase of $12.1 million versus the prior year period. Adjusted EBITDA margin was 15.1% an improvement of 220 basis points versus the prior year. Our sales growth, driven by both volume and price, along with expanded growth margins were the most significant drivers of adjusted EBITDA growth. Gross' profit of $132 million was $31.3 million higher than the third quarter of last year.

Our strong performance in 2023 has been above our expectations. It is a direct result of our ability to effectively manage the global supply chain crisis and emerge stronger than ever as Dave mentioned, we navigated a global pandemic and supply chain disruptions, while still delivering.

On our enterprise strategy a year ahead of schedule. The changes we have made over the past three years demonstrate that our goal of mid single digits and above market growth rates is sustainable.

We are pleased with our third quarter results and based on the continuing trends we are increasing our full year 2023 guidance.

Fay West: Gross margin of 43.3% in the third quarter of 2023 improved 500 basis points compared to the prior year. We have successfully returned to pre-pandemic gross margin rates based on strong price realization, which offset the multi-year impact of inflation. S&A expense of $88.2 million increased $16.8 million compared to the prior year quarter due to higher variable costs associated with increased operating performance and incremental spending on strategic investments. We anticipate S&A expense as a percentage of sales on a full-year basis will be comparable to the prior year.

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 reduce backlog.

Given this trend, we expect fourth quarter net sales to be between $298 million and $318 million and adjusted EBITDA to be between $39 million and $49 million.

Implied in our guidance is our expectation that we will be able to reduce backlog below $200 million.

And we will return to more normalized levels of backlog by the end of 2024 or early 2025.

Fay West: Turning now to capital deployment. Net cash provided by operating activities was approximately $54 million in the third quarter compared to net cash used in operating activities of approximately $15 million in the year ago period. The increase was the result of improved operating performance coupled with a significant reduction in strategic inventory spend. Capital expenditures of approximately $4 million were in line with our expectations and 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 $5 million and repurchased approximately $22,000 shares of our common stock for $1.7 million.

Overall demand has been resilient, we are monitoring global order rates very closely, especially as we see some market softening in EMEA. Further we anticipate continued strong price realizations. However, gross margins may see some variability in the fourth quarter as our revenue mix, we will see.

Some seasonal geographical changes.

Based on the timing of our spend.

Spend R&D expense will be higher in the fourth quarter.

We remain cautious and prudent in our spending but as expected we anticipate that SG&A will be higher in the fourth quarter as we invest in employees and strategic growth opportunities.

Given these factors and the strong profitable growth in the first three quarters of the year, we are raising our outlook for the full year of 2023, specifically.

Fay West: We also announced a 5.7% increase in dividends to $0.28 per share, marking the 52nd consecutive year the company has increased its annual cash dividend payout. Tenance liquidity remains strong with a balance of $97 million in cash and cash equivalence at the end of the third quarter and $316.9 million of unused borrowing capacity on the company's revolving credit facility. At the midpoint of our full-year guidance range, our net leverage was approximately 0.6 times adjusted EBITDA, lower than our stated goal of 1.5 to 2.5 times. We had remained focused on maintaining a strong balance sheet. Given our robust cash flow generation and in the current interest rate environment, we have directed cash to reduce debt by $56.2 million in the third quarter.

We now expect net sales to be in the range of 123 billion to $1. Two 5 billion, reflecting organic sales growth of 12 five to 14, 5%.

Adjusted EBITDA to be in the range of $190 million to $200 million.

And adjusted EBITDA margin to be in the range of 15, 4% to 16% with that I will turn it back to David.

Thank you Fay.

We are on pace for a record 2023 per tenant company and I could not be prouder of the work our high performance teams have achieved.

I'd like to take this opportunity to invite everyone to an investor day, we will be having in New York in spring of 2020 for more details will be published soon.

With that we'll open the call up to questions. Operator. Please go ahead.

Fay West: Moving to guidance. Our strong performance in 2023 has been above our expectations. It is a direct result of our ability to effectively manage the global supply chain crisis and emerge stronger than ever. As Dave mentioned, we navigated a global pandemic and supply chain disruptions while still delivering on our enterprise strategy a year ahead of schedule. The changes we have made over the past three years demonstrate that our goal of mid-single digits and above market growth rates is sustainable.

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Fay West: We are pleased with our third quarter results and based on the continuing trends, we are increasing our full-year 2023 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 of availability allowed us to increase our production to fulfill open orders and meaningfully reduce backlogs. Given this trend, we expect fourth quarter net sales to be between $298 million and $318 million and adjusted EBITDA to be between $39 million and $49 million.

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Good morning, we're having we're having trouble locating our operator wants to go ahead and ask your question will moderate ourselves directly right.

Alright. This is Chris Martin notable.

Fay West: We will return to more normalized levels of backlog by the end of 2024 or early 2025. Overall demand has been resilient. We are monitoring global order rates very closely, especially as we see some market softening in a maa. Further, we anticipate continued strong price realizations. However, growth margins may see some variability in the fourth quarter. As our revenue mix will see some seasonal geographical changes based on the timing of spend R&D expense will be higher in the fourth quarter.

Alright.

First of all congratulations great quarter, great year to date.

It looks interesting last lots here so.

You talked about orders being resilient I think they had been pretty much flat year over year Q1, and Q2 is that about where you ended Q3.

Well.

First of all thank you I appreciate the recognition of the record quarter. We're really proud of the results. We delivered from an order perspective, yes, we've been describing our order pattern is resilience given all of the potential for disruption over the last five.

Fay West: We remain cautious and prudent in our spending, but as expected, we anticipate that SNA will be higher in the fourth quarter as we invest in employees and strategic growth opportunities. Given these factors and the strong profitable growth in the first three quarters 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 1.23 billion to 1.25 billion, reflecting organic sales growth of 12.5 to 14.5%. Adjusted EBITDA to be in the range of $190 to $200 million, and adjusted EBITDA margin to be in the range of 15.4% to 16%.

Five quarters.

Supply chain crisis, and growing backlog in plate inflation etcetera, our Q3 orders were slightly up versus the same quarter in 2022, if you'll recall Q2 was a tougher order quarter for us.

And we described it as a flat ish, which left us questioning what the Q what Q3 would hold so the fact that Q3 orders were up on a quarter over quarter basis.

Give us some confidence as we look towards the towards fourth quarter.

Also appears that we're returning to some semblance of normal seasonality, which allows us to be more predictable in how we forecast to forecast our business Q3 was in line with our expectations.

And I'll note at an enterprise level, if you dig within the quarter one of the metrics, we use to get a signal from the business about how the order demand is shaping up as an average daily order rate and average daily order rate basis September was actually our highest quarter excuse me our highest month.

David Huml: With that, I will turn it back to date. Thank you, Faith. We are on pace for a record 2023 for tenant company, and I could not be prouder of the work our high performance teams have achieved.

David Huml: I would like to take this opportunity to invite everyone to an investor day we will be having in New York in spring of 2024. More details will be published soon.

Year to date so.

One month does not a quarter or year make but the fact that we finished Q3 strong as another important data point that gives us some optimism not only on the quarter, but for the year.

Christa: With that, we will open the call up to questions. Operator, please go ahead.

Area. We're monitoring very closely is EMEA orders have been softening in EMEA year to date. They were they were down slightly in the quarter. We think we understand what's underneath that and that's driven from a macroeconomic perspective. So we want to keep close tabs and we're taking appropriate actions as far as how we plan our business given the softening order pattern in EMEA.

But we're monitoring it closely to make sure that were right sizing the business appropriately and responding to the signals, we're getting having said that our share position provides significant upside for us in the EMEA marketplace and so we're not pulling up tents and going home just because orders a little bit soft and there are some macroeconomic economic headwinds.

Got it very helpful. Conversely, it looks like volume was up a bit in China, which lots of companies are calling out kind of challenges there and anything youre seeing on that front.

Yes, I think it was a great quarter in China.

Markets reopened we are up over 20% in the region. Obviously it was a it was an easier comparable but the fact that the market is open and we're able to operate freely and get our product out into the channels and out in front of customers. We are harvesting. These are reopening within the marketplace.

[inaudible][inaudible] All right.

It's a positive outlook, we have a similar outlook for order demand in China in Q4, a continuing trend of positive year over year. So we continue to be bullish on our opportunity in China and the fact that we've invested we invested in.

David Huml: This is Chris Marvin C. Day. All right. At first of all, congratulations. It's a great quarter, great year to date. Looks interesting. Lots, lots here. So you talked about orders being resilient. You know, I think they had been pretty much flat every year Q1 and Q2. Is that about, you know, where you ended Q3? Well, thank you. Appreciate the recognition of the record quarter. We're really proud of the results we delivered from an order perspective.

An acquisition in China, Guy or Gal May brand, we have a very broad product portfolio, we've made investments and continue to invest in our multichannel go to market in China, and so we think we're really well positioned to capitalize on the <unk>.

David Huml: Yeah. We've been describing our order pattern as resilience given all of the potential for disruption over the last, you know, five quarters of supply chain crisis and growing backlog and inflation, etc. Q3 orders were slightly up versus the same quarter in 2022. If you ever call Q2 was a, was a tougher order quarter for us. And we described it as a flat ish, which left us questioning what the Q, what Q3 would hold.

Reopening and the market demand in the China marketplace here as we as we exit the year is set up for 2024.

Got it.

Lots of talk about a longer higher fed equation just.

Curious how youre looking at are at pricing beyond 'twenty three historically, maybe normal was one or 2% just any any big picture thoughts in terms of what pricing will look like beyond 'twenty three.

Yes.

Working on that now and pulling the data from the marketplace not only.

From internal inflation projections et cetera, but also a market competitiveness has been so many moves in the marketplace.

David Huml: So the fact that Q3 orders were up on a quarter of a quarter basis gave us some confidence. You know, as we looked towards the towards fourth quarter, it also appears that we're returning to some semblance of normal seasonality, which allows us to be more predictable on how we forecast forecast our business. Q3 was in line with our expectations. And I'll note at an enterprise level, if you dig within the quarter, one of the metrics we use to get a signal from the business about how the order demand is shaping up is an average daily order rate.

Over the last couple of years, we wanted to make sure that we're offering a very compelling value proposition with our products and continue to offer strong customer economics with our price positioning as we move into 2024, having said that we're imagining that we will move to a more traditional kind of an annual price increase kind of.

David Huml: And an average daily order rate basis September was actually our highest quarter, excuse me, our highest year to date. So, you know, one month is not a quarter or a year make, but the fact that we've finished Q3 strong is another important data point because some often is not only on the quarter, but for the year. You know, the one, the one area we're monitoring very closely is in May. Orders have been softening in in May.

The pricing structure for 2024, and 2021 'twenty two we obviously had to do mid year price increases in response to the model. The massive inflation that was Larry into our business. So we expect to move into more of a normal annualized kind of price increase I think in the low single digits is reasonable if you look at at what what's the outlook for inflation is.

And importantly, the price increases, we published to date and coming through 2023.

Cover us on a multiyear inflation basis. So we feel like we chewed up and we're a hole as we enter 2024, and we will look for a kind of low single digits type increase across the board within that.

David Huml: Year to date, they were, they were down slightly in the quarter. We think we understand what's underneath that and it's driven from a macroeconomic perspective. So we want to keep close tabs and we're taking appropriate actions as far as how we plan our business given the softening order pattern in in May. But we're monitoring closely to make sure that we're, we're right sizing the business appropriately and responding to the signal for getting.

Average across the company there are opportunities, where we can take take more price and be more aggressive where we have a competitive advantage, where we have a strategic opportunity we want to make sure that we're harvesting those opportunities and in other categories, where it's more.

<unk> and we've got to get more aggressive to go gain share we're going to we're going to pull that lever as well the other pieces relative to pricing that will maintain is our discipline around discounting levels, a muscle that we enhanced coming through our prior enterprise strategy and so all of our operating geographies and our business units have a very rigorous process and discipline in place for managing.

David Huml: Having said that, our share position provides significant upside for us in the MAMR replace. And so we're not pulling up tents and going home just because the order is a little bit soft and there's some macroeconomic economic headwinds. Got it. Very helpful. Conversely, it looks like volume was up a bit in China, which lots of companies are calling out, you know, kind of challenges there. And anything you're seeing on that front.

Discounting to make sure that where we give discount.

Specifically targeting incremental volume or share gain.

Got it and maybe just the last one for me the pivot to growth looks really interesting on the M&A side is that just.

David Huml: Yeah, it was a great quarter in China. You know, markets reopened, you know, we're up over 20% in the region. Obviously, it was a, it was an easier comparable. But the fact that the market is open, we're able to operate freely and get our product out into the channels and out in front of customers. We are harvesting the re-opening within the marketplace. It's a positive outlook. We have a similar outlook for order demand in China and few for a continuing trend of positivity year over year.

The current pipeline is there much.

In there at this point in time, or it's really getting renewed at this point.

Yes, we're populating the pipeline as we speak given that the first leg of our M&A strategy is to grow the core.

We know many of these players from operating in this marketplace and so populating the funnel at least with our known.

Potential targets is relatively simple we are taking a very comprehensive look back and within each of the three pillars of our strategy to populate the funnel with potential candidates and then we'll put them through a.

David Huml: So we're, we continue to be bullish on our opportunity in China. And the fact that we've invested, we invested in an acquisition in China. Got our calme brand. We have a very broad product portfolio. We've made investments and continue to invest in our multi-channel voter market in China. And so we think we're really well positioned to capitalize on the re-opening and the market demand in China marketplace here as we, as we exit the year, it's set up for 2024. He's got it.

Filtering to decide which ones we want to pursue proactively while we're monitoring the entire category four for action if something becomes available we have to be more more opportunistic, but I would say that the grow the core funnel is probably the most populated just because that's the closest adjacency, but we've begun to populate the rest of the funnel as well.

David Huml: It just, you know, lots of talk about a longer higher fed equation, just curious how you're looking at pricing beyond 23. You know, historically, you know, maybe normal was one or two percent. Just any any big picture thoughts in terms of, you know, what pricing will look like beyond 23? Yeah, you know, we're working on that now and pulling the data from the marketplace not only from internal inflation projections and such, but also market competitiveness.

We will be activating reach out here, we have started and will continue to reach out here as we move into the coming quarters.

Got it really helpful I will.

Step back and hopefully operate will get things going.

Thank you thanks.

Your next question comes from the line of Steve <unk> from Sidoti. Please go ahead.

Good morning, everyone I appreciate the detail on the call.

David Huml: There's been so many moves in the marketplace over the last couple of years. We're going to make sure that we're offering a very compelling value proposition with our products and continue to offer strong customer economics with our price positioning as we move into 2024. I haven't said that. We're imagining that we will move to a more traditional kind of an annual price increase kind of pricing structure for 2024 in 2021-22. We obviously had to do mid-year price increases in response to the massive inflation that was layering into our business.

The surprise to me in the quarter was how strong the gross margin continued given that obviously it was going to be.

Reduced backlog conversion in <unk>.

Given your guidance adjustments that you are still you move to the high end of the sales range is.

Is the guidance change primarily related just on the EPS side too so really healthy gross margins, even though you said you might have a little bit of a step down in Q4.

Okay.

Answering your second question first yes.

David Huml: So we expect to move into more of a normal annualized kind of price increase. I think in the low single digits is reasonable if you look at what the outlook for inflation is and importantly, the price increases we've published today and coming through 2023 cover us on a multi-year inflation basis. So we feel like we treat up and we're whole as we enter 2024 and we'll look for a kind of low single digits type increase across the board.

The drop through on the expanded margins.

Reflected in our in our increased guidance and you know the gross margin expansion has really been a hard fought battle here as we've tried to whether the inflation that's layered into the business over the prior seven to nine quarters, we have a number of levers we pull to offset inflation.

At first blush, we pushed back on increases.

And our reform possible. We also have built a cost out muscle. So that we have a very comprehensive cross functional.

David Huml: Within that average across the company, there are opportunities where we can take more price and meet more aggressive, where we have a competitive advantage, where we have a strategic opportunity. We want to make sure that we're harvesting those opportunities and in other categories where it's more competitive and we've got to get more aggressive to go gain share. We're going to pull that lever as well. The other piece in relative to pricing that we'll maintain is our discipline around discounting.

Process, we used to rack and stack the greatest opportunities to drive cost back out of the business and we fund and resource those as part of our annual plan. We're also improving our SIOP capability through our enterprise strategy. We just concluded so that we can operate with greater productivity as to sort of having a better outlook and forecast for what we expect to sell.

David Huml: That was a muscle that we enhanced coming through our prior enterprise strategy and so all of our operating geographies in our business units have a very rigorous process and discipline in place for managing discounting to make sure that where we give discount it's specifically targeting incremental volume or share gain. Got it.

Allows our manufacturing supply chain to plan better and operate more productively as kind of our option of last resort, we move with strategic price increases and so the margin expansion that you saw in the quarter is really a result of strong price realization and publishing prices to cover our multiyear inflation. So this is.

David Huml: Maybe just the last one for me.

The pivot to growth looks really interesting.

In place and we already incurred in the business either in this year or in prior years, and really making ourselves making ourselves whole.

David Huml: On the M&A side is the current pipeline is there much in there at this point in time or it's really getting renewed at this point. Yeah, we're populating the pipeline as we speak given that the first leg of our M&A strategy is to grow the core. We know many of these players from operating in this marketplace and so populating the funnel at least with our known potential targets is relatively simple. We are taking a very comprehensive look back and within each of the three pillars of our strategy to populate the funnel with potential candidates and then we'll put them through a filtering to decide which ones we want to pursue proactively while we're monitoring the entire category for action if something becomes available and we have to be more more opportunistic.

Did you have did you have more than one price increase this year.

No. This is this is the realization on the formerly published price increases.

Okay.

Yes.

Announced and released a lot of new products over the last 12 months.

Can you see if not quantify at least qualitatively talk about.

Success or future potential reach.

Reaching a wider audience with some of these new products and also whether you are starting to see greater sales with your with your current customer base, given the greater availability of products.

Yes, we're really excited about our new product pipeline and if you look back of the products. We've introduced they fallen into three three broad categories. One is in the area of small space and I've talked about small space offerings as being a really attractive segment because they are a small space applications in virtually every one of our serve vertical markets and we can sell these products through every.

David Huml: But I would say that the grow the core funnel is probably the most populated just because that's the closest adjacency but we begun to populate the rest of the funnel as well and we'll be activating reach outs here. We have started and we'll continue the reach outs here to move into the coming quarters.

Thank you. Got it. Oh, really helpful.

One of our channels and so it's a really attractive and compelling space our <unk> products.

Christa: I will step back and hopefully operator will get things going.

Thank you.

<unk> XL I'm, often I'm up light.

Steve Ferazani: Your next question comes from the line of Steve Ferazani from Sidoti. Please go ahead.

Have been very significant product launches. We also had our <unk> five and our small space category. We're really pleased with the success of those products and we'll continue to iterate and launch more products in the small space small space category. These tend to be smaller ticket value per unit and so you have to sell a whole lot of them to add up to the to the <unk>.

Fay West: Morning everyone. Appreciate the detail on the call. Um, I guess the surprise to me in the quarter was how strong gross margin continued. Given that obviously it was going to be reduced backlog conversion and given your guidance adjustment that you're still you move to the high end of the sales range. Is the guidance changed primarily related on the EPS side to the really healthy gross margin, even though you said you might have a little bit of a step down in queue for.

Revenue of an industrial machine for example, but they are an important component of owning the entire space within our customer we have channel leverage we can obtain it supports our brand has had as being the comprehensive supplier and ultimately the goal is to convert mop and bucket and so get out of the mop and bucket cleaning and move into a mechanized solutions. So.

Fay West: Answering your second question first, yes, the drop through on the expanded margins are reflected in our in our increased guidance. And you know, the gross margin expansion has really been a hard fought battle here as we've tried to weather the inflation that's layered into the business over the prior seven to nine quarters. We have a number of levers we pulled off that inflation, you know, at at at first place we push back on increases in every form possible.

We're really pleased with the progress to date, you'll continue to see a more new products in the small space category, we've been extending our product lines by taking our acquired platforms from IPC, and gourmet and rebranding them and bring them into new geographies. So that we can compete at more mid tier price points.

<unk> and maintain margins. It also allows us to maintain premium pricing on our legacy Tennant brand. For example that has been very very successful in terms of maintaining margin on the legacy branded side the premium position, but also serving existing customers and new customers at those more competitive price points and go on tour.

Fay West: We also have built a cost out muscle so that we have a very comprehensive cross functional process we use to rack and stack the greatest opportunities to drive cost back out of the business. And we fund and resource those as part of our annual plan. We're also improving our side up capability through our enterprise strategy. We just concluded so that we can operate with greater productivity as to so having a better outlook and forecast for what we expect to sell allows our manufacturing supply chain to plan better and operate more productively as kind of our option of last resort.

<unk> competitors, where in the past, we would have had to discount or premium product to compete now we have a product. That's been designed for that military application that we can sell profitably and deliver a fantastic customer experience and we can wrap all of the premium product and the mid tier products in the tenant ecosystem of aftermarket service and support so it really it's really a <unk>.

Selling offer as we approach both new and.

Fay West: We move with strategic price increases and so the margin expansion that you saw in the quarter is really a result of strong price realization and publishing prices to cover a multi year inflation. So this is inflation we already incurred in the business either in this year or in prior years and really really making ourselves making ourselves whole. Did you have the did you have more than one price increase this year? No, we didn't. This is this is the realization on the formally published prices.

And existing customers with our mid tier offerings, and we're doing that as you go around and we're doing that on a global basis, because those mid tier opportunities exist in virtually every market.

That we that we currently compete and participate in and last but not least we talk a lot about <unk> we have introduced.

Multiple products in the EMR space and so we believe today, we have the broadest portfolio where.

We're really excited about our <unk>, we've talked about it on former calls it gives us a robot to sell into industrial applications and manufacturing and warehousing logistics that has been a traditional tenant strength for the company in those vertical markets. Our customers were asking for a robotic solution in those in those markets.

David Huml: You've announced and released a lot of new products of the last 12 months. Can you if you if not quantify at least qualitatively talk about success or future potential reaching a wider audience with some of these new products and also whether you're starting to see greater sales with your with your current customer base given the greater availability of products. Yeah, we're really excited about our new product pipeline and if you look back at the products we've introduced they've fallen into three three broad categories one is in the area of small space.

And we believe we have a differentiated offering we also believe that over we believe adoption could be quicker in those environments. Because you don't have the added complexity of having to deal with the public walking through those environments and those types of customers are more adept at making capital investments and delivering a return on those investments because.

It's largely operating within Donald within the four walls of their facility and so we think that adoption can actually be quicker and over time, we think that could be a larger robotics opportunity from a served market potential than some of the other vertical markets that we entered earlier in our journey. So excited about about <unk> and the new product opportunity.

David Huml: And I've talked about small space offerings as being a really attractive segment because there are small space applications in virtually every one of our serve vertical markets and we can sell these products through every one of our channels. And so it's a it's a really attractive and compelling space our our I'm off product I'm off XL I'm off and I'm off late, has been very significant product launches. We also had our CS5 and our small space category.

In that space as well as we go forward you should expect to see new products in those three categories. As we move forward. We're investing we've maintained our investment in R&D as we've come through the prior years.

David Huml: We're really pleased with the success of those products and we'll continue to iterate and launch more products into the small space category. These tend to be smaller ticket value per unit and so you have to sell a lot of them to add up to the revenue of an industrial machine, for example, but they're an important component of owning the entire space within our customer. We have channel leverage. We can insane. It supports our brand as has been the comprehensive supplier and ultimately the goal is to convert mop and bucket and so get out of the mop and bucket cleaning and move into a mechanized solution.

We will see the fruits of those labors as we launched new products here in the future years, I'm really excited about about where we're heading with our new product pipeline.

Great.

If I get one last in it's not the most exciting topic, but it was in your deck.

New modernization of ERP, I know that kimco for companies really really well and it can also in the near term prevent challenge presents challenges can you talk a little bit about where you are on that what you think the opportunities are and how you avoid.

<unk> said other companies, obviously have historically run into wouldn't have tried to implement new ERP.

David Huml: So we're really pleased with the progress today. You'll continue to see more new products in the small space category. We've been extending our product lines by taking our acquired platforms from IPC and Gaume and rebranding them and bringing them into new geographies so that we can compete at more mid-tier price points competitively and maintain margins. It also allows us to maintain premium pricing on our legacy tenant brand, for example. That has been very, very successful in terms of maintaining margin on the legacy branded side, the premium position, but also serving existing customers and new customers at those more competitive price points and going total total of competitors.

I. Appreciate the question, obviously is top of mind and we felt it was appropriate to have to signal that we're doing work to plan for this year on ERP.

Migration is never you said it is not it is not particularly exciting.

Not particularly fund to contemplate and it's not without risk, but I will tell you that I have a high level of conviction that it is necessary and is critical to build out our digital infrastructure to enable our growth to provide scale leverage as we move forward to enhance our cyber security to improve our compliance and ultimately deliver a better.

Our customer experience and make Tennant company easier to do business with so I have a high level of conviction that that is the right direction for the company. We're operating at a 15 year old system today and across our global enterprise, we have eight different <unk>.

David Huml: We're in the past. We would have had to discount our premium product to compete. Now we have a product that's been designed for that mid-tier application that we can sell properly and deliver a fantastic customer experience and we can wrap all the premium product and the mid-tier product in the tenant ecosystem of aftermarket services support. So it's really a compelling offer as we approach both new and existing customers with our mid-tier offerings.

<unk> or instances of Erp's, which makes it extremely cumbersome to operate so.

It's kind of a non negotiable in my mind at this point.

You may ask well why why now and as we've talked about it in close partnership with our board of directors.

David Huml: We're doing that. We're doing that on a global basis because those mid-tier opportunities exist in virtually every market that we currently compete and participate. And last but not least, we talked a lot about AMR. We have introduced multiple products in the AMR space and so we believe today we have the broadest portfolio. We're really excited about our T16 AMR. We've talked about it on former calls. It gives us a robot to sell into industrial applications in manufacturing and warehousing logistics that has been a traditional tenant strength for the company in those vertical markets.

We're kind of through largely through the.

The disruptions of the prior years, including the supply chain disruption, we've demonstrated that we're taking backlog down meaningfully and operating at a more predictable fashion relative to supply chain and it.

Accordingly, we are launching a new three year strategy and so to be able to introduce the ERP consolidation in the context of our growth strategy allows us to resourcing it appropriately to make the appropriate trade offs and to plan for the investment that the ERP consolidations will be while we continue to grow the core business.

David Huml: Our customers were asking for a robotic solution in those markets and we believe we have a differentiated offering. We also believe that we believe adoption could be quicker in those environments because you don't have the added complexity of having to deal with the public walking through those environments and those types of customers are more adept at making capital investments and delivering a return on those investments because it's largely operating within the four walls of their facility.

Rounded I'm really viewing this as an investment for the next 10 to 15 years of this fantastic businesses that we've been entrusted to manage where we're at.

We really devoted 2023 to our planning exercise we pulled forward most of our large scoping decisions.

We have selected our final ERP or negotiating our statements of work as well as our partners that will support our integration. We are working through our Resourcing plans to make sure that we have the appropriate amount of internal and external resources supplied to the project and we're working on our business case to understand what will.

David Huml: And so we think that adoption can actually be quicker and over time. We think that could be a larger robotics opportunity from a certain market potential than some of the other vertical markets that we entered earlier in our journey. So excited about AMR and the new product opportunity in that space as well as we go forward.

B the investment required and what return can we expect for the investment. So 2023 has been largely devoted to planning and is one of the areas that we were counsel as we went out and Benchmarked and studied best practices and talk to others, who have gone before us on this journey.

You should expect to see new products in those three categories as we move forward. We're investing. We've maintained our investment in R&D as we come through the prior years. We'll see the fruits of those labors as we launch new products here in the future years. I'm really excited about where we're heading with our new product pipeline.

Appropriate planning ahead of time pulling forward big scope decision. So you can avoid scope.

<unk> creep and delays in decision, making later in the program picking the best partners and being very crisp on what the expectations are as well as appropriately Resourcing. The project are areas that were identified that we could mitigate the inherent risk in a program like this this will be a significant investment of time and money as we go forward we'll will.

David Huml: Great. If I get one last hand it's not the most exciting topic but it was in your deck. A modernization of ERP, I know that can go for companies really, really well and it can also in the near term prevent challenges. Can you talk a little bit about where you are on that? What you think the opportunities are and how you avoid problems that other companies obviously have historically run into when they've tried to implement new ERP?

Solidify our thinking around the business case as well as the return we expect to get for the investment and share more details as we move as we move forward, but we wanted to make you aware that we've done some work and we're heading that direction.

David Huml: Okay. I appreciate the question. Obviously it's it's top of mind and we felt it was appropriate to signal that we're we're doing work to plan for for this. You know, your p migration is never you said it is not it's not particularly exciting. It's not particularly fun to contemplate and it's it's not without risk. But I will tell you that I have a high level of conviction that it is necessary and it's critical to build out our digital infrastructure to enable our growth to provide scale leverage as we move forward.

Great. Thanks, Dave.

You bet.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Your next question comes from the line of Tim Moore from E. F. Hutton. Please go ahead.

Thanks, and congratulations on the very impressive gross margin expansion and clearly the operational efficiencies.

Nice to see them.

David Huml: To enhance our cybersecurity to improve our compliance and ultimately deliver a better customer experience and make tenant company easier to do business with. So I have a high level conviction that that is the right direction for the company. We're operating on a 15 year old system today and across our global enterprise. We have eight different ERPs or instances of ERPs which makes extremely cumbersome to operate. So you know it's kind of a non-negotiable in my mind at this point.

9% hike to the adjusted EPS midpoint of the range this year.

No.

You already gave commentary maybe about the fourth quarter possible gross margin, but how should we think maybe about gross margin for next year.

41% more realistic of your magnitude maybe after you lap some of the heavier price realizations this year.

Yes. So we're actively working on 2024, and we will be able to provide some additional guidance really actor in the first quarter of next year.

David Huml: You know you may ask why why now and as we've talked about it and close partnership with our board of directors. We're kind of through largely through the the disruptions of the prior years including supply chain disruption. We've demonstrated that we're taking back lockdown meaningfully and operating at a more predictable fashion relative to supply chain and importantly we're launching a new three year strategy. And so to be able to introduce the ERP consolidation in the context of a growth strategy.

We are operating and gross margin range ranges that we think are achievable and could be sustainable going forward. So I think I think just stay tuned on more specifics as to what we anticipate.

<unk> 2024.

I think where we landed on a full year basis.

As a good proxy.

David Huml: It allows us to resource it appropriately to make the appropriate tradeoffs and to plan for the investment that the ERP consolidation will be while we continue to grow the core business around it. I'm really viewing this as an investment for the next 10 to 15 years of this fantastic business that we've been entrusted to manage. Where we're asked, we really devoted 2023 to a planning exercise. We pulled forward most of our large scoping decisions.

Great. That's helpful color and I look forward to the February earnings call.

Just had a question about your backlog I mean.

It was inevitable decrease more normalized supply chain all the industrial companies are backlogs are coming down in the sector.

I was just wondering maybe Dave how close are you to maybe.

A more normalized component supply chain in line disruptions I know that you've made a lot of good progress on that.

David Huml: We have selected our final ERP and negotiating our statements of work as well as our partners that will support our integration. We are working through our resourcing plans to make sure that we have the appropriate amount of internal and external resources supplied to the to the project. And we're working on our business case to understand what will be the investment required and what return can we expect for the investment. So 2023 has been largely devoted to planning.

I'm just trying to think you might had like 90% of the way there.

Avoiding that drag from the supply chain as I tried to parse out really the gross margin expansion from better operational efficiencies and utilization versus kind of the catch up pricing realizations.

Yes, I would say broadly speaking we're through.

The major supply chain challenges, we experienced its hard for me to put a percentage on it because we always manage supply chain challenges I would say, we spent seven quarters talking about pumps and circuit boards and while we are still actively managing those commodities most parts for our production if not at the heightened crisis level that.

David Huml: And it's one of the areas that we were counseled as we went out in Brentmarked and studied best practices and talked to others who had gone before us on this journey. Appropriate planning ahead of time pulling forward big scope decisions so you can avoid scope to scope creep and delays and decision making later in the program picking the best partners and being very crisp on what the expectations are. As well as appropriately resourcing the project are areas that were identified that we could mitigate the inherent risk in a program like this.

We were only just say like this time last year, where we were spending a lot of time and energy and resources and investments to try to try to overcome those two specific commodities. So yes, I think we're approaching a more normalized kind of supply chain environments, we have enhanced our capabilities around supply chain management, we've made some investments.

To improve our capability there.

As recently as this quarter, we have invested both.

David Huml: This will be a significant investment of time and money as we go forward will will solidify our thinking around the business case as well as the return and we expect to get for the investment and share more details as we move as we move forward. But we want to make you aware that we've done some work and we're heading that direction.

In people and in systems to improve our supply chain capabilities and thats really to enable ourselves to operate more productively and support our growth going forward. We're not we're not going back in and preparing for yesterday's problems. We're looking forward and saying we've survive we've built some new muscles.

Right. Thanks, Dave. If you would like to ask a question, please press star followed by the number one on your telephone keypad.

Most of the investments we've made have paid off over time and now we want to make sure that we have the capability to support to support the business going forward I think your question, let off with kind of the backlog reduction and how to think about backlog in.

Timothy Moore: Your next question comes from the line of Tim Moore from EF Hutton. Please go ahead. Thanks, and congratulations on the very impressive gross margin expansion and clearly the operational efficiencies. It was really nice to see the 90% hike to the adjusted EPS midpoint of the range this year.

In the quarter, we took backlog down at enterprise level from $255 million to $214 million.

At our inflation adjusted rate, our normalized backlog level for the enterprise would be in the in the $50 $60 $60 million range.

Fay West: You know, you already gave commentary maybe about the fourth quarter possible gross margin, but how should we think maybe about gross margin per next year is 41% more realistic of your magnitude, maybe you have to you lap some of the heavier price realizations this year? Yeah, so we're actively working in 2024 and we'll be able to provide some additional guidance really after, you know, in the first quarter of next year. We are operating in gross margin range, ranges that we think are achievable and could be sustainable going forward. So, I think just stay tuned on kind of more specific to what we anticipate in 2024, but I think, you know, where we landed on a full year basis is a good proxy.

Varying by quarter, obviously, you have some seasonality will be buying ahead to service, but $50 million to $60 million. So you can think about the gap still to close from the $214 million that we're exiting this quarter down to the towns with a more normalized rate and we expect to make progress against that.

In the continuing quarters on the strength of supply chain and the strengthening supply chain, having said that the backlog is becoming increasingly consolidated in industrial product.

That is manufactured in one plant in Minneapolis.

And those products are only builds for the globe. They are only built in that one plant and so when you think about having.

Elevated backlog concentrated in one or two or three assembly lines. It becomes more difficult to move the needle on a quarterly basis as we reduce those backlogs. So allows us to laser focus on the investments of the adjustments we need to make to reduce the backlog every dollar of backlog represents a customer that wade.

Fay West: Great, that's helpful color and I look forward to the February earnings call.

I mean, just a question about your backlog. I mean, the, you know, the, it was an inevitable decrease, more normalized supply chain, all the industrial companies, their backlogs are coming down in the sector. You know, I was just wondering maybe Dave, how close are you to maybe on a more normalized component supply chain and line disruptions? I know that you've made a lot of good progress on that. I'm just trying to think in my head, are you like 90% of the way there with avoiding that drag from the supply chain?

And in alternative products. So we are highly motivated to get the product out the door and we will update on the progress we make but I expect that we'll be able to reduce backlog at a decreasing rate as we move forward because of the consolidation.

On singles single products within the Big Apple's plan.

Great. That's helpful color I just have a two part question now.

Maybe can you maybe name has done a great job of explaining some of the drivers behind the industrial end markets, we get the warehouses and logistics.

Is they try to parse out really the gross margin expansion from better operational efficiencies and utilization versus kind of the catch up pricing realization? Yeah, I would say broadly speaking, we're through the major supply chain challenges of experience, but it's hard for me to put a percentage on it because we always manage supply chain challenges. I would say we spent seven quarters talking about pumps and circuit boards and, and while we're still actively managing those commodities, those parts and for our production, if not at the heightened crisis level that we were in, you say, you know, like this time last year, where we were spending a lot of time and energy and resources and investments to try to overcome those two specific commodities.

Compact in.

Is there any other things that are driving kind of the industrial side and market growth, which seems to be vastly outpacing retailer schools and hospitals.

Yeah, I think it's a really dynamic space, maybe more dynamic than it's been.

Over the past or at least my tenure here at this company so.

Depending on how wide you opened our aperture there are conversations around Resourcing and we've got some of our businesses reporting some benefit out in the future for restoring primarily along the border and in Mexico.

We're every year companies are contemplating expanding square footage on a more to serve domestic market closer to kind of closer to home.

So yeah, I think we're approaching a more normalized kind of supply chain environment. We have enhanced our capabilities around supply chain management. We've made some investments to improve our capability there as recently as this quarter, we've invested both in people and in systems to improve our supply chain capabilities. And that's really to enable ourselves to operate more productively and support our growth going forward. We're not going back and, and preparing for yesterday's problems.

<unk>.

I think that you see companies investing in kind of an industry four <unk>, because they've got labor shortages and a rising inflation cost of labor and the labor component, there, whether they're manufacturing environment Ora.

Or or warehousing logistics environment labor is becoming more scarce.

And more expensive and so to the extent they can invest in automation to.

We're looking forward and saying we've, we've survived, we've built some new muscles. Most of the investments we've made have paid off over time and now we want to make sure that we have the capability to support the, to support the business going forward.

It reduced the reliance on labor, that's going to be a that's going to be a positive.

Across across vertical markets in the labor the labor tailwind is consistent across all of our vertical markets. So youll see.

Virtually every vertical market.

David Huml: I think your question let off with kind of the backlog reduction and how to think about backlog. You know, in the quarter, we took backlog down and then in price level from $255 million to $214 million at, at our inflation adjusted rate, unnormalized backlog level for the enterprise would be in the, in the $50, $60 million range, very in by quarter. Obviously, we have some seasonality when we would be buying ahead to service, but 50 is $60 million.

Operate in is trying to automate to reduce the reliance on labor and or make it easier to hire lower skilled labor.

To do the work and then.

So I think the macro trends are largely blowing in our favor you mentioned, specifically manufacturing and warehousing logistics I think there has been.

Obviously, there is there are segments within those categories that are growing at a higher rate than some other segments. So if you think about the growth in EV and the growth in the supply chain for <unk> and lithium ion batteries et cetera. Those are primarily new square footage to service those those categories and then the last one that has been a more of a decade.

David Huml: So, you know, you can think about that the gap still to close from the, the $214 million that we're exiting this quarter, you know, down to the, down to the more normalized rate. We expect to make progress against that and the continuing quarters on the strength of supply chain and the strength in supply chain. Having said that, the backlog is becoming increasingly consolidated in industrial product that is manufactured in one plant in Minneapolis and those products are only bills for the globe.

Long trend has been e-commerce.

E Commerce has grown there has been a differing.

David Huml: They're only bills in that one plant and so when you think about having an elevated backlog concentrated in one or two or three assembly lines, it becomes more difficult to move the needle on a quarterly basis as it reproduces backlog. So, it allows us to laser focus on the investments and the customers we need to make to reduce the backlog. Every dollar backlog represents a customer that's waiting on the tenant product, so we are highly motivated to get the product out the door and we'll let, we'll update on the progress we make, but I expect that we'll be able to reduce backlog at a decreasing rate as we move forward because of the consolidation on single single products within the Minneapolis plant.

In addition in square footage both in retail as well as backend back into distribution centers to support E Commerce and so.

E Commerce continues to grow in all the outlook is that ecommerce will be a significant portion of the holiday season. This year as we went through Q4 that creates opportunity for us what I would tell you as we translate the tail winds of macro trends into what it could mean for tenant the tenant equipment.

Great, that's helpful color.

Tends to come in late stage after new square footage is built so you'll you'll hear about the project and you'll read about it David if we could Dodge reports and then they will there'll be in construction construction will take longer than you would like because I can't find the labor and then the last thing they do before they turned the keys over to the owner is clean the space and then they move into more operational maintenance.

Meaning that's when that's when we see the incremental benefit of the new square footage being at it but we think the vertical markets. We serve a number of tailwind to them on a macro basis, we're really excited about 2024 and beyond.

David Huml: I just have a two part question now. Maybe it's done a great job explaining some of the drivers behind the industrial and markets, you know, we get the warehouses and logistics and compact and is really other things that are driving kind of the industrial side and market growth which seems to be vastly outpacing retail and schools and hospitals. Yeah, I think it's a really dynamic space, maybe more dynamic than it's been.

Great Dave that was very helpful. My next question is about <unk>.

Can you update us as you know thats, a more affordable cost platform in China.

It being rebranded still for other low cost countries like Brazil, and maybe if you can give us some progress update on that and the opportunity there for maybe that low cost compact right onto.

David Huml: Again, you know, over the past, at least my tenure here at this company. So, you know, depending on how wide you open your aperture, there are conversations around reshoring and we've got some of our businesses reporting some benefit out in the future from reshoring primarily along the border in Mexico is where we hear companies are contemplating expanding square footage on a more, you know, to certain domestic market closer, kind of closer to home.

Yeah, we've been we've been leveraging when I talked about new products answering answering the earlier question, we have been leveraging our acquired platforms to more competitively positioned.

Position ourselves and compete in those mid tier markets around the world and so.

That's both our IPC legacy Italian manufactured platform as well as our legacy Gourmet, China produced platforms, we've been bringing those into local brands throughout the throughout the world both the Italian legacy product as well as the gourmet legacy product.

David Huml: I think that you see companies investing in kind of industry 4.0 because they've got labor shortages and arising inflation cost of labor in the labor component there, whether they're a manufacturing environment or a, or a warehouse and logistics environment labor is becoming more scarce and more expensive. And so to the extent they can invest in automation to reduce the reliance on labor, that's going to be a, that's going to be a positive.

Really excited about it.

We've moved the <unk> Montgomery, specifically, we have rebranded that product into Latin America with some success.

Early success against a pretty pretty recent occurrence and we're also taking it elsewhere within within China.

And so.

Excuse me within Southeast Asia. So you can imagine and we're bringing out of the <unk>.

David Huml: Across across vertical markets and the labor, the labor tail wind is consistent across all of our vertical markets. So you see virtually every vertical market we operate in is trying to automate to reduce the reliance on labor and or make it easier to hire lower skilled labor to, you know, to do the work. And then, you know, so I think that the macro trends are largely blowing in in our favor, you mentioned specifically manufacturing and warehouse and logistics.

Other brands. So there is still upside from taking that Gal may brands dominate legacy has been gourmet legacy platforms into other brands.

We're contemplating a move into enter other geographies and we will do it where it makes sense.

For our developed markets, meaning North America, and Europe, and in Australia, New Zealand for example.

We're assessing whether we need to have three different price points to compete in the marketplace, meaning a good better best Gourmet legacy IPC legacy.

David Huml: I think there has been, obviously, there are segments within those categories that are growing at a higher rate than some other segments. If you think about the growth in EV and the growth and supply chain for EV and lithium ion batteries, et cetera, those are primarily new square footage to service those those categories. And then the last one that has been a more of a decade-long trend has been e-commerce. As e-commerce has grown, there's been a differing addition in square footage both in retail as well as, you know, back end back in the distribution centers to support e-commerce.

And tenet legacy.

Overkill for them for the majority of markets. We're in so a two tiered offering makes more sense as we look at the applications and the customers in the channels and our positioning strategy. So the decision is whether the IPC product is a better fit or the gourmet products is a better fit for the mid tier within those geographies.

David Huml: And so, as e-commerce continues to grow and all the outlook is that e-commerce will be a significant portion of the holiday season this year is going to be for that creates opportunity for us. What I would tell you is we translate the tailwinds of macro trends into what it could mean for tenant that the tenant equipment tends to come in late stage after new square footage is built. So you'll hear about the project and you'll read about it even if you could dodge reports.

That's terrific to hear thanks for sharing that and I'll turn it back over to the operator.

Since there are no further questions at this time I would like to turn the call over to management for closing remarks.

Thank you and thank you for your interest in Tennant Company. This concludes our earnings call have a great day.

David Huml: And then they'll they'll be in construction, construction will take longer than they would like because they can't find the labor. And then the last thing they do before they turn the keys over to the owner is clean the space. And then they move into more operational maintenance cleaning. And that's when that's when we see the incremental benefit of the new square footage being added. But, you know, we think the vertical markets we serve have a number of tailwinds to amount of macro basis. So we're really excited about 2024 and beyond.

Okay.

Okay.

We are now private.

Great day. That was very helpful.

Yes, do you know what happened there after after the recording because we Couldnt hear you on airlines.

Yes, do you know what happened.

David Huml: My next question is about Gau Mae. Let them more affordable cost platform in China. Is it being rebranded still for other low-cost countries like Brazil, and maybe you can give us some progress up to it on that and the opportunity there for maybe that low-cost compact ride on too. Yeah, we've been leveraging, when I talked to a new product answering the earlier question, we've been leveraging our acquired platforms to more competitively position ourselves and compete in those mid-tier markets around the world.

David Huml: And so, that's both our IPC legacy Italian manufactured platform as well as our legacy Gau Mae China produced platform. We've been bringing those into local brands throughout throughout the world, both the Italian legacy product as well as the Gau Mae legacy product. Really excited about it. We've moved the Gau Mae US, but Gau Mae specifically, we have rebranded that product into Latin America with some success. Early success, it gets a pretty recent occurrence, and we're also taking it elsewhere within China.

David Huml: And so, excuse me, within Southeast Asia, so you can imagine we'll bring that into other brands. So, they're still upside from taking that Gau Mae brand, Gau Mae Legacy platform into other brands. We're contemplating a move into enjoy other geographies, and we'll do a work that makes sense. For our developed markets, meaning North America and Europe and Australia and New Zealand, for example, we're assessing whether we need to have three different price points to compete in the marketplace, meaning a good, better, best Gau Mae legacy, IPC legacy, and tenant legacy.

David Huml: It's probably overkill for the majority of markets we're in, so a two tiered offering makes more sense as we look at the applications and the customers and the channels, and our positioning strategies. So, the decision is whether the IPC product is a better fit or the Gau Mae product is a better fit for the mid-tier within those geographies.

That's terrific to hear.

Christa: Thanks for sharing that, and I'll turn it back over to the operator.

Thanks.

David Huml: Since there are no further questions at this time, I would like to turn the call over to management for closing remarks. Thank you, and thank you for your interest in tenant company.

This concludes our earnings call. Have a great day.

Unknown Executive: We are now private. Yeah, do you know what happened there, after the recording, because we couldn't hear you on our