Q3 2024 Tennant Co Earnings Call
Good morning, My name is Regina and I will be your conference operator today at this time I would like to welcome everyone to Tennant company's third quarter 'twenty 'twenty four earnings call.
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Speaker Change: Thank you for participating in Tennant company's third quarter 2024 earnings Conference call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.
Good morning, everyone and welcome to Tennant Company's third quarter 2024 earnings Conference call I'm, Lorenzo Baskett, Vice President Finance and Investor Relations.
Speaker Change: Joining me on the call today are Dave Huml, Tennant's, President and CEO, and Fay West Senior Vice President and CFO.
Speaker Change: Today, we will provide an update on our 2024 third quarter performance, Dave will discuss our results in enterprise strategy and Fay will cover our financials.
Speaker Change: After our prepared remarks, we will open the call to questions.
Our earnings press release, and slide presentation that accompanies this conference call are available on our Investor Relations website.
Speaker Change: 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.
Speaker Change: Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in the statements.
Speaker Change: 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.
Speaker Change: Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items in our 2024 third quarter earnings release includes the comparable GAAP measures and a reconciliation of non-GAAP measures to our GAAP results.
Speaker Change: I'll now turn the call over to Dave.
Dave Huml: Thank you Lorenzo and Hello, everyone on the call today I will be discussing highlights from the third quarter 2024, our outlook for the remainder of the year and the progress on our enterprise strategy I am pleased to report on our strong third quarter results lapping a record high third quarter in the prior year, we delivered both organic net sales growth.
Dave Huml: And increased adjusted EBITDA.
Dave Huml: As we anticipated this quarters performance was driven more by incoming order demand and less from backlog reduction.
Dave Huml: With this growth momentum, we are well positioned to achieve our 2020 for guidance and continue to execute our enterprise growth strategy effectively.
Dave Huml: For the third quarter of 2024, net sales increased three 6% to $315 $8 million.
Dave Huml: Adjusted EBITDA rose to $47 9 million, yielding an adjusted EBITA margin of 15, 2%.
Dave Huml: Order rates were very strong in the third quarter, increasing high single digits compared to the same period in 2023 on a year to date basis order rates have increased mid single digits and are above our long term revenue growth target of 3% to 5%.
Dave Huml: This quarter also marks the second consecutive quarter with strong order growth across all our geographies a trend. We believe will continue in the fourth quarter.
Dave Huml: Unpacking, the third quarter, our business results varied by geography.
Dave Huml: In the Americas order rates during the quarter were up compared to the prior year period significantly outperforming the average growth rates, we have seen in the region over the past few years.
Dave Huml: This was the result of both pricing and volume growth driven by our enterprise strategy initiatives.
Dave Huml: Reduced our backlog in the quarter at a faster pace than expected due to order softness within our North America industrial products.
Dave Huml: Overcoming currency related headwinds in Brazil, our strategic investments in the Americas continued to deliver order rates outpacing market growth reinforcing our confidence that our strong leadership position is growing.
Dave Huml: In EMEA continued market demand softness this year was compounded in the third quarter by lapping our previous quarter with higher backlog reduction benefit. Despite the overall sluggishness, we continued to see some positive signs in the region.
Dave Huml: Third quarter order rates increased double digits and year to date orders are up mid single digits.
Dave Huml: Go to market initiatives helped to drive double digit growth in the U K compared to the prior year period, and Italy saw strong organic growth as we expanded our distribution network.
Dave Huml: Lastly, Tcs, our previously announced acquisition in Eastern Europe continues to perform ahead of expectations. This business drove nearly 6% growth for the region in the quarter.
Dave Huml: Integration is on track and we are executing aggressive growth plans for this business in this attractive region.
Dave Huml: Turning now to APAC.
Dave Huml: Our APAC region accounts for 7% of our enterprise level sales with China, and Australia combined accounting for over 60% of this region's revenue annually.
Dave Huml: Business performance in this region was primarily impacted by start declines in China, where overall market demand has slowed considerably Australia is also showing signals of slower demand, reflecting customers' growing economic uncertainty.
Dave Huml: As has been widely reported excess manufacturing capacity and government induced overproduction in China are pressuring the market prices in our mid tier product offerings and impacting our results we.
Dave Huml: We do not see this dynamic changing for the remainder of the year to counter this we have strategically shifted our focus to vertical markets and product categories that are more insulated from the broader market dynamics, particularly through our tenant branded legacy product offerings, which delivered strong growth in the third quarter.
Dave Huml: Turning now to strategic initiatives last year, we introduced the three pillars of our new enterprise strategy growth performance and people.
Dave Huml: We continue to resource invest and execute targeted initiatives across each of these pillars and I'd like to take the opportunity to provide you with several key updates from the quarter.
Dave Huml: Within the growth pillar pricing is a critical piece to driving growth during the third quarter, we continued to see price growth across each of our geographies at an enterprise level. We are targeting approximately 50 to 100 basis points of annual price growth as part of our long term goals, we are well positioned to achieve that.
Dave Huml: In 2024, and expect our pricing realization to more than offset inflationary pressure for the full year 2024.
Dave Huml: New product development is another important focus area in our growth pillar by.
Dave Huml: By launching innovative new products, we help our customers solve their most pressing challenges capitalize on emerging technology and market trends and differentiate our offerings from our competitors at an enterprise level, we are targeting new product development to add approximately 150 to 200 basis points of growth as part of our long term goals.
Dave Huml: Bolstered by the release of the X for Rover earlier. This year, we are on pace to achieve that in 2024.
Dave Huml: As part of our new product development efforts, we are placing a strong emphasis on small space and product line extensions earlier. This year, we introduced our <unk> family of products into new geographic markets, including Brazil, France, Portugal and Spain.
Dave Huml: This international expansion has driven incremental growth of <unk> products. During the current year and we anticipate continued growth through increased country channel and brand access as we look ahead to 2025 and beyond.
Dave Huml: In September we launched our new T 291, small walk behind scrubber into the North American market.
Dave Huml: Designed for use in both hard to reach spaces and open areas. The T. 291 is a walk behind scrubber built to simplify and improve facility management by combining cleaning power and maneuverability.
Dave Huml: The <unk> hundred 90, <unk> versatility on small size makes it an excellent fit for mid sized retail healthcare and education environments.
Speaker Change: Our product line extensions have proven to be an effective strategy positioning our mid and premium tier products to grow share and generate incremental revenue and margin.
The third area of focus for our new product development efforts is ahmar.
Speaker Change: A strong market reception for the export Rover combined with continued high demand for our existing <unk> products has been encouraging.
Speaker Change: Customers are choosing tenant machines supporting our belief that we have a winning product portfolio differentiated service capability and strong value proposition in the market custom.
Speaker Change: Customers are actively upgrading and expanding their EMR fleets with new export Rover and our other ahmar models.
Speaker Change: In the third quarter of 2024, we saw significant repurchases from existing key retail customers and are reaching new customers with the S. Four Rover, which officially launched in EMEA during the quarter.
Speaker Change: In the first nine months of 2024, we have deployed over 2200 units, bringing our cumulative ahmar total to over 8700 units deployed since introduction.
Speaker Change: We continue to be pleased with our progress on driving disruption in robotics and growing our armada portfolio, which now accounts for approximately 5% of net sales at the enterprise level for the first nine months of 2024.
Speaker Change: The launch of the <unk> Rover, alongside our strong <unk> performance fuels, our optimism as it relates to our long term growth strategy. We designed <unk> Rover is a scalable platform, allowing us to bring new products to market more quickly and cost effectively. This includes accelerating the development of new products based on the export.
Speaker Change: Rover platform with additional launches now planned for 2025.
Speaker Change: Shifting to the performance pillar of our enterprise strategy. Our ERP modernization journey is one of the key components within our performance pillar <unk>.
Speaker Change: The project is on track and we have hit our current year milestones related to the design and build phase of the implementation with staggered go live launches planned for 2025.
Speaker Change: Our significant investment in this ERP project, who will provide a strong and secure digital infrastructure to enable globally standardized processes and systems for scalable growth by better serving more customers and unlocking operational efficiencies.
Speaker Change: Looking ahead, we anticipate a strong finish to 2024, driven by increasing order growth across all geographies.
Speaker Change: This momentum supported by our strategic initiatives is expected to continue promoting higher order growth in 2025.
Speaker Change: While this order growth bodes well for our long term outlook other dynamics will shape, our 2025 performance.
Speaker Change: As previously discussed our 2024 backlog was primarily concentrated in North America industrial equipment.
Speaker Change: Initially, we anticipated, reducing our backlog by $80 million to $100 million within the year. However, we are now on track to reduce our backlog by $130 million by the end of 2024. This accelerated reduction is attributable to lower than expected incoming orders for industrial equipment and.
Speaker Change: In 2024, we experienced lower than anticipated demand for industrial equipment across various vertical markets, including the rental channel, where we are experiencing extended replacement cycles.
Speaker Change: This market dynamic has contributed to a larger than expected backlog reduction in 2020 for presenting a headwind for 2025.
Speaker Change: Despite anticipated strong order growth in 2025, this significant backlog reduction coupled with continued softness in certain regions is likely to result in muted topline performance in 2025.
Speaker Change: We continue to see success in the first year of our enterprise growth strategy. The investments we are making are reading out in the current year illustrated by our strong double digit order growth.
Speaker Change: We believe we will see continued order growth from these initiatives as we navigate the short term backlog challenges in 2025.
Speaker Change: Our key enterprise growth drivers pricing, new product development and go to market investments will continue to fuel our growth and helped drive our long term revenue growth targets of 3% to 5%. Additionally.
Speaker Change: Additionally, we will continue to prioritize investments aligned with our long term growth pillars, while maintaining strict spending discipline.
Speaker Change: With that I will turn the call over to pay for a discussion of our financials.
Speaker Change: Thank you, Dave and good morning, everyone in the third quarter of 2024 tenants delivered GAAP net income up $28 million compared to $22 9 million in the prior year period.
Speaker Change: Net income for the quarter benefited from increased net sales, primarily driven by effective price realization and volume growth in the Americas.
Speaker Change: However, this positive performance was partially offset by volume declines in EMEA and APAC.
Speaker Change: Additionally, operating expenses growth this year due to the ERP implementation costs as well as integration costs related to our acquisition of Tcs, which totaled $4 million in the quarter.
Speaker Change: Beyond operating income interest expense in the third quarter was $6 million lower than the prior year period.
Speaker Change: This reduction was primarily due to a decrease in debt balances coupled with lower interest rates.
Speaker Change: Our average interest rate net of hedging for the third quarter of 2024 was $4, 63% compared to 492% in the prior year quarter.
Income tax expense in the third quarter was slightly higher than the prior year period, our effective tax rate was 24, 4% in the third quarter 2024, compared to 23, 4% in the prior year period.
Speaker Change: The increase in the effective tax rate was primarily due to an increase in nondeductible executive compensation and an unfavorable change in the mix of forecasted earnings by country.
Speaker Change: Anticipate that our full year effective tax rate will be within our guided range of 22% to 27%.
Speaker Change: Excluding ERP implementation costs and other non-GAAP op.
Speaker Change: Adjusted net income in the third quarter of 2024 was $26 $6 million compared to $25 4 million in the prior year period, a four 7% year over year increase.
Speaker Change: Adjusted EPS for the third quarter of 2024 increased three 7% compared to the prior year period to $1 39 per diluted share.
Speaker Change: Looking a little more closely at our quarterly results.
Speaker Change: For the third quarter of 2020 for consolidated net sales totaled $315 8 million, reflecting a three 6% increase from the $304 $7 million reported in the third quarter of 2023.
Speaker Change: Acquisitions contributed one 3% of this growth while changes in foreign currency exchange rates had a negative impact of 4% primarily affecting our operations in Brazil.
Speaker Change: On a constant currency basis organic sales increased two 7% with one 8% attributable to price increases and <unk>, 9% due to volume growth.
Speaker Change: On a consolidated basis order activity grew mid single digits driving higher equipment sales, particularly in the Americas.
Speaker Change: However, volume in the current period.
Speaker Change: Adversely affected by sluggish economic conditions in EMEA, and a challenging business environment in APAC.
Speaker Change: As a reminder, we group our net sales into the following categories equipment parts and consumables and service and other.
In the third quarter, we experienced growth in both equipment and service the product category.
Speaker Change: As compared to the prior year period.
Speaker Change: Equipment sales grew three 7% and service increased nine 2%, while sales for parts and consumables remained unchanged.
Speaker Change: Tenant also group sales into three regions. The America includes all of North America in Latin America EMEA covers Europe, the Middle East and Africa, and Asia Pacific includes Australia, China, Japan, and other Asian markets.
Speaker Change: Organic sales in the Americas increased four 6% compared to the prior year period.
Speaker Change: The increase in net sales was driven by a 60 40 split between volume and price.
Speaker Change: Volume growth across the region with generated primarily from our commercial equipment sales, while volume growth in our industrial equipment.
Speaker Change: Flat.
Speaker Change: Organic sales declined 8% in EMEA due to volume declines in both equipment sales and parts and consumables, partially offset by price realization and all product categories.
Speaker Change: Sales volumes were impacted by weaker than expected market conditions, and a smaller contribution from backlog reduction in the current period.
Speaker Change: Organic sales decreased four 3% and APAC, primarily due to volume declines in China and Australia.
Speaker Change: Partly offset by price growth in Australia, as Dave mentioned earlier challenging business conditions persist in the region and we expect this dynamic to continue for the remainder of the year.
Speaker Change: And Jeff.
Speaker Change: Third quarter of 2024 was $47 9 million.
Speaker Change: Up four 4% compared to the third quarter of 2023 adjust.
Speaker Change: Adjusted EBITDA margin for the third quarter 2024 was 15, 2% of net sales up slightly compared to the third quarter 2023.
Speaker Change: Gross margin was 42, 4% in the third quarter, a 90 basis point decrease compared to the prior year quarter and margin rate decrease is attributed to inflationary pressure on material as well as elevated freight costs.
Speaker Change: Unfavorable geographic and customer mix also contributed to the decline but to a lesser degree.
Speaker Change: This was partially offset by price realization.
Speaker Change: Our overall margin profile can be impacted by shifts in our geographic product and customer mix during.
Speaker Change: During the first half of 2024, as we reduced our industrial equipment backlog, our overall margin rate benefited from the higher margin profile shift.
Speaker Change: In the third quarter as orders for our commercial products increase.
Speaker Change: Our product mix became more balanced.
Speaker Change: This balanced mix to continue in the fourth quarter of 2020 for.
Speaker Change: Our pricing and cost initiatives efforts during the year have positioned us to achieve our EBITDA margin expansion target for the full year of 2024.
Speaker Change: Adjusted selling and administrative expense in the quarter totaled $88 7 million.
Speaker Change: $8 $5 million increase compared to the third quarter of 2023 adjusted.
Speaker Change: Adjusted SG&A expense as a percent of net sales was 28, 1%. This is an 80 basis point improvement compared to the third quarter of 2023.
Speaker Change: Turning now to capital deployment.
Speaker Change: Net cash provided by operating activities was $30 7 million during the third quarter compared to $54 4 million in the year ago period.
Speaker Change: Operating cash flow during the quarter was impacted by investments in the ERP project as well as working capital investments related to inventory.
Speaker Change: We generated free cash flow of $26 4 million for the quarter, which included investment in the ERP of $9 4 million.
Speaker Change: When excluding these non operational cash flows we converted 154% of net income to free cash flow during the quarter.
Speaker Change: The company continued to deploy cash flow toward operational capital needs and to return capital to shareholders in line with its capital allocation priority.
Speaker Change: During the third quarter, the company invested $4 3 million in capital expenditures and returned $13 $3 million to shareholders through dividends and share repurchases.
Speaker Change: Yesterday, we announced a five 4% increase to our annual dividend raising it to 29 and half cents per share.
Speaker Change: This marks the 50 <unk> consecutive year Tennant has increased the dividend payout.
Speaker Change: Tenant's liquidity remains strong with a balance of $91 $3 million in cash and cash equivalents at the end of the third quarter.
Speaker Change: $439 3 million.
Speaker Change: The unused borrowing capacity under the Companys revolving credit facility.
Speaker Change: As previously announced in August the company refinanced its existing debt agreement, increasing its revolving credit facility limit to $650 million.
Speaker Change: This provides the company with increased flexibility and capability to fund growth through M&A and create value for our stakeholders.
The company continues to effectively manage debt and maintain a strong balance sheet. Our net leverage was five six times adjusted EBITDA below our targeted range of one to two times adjusted EBITDA.
Speaker Change: Moving to 2024 guidance overall based on the strong order growth rates and demand for our products and services, we are reaffirming our 2024 guidance.
Speaker Change: We will remain disciplined and prudent in our spending focusing on investments in areas that position us for growth and increased operating efficiency.
Speaker Change: For 2024 tenant reaffirms the following guidance.
Speaker Change: Net sales in the range of $1 $280 million to $1 $305 million.
Speaker Change: Reflecting organic growth between two 5% to 45%.
Adjusted EPS of $6 15 to $6 55 per diluted share, which excludes certain nonoperational items and amortization expense.
Speaker Change: Adjusted EBITDA in the range of $205 million to $215 million.
Speaker Change: Adjusted EBITDA margin in the range of 16% to 16, 5% and.
Speaker Change: And capital expenditures of approximately $20 million.
Speaker Change: With that I will turn the call back to Dave.
Dave Huml: Thank you Fay.
Dave Huml: In summary, I am very proud of the global team and our ability to continue our growth trajectory as we carry this momentum through the end of the year, we are well positioned to achieve our 2020 for guidance.
Dave Huml: I am optimistic by the positive returns we are seeing from the investments we are making in the first year of our enterprise growth strategy. The work. The team is doing is helping create the framework to reach our long term financial targets of 3% to 5% sales growth and annual EBITDA margin expansion between 50 and 100 basis points.
Dave Huml: Our strategy is centered on creating value for our shareholders through returning capital via dividends and share repurchases as well as a renewed focus on value creation through acquisitions.
Dave Huml: Growth through acquisitions presents an exciting opportunity to capitalize on mega trends expand our total addressable market and drive growth.
Dave Huml: We're excited about the opportunities here at tenant as we continue to make investments fuelling our growth we're prepared to tackle the 2025 backlog headwinds and drive forward with the transformational ERP modernization project. This ERP journey will empower us with real time insights, enabling smarter faster decision, making across the business.
Dave Huml: The foundation our team is building now is paving the way for our future success.
Dave Huml: If you wish to learn more about our company and the direction. We're heading we are participating in the Baird Global Industrial conference on November 13th in Chicago.
With that we will open the call to questions. Operator. Please go ahead.
Speaker Change: At this time, if you would like to ask a question simply press star followed by the number one on your telephone keypad.
Speaker Change: Our first question will come from the line of Steve Rossi with Sidoti. Please go ahead.
Steve Rossi: Good morning, everyone. Appreciate all the detail on the call you've covered a lot of ground. So a lot of numbers.
I wanted to see if I can walk through at least a couple of big topics. That's okay.
Steve Rossi: I want to start with the EMR.
Steve Rossi: It sounds like if it's 5% year to date.
Steve Rossi: <unk> kind of 5%.
Steve Rossi: Year to year to date net sales it sounds like that's really if anything understating the performance right because as I recall, you only began shipping the new Rover are in <unk> and now you've just move to EMEA and <unk>.
Steve Rossi: <unk> is that is that accurate.
Speaker Change: So it really is.
Speaker Change: If we're looking at it from from the period. When you started launching the product that would be a much higher number.
Speaker Change: Hey, good morning, Steve and thanks for the thanks for the question just to clarify the 5% number is on total revenue for all of our Armada products.
Speaker Change: Hey, Brian.
Steve Rossi: So I think maybe you were referring to Vegas, but im assuming the Rover is the biggest driver of this year or is that not accurate.
Speaker Change: Rover is part of the driver, but it's a really it's a great question underneath that we are growing differentially in our legacy AMR product as well as benefiting from the export Roper and when you think about the export Rover, we're really excited about it we believe it's a game changer for US we really started shipping the export Rover in Q2 in the north.
Speaker Change: American marketplace and later in Q3 and the European marketplace. So it's it's.
Speaker Change: Performance is not it's not a dramatic driver of that 5% data point.
Speaker Change: Okay.
Speaker Change: When I think about when you would launch the FERC.
Speaker Change: Initially launched EMR. It was driven primarily by two or three big orders is Rover.
Speaker Change: <unk> demand is different.
Yes. So if you think back to the if you opened the aperture and think about the ALR journey. We've been on we had a large strategic account order that we were public about right out of the gates in 2020 and took into 2021 as well.
Speaker Change: Since then we've launched additional models in the <unk> and now with now the the export Rover, we're very fast out of the gates with the export Rover, but as I mentioned, we're below we really only got a quarter or a half explore rover impact in the year to date numbers.
Speaker Change: And less than a quarter's impact in EMEA impact.
Speaker Change: Results in the year to date numbers. So my point being we expect ex Florida continue to ramp as a percentage of our total <unk> sales and it is important to note the pipeline for export and actually the pipeline for all of our <unk> is really strong here as we look out into Q4 and beyond.
Speaker Change: Excellent I appreciate that Dave.
Speaker Change: Help me out with the backlog there are a lot of numbers there.
Speaker Change: So it now sounds like let me make sure I got these right and I can ask.
Speaker Change: Steve converted $80 million to $100 million this year, youre expecting $130 million full year as I recall that compares to I think you converted $140 million last year.
Speaker Change: Hi.
Speaker Change: Where are you will you be at a normalized rate by year end.
Speaker Change: Yes, so Steve your numbers are good we had guided to an 80 or excuse me.
Speaker Change: And $80 million to $100 million backlog reduction.
Speaker Change: As we started the year, we're actually going to deliver now.
Speaker Change: We believe about $130 million in backlog reduction that compares to $140 million in prior year, and we expect to exit the year with normalized backlog, which means we're back to market competitive lead times and in selling our entire product portfolio at the lead times that our customers expect.
Speaker Change: And then it sounded like you also commented that the reason you are able to convert so much of the industrial backlog. This year was industrial orders have been a little bit slower.
Speaker Change: Does that set you up for not only challenging sales comps next year, but also your mix is going to be dramatically shifted right, particularly in industrial is slower.
Speaker Change: Yes, I think it's important to meant to dimensionalize that comment about industrial softness because really.
Speaker Change: It's a very narrow set of products and we mentioned earlier that our backlog had become increasingly consolidated in North America and on a fewer number of product lines. Those are the lines, where we saw the softness in incoming orders, which allowed US then to drain the backlog more quickly than we expected and when you dig deeper into what drove the softness in those particular industrial <unk>.
Speaker Change: <unk>, it's really a story of a few customers and the rental channel, which we referenced referenced in the script I can put more color around the rental industry dynamic if you'd like but it's we believe it's a correction kind of in the in that industry or coming off of the supply chain prices.
Speaker Change: We don't expect that's going to rectify itself that specific situation anytime soon in 2025, but beyond that we see opportunity in the other industrial vertical markets in the industrial products. So we will solve for that that acute problem in that specific vertical market and industry, it's not a broad based industrial.
Real downturn does that makes sense.
Speaker Change: Because I remember at the beginning of year. The view was the industrials could be strong because of the labor saving opportunity where doors, obviously labor shortages. So did you say.
Speaker Change: When you are saying is that we're still playing out it was specific to the rentals market only where you've seen the softness.
Speaker Change: Correct.
Speaker Change: Okay. Okay. That's helpful last one for me and then I'll I'll take up too much time here I'm going to let other people have a chance, but can you update us on where you are with the ERP modernization.
Speaker Change: Time and costs that remain in you could walk through what that can mean on a financial side once that's completed.
Speaker Change: Yeah, Let me walk through the projects sort of where we're at on scope timeline in Fayetteville and the details on the financials behind it I'm really pleased with progress on the major transformational project for Tennant company, where it will be end of year or two of the programs. We are in the design and build a phase where we're actually building out the system to meet.
Speaker Change: Our requirements and configure to match a batch of our business team has done a fantastic job and this has required a significant lift from many resources across the company. We are benefiting greatly from our partners significant lift by our team around the world and also guidance by our board.
Speaker Change: As experienced with multiple ERP deployments in the other industries. Other companies. So we feel like we're really well positioned we're on pace as far as scope and functionality deliverables as we move through Q3 and are optimistic on our outlook 25, 2025 is a big year for the program. We have staggered go lives land Jia.
Speaker Change: Graphically around the world beginning in Q2, and so it'll be all hands on deck to make sure that we can deploy the system effectively.
Speaker Change: Help our team members as they change towards the new way of working with the new standardized global processes.
Speaker Change: <unk> business disruption and realize the benefits, both tangible and intangible of having a common ERP around the world.
And Steve just to put some numbers around it year to date, we expect approximately $25 million.
Steve Rossi: Of that $25 million $9 million is running through the P&L is $16 million has been capitalized on a full year basis, we anticipate spending right around $37 million, which was in line with our original expectation.
Steve Rossi: And the breakout there would be similar as far as what gets capitalized.
Steve Rossi: In P&L.
Steve Rossi: And what's remaining for costs and timing.
Speaker Change: Yeah, So as Dave mentioned, we've got a year of deployment in 2025.
Speaker Change: Throughout the year and I suspect likely some of that given the timing of deployment.
Speaker Change: <unk> will run into early part of 2026.
Speaker Change: In line with our with our with our anticipated cost projections for the project.
Speaker Change: That we that we outlined early on so we are tracking timeline wise and tracking dollar line.
Speaker Change: Okay, and what do you think the impact can be in terms of do you view this as potentially beyond just <unk>.
Speaker Change: The speed and convenience Kent is this a margin enhancing project for the business.
Speaker Change: Yes, so we're planning on efficiency savings between 10, and $15 million and we continue to refine and enhance those estimates as we build the system and understand the true functionality, we can deliver.
Speaker Change: And the timeframe to realize the efficiency savings.
Speaker Change: That's really only part of the story.
The benefits are going to be less tangible and quantifiable the P&L, but we're looking for enhanced decision, making by putting better data in people's hands to make faster decisions capitalize on opportunity and candidly just served more customers better with less manual effort required. So there is a $10 million to $15 million kind of efficiency planning.
Speaker Change: We have out there we'll update you as we move through 2020 forward into 2025.
Speaker Change: How that how that number is shaping up as we finalize the estimates.
Speaker Change: Great. Thanks, Dave Thanks Pam.
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question comes from the line of Tom Hayes with C. L. King. Please go ahead.
Tom Hayes: Hey, good morning, everyone. Thanks for taking my questions.
Speaker Change: Good morning, Tom.
Speaker Change: Alright.
Tom Hayes: Dave maybe just a couple of geographic basic questions.
Tom Hayes: Thank you mentioned APAC, obviously, I think everyone knows or kind of understand the China has been a pressure point for for you and everyone in the industrial world for a while I was just wondering if you had kind of highlighted in your prepared remarks.
Tom Hayes: Some initiatives or actions, you're taking in that market could you just maybe just go over those a little bit more.
Speaker Change: Yes, I'd be happy to in.
Speaker Change: The headline story around APAC is performance is really that market driven softness in China.
Speaker Change: China and this has been widely reported in the mass media China's trying to overcome some significant macroeconomic headwinds and we are not immune to those pressures in the way that's manifested itself in shown itself in the markets. We serve is that there is overcapacity from a production standpoint on decreasing demand in the market.
Speaker Change: As well as government incentivized over production. So we've seen price pressure primarily in the lower end of our product line, you would say commercial products and down as kind of a very competitive price point products that we have it in our portfolio and so whats happened is theres. This price war going on amongst amongst.
Speaker Change: Amongst competitors and what we're not doing is chasing the price down the sewer.
Speaker Change: Being very intentional about where we're choosing to participate in that in this market environment, where there's just as much pricing pressure to make sure that where we are taking taking orders, we're going to do it profitably and its incremental volume for us. So we're being very intentional reacting to this market dynamics within China and there is a halo effect of this dynamic.
Speaker Change: Outside of China, because as the overproduction.
Speaker Change: He is unable to find a home in the local China market. They are exporting their production at really reduced market rates. So youre seeing some impact throughout southeast Asia and elsewhere of these of these exported low low price units. So what we are doing in response is flexing our resources to focus more on the higher end of our lineup for that for those.
Speaker Change: That's our industrial industrial product.
In that space there are just fewer competitors.
Speaker Change: We our product advantage in that space, we have a legacy of product leadership. So we're well known as a preferred partner in that space and from a selling perspective. These are more single site sales up and down the street, where our direct selling capability gives us an edge in our direct service capability gives us an edge over <unk>.
Speaker Change: Distribution for example, selling into distribution because we have a direct relationship with end use customers. So what we're doing is flexing our selling organization to focus more on the industrial vertical markets to try to drive volume, where we can get growth at decent margin accretive margin rather than kind of just chasing this commercial.
Speaker Change: <unk> as it moves ratchets down in price points in the short term, we werent able to offset the decline in the commercial space with the industrial sales and but we did drive incremental business for us and industrial on a standalone basis. So we think it's an appropriate step to take just acknowledging the challenging them.
Speaker Change: We are in China.
Speaker Change: No I appreciate the color and maybe shifting.
Speaker Change: Overdue EMEA.
Speaker Change: It sounds like the acquisition that you guys did I think it was.
Speaker Change: Earlier, this year or late last year on the distribution platform is performing well just your thoughts on that.
Speaker Change: Progress.
Speaker Change: Yes, it is going really well I. Appreciate you I appreciate you mentioning in asking the question is doing really well really really pleased with the performance of the business.
Speaker Change: We bought a business that's made up of a group of really talented long tenured people, who have long standing customer relationships in these markets and they just had not been appropriately.
Speaker Change: Appropriately equipped to address all the opportunity in our markets whether that be from a training perspective from a go to market strategy perspective from a product assortment perspective, so I'm really proud of the Tennant team for coming in embracing the acquisition moving intentionally with aggressive growth plans. So that we can get the products into the hands of the sellers of <unk>.
Speaker Change: The sellers trained so they can take those products in front of the end use customers and the early returns are really positive I continue to be very bullish on this on this acquisition I think it's a.
Speaker Change: An excellent example of where we can put.
Speaker Change: Our.
Speaker Change: Put our capital to work to create value for shareholders within our core space our core cleaning market. As this is a channel play we thought we've acquired new channels to market and new geographies on a direct basis direct sales and service basis that can drive incremental value not only growth for the company, but incremental value for shareholders as well.
Speaker Change: Okay. No I appreciate that maybe just one on the EMR business and then I know you covered a lot of there's a lot of that with the previous caller, but I was just wondering on production capacity I know you added some not too long ago, but what are your thinking on that outlook, especially with your commentary that demand remains pretty robust.
Speaker Change: <unk>.
Speaker Change: Yes, we did reference in earlier call on the export Rover, specifically when we when we launched in North America, we looked at the pipeline of opportunity in orders likely to come in we decided to make the investment to roughly double our production capacity versus your original launch plan on export Rover I am pleased to report we are.
Speaker Change: Making great progress securing orders for that increased production. So I think that's proven to be a smart move by the team to double down.
Speaker Change: On the product in that space listen I think it's it's a lot of upside for Ahmar for us.
2024, and out into 2025, and I would remind you we're solving for one of our customers most pressing problems, which is the availability the cost and our reliability of labor and all of our equipment enhances productivity with AMA, specifically reduces the reliance on cleaning labor that is increasingly hard to find and expensive.
Speaker Change: We are demonstrating success with our legacy AMR products. We've gained some significant re fleet orders. In addition to fleet orders on our <unk>. For example, our <unk> was the last before the export Rover that was the most recent introduction that's focused on.
Speaker Change: Industrial applications and the uptake on that product has been.
Really really great and are excited about the upside at <unk> export Rover listen I've I've spent a lot of airtime on it as our first ground ground up purpose built ahmar product I think it is a real game changer for us and our customers are telling us that it solves a real need they have in a differential way and so I think we've got a lot of upside on export Rover.
If you narrow your view and just think about 2025, we had a mid year launch of export Rover in North America and in the late Q3 launch of export Rover in EMEA. So even just straight lining for full year availability in 2025 provides mathematical upside the pipeline looks looks very robust and now we've just got to get out and convert.
The pipeline of interest into a pipeline of appeals.
Speaker Change: Okay, maybe one more if I could just on your new product launch on the T. Two 991, what are there any specific markets that's addressing.
Speaker Change: Thank you Sir.
Speaker Change: Yes. This.
Speaker Change: This is really a product thats borne out of our product line extension strategy, where we look at.
Speaker Change: The platforms the hardware platforms, we have from our acquired businesses and IPC and gourmet and consider rebranding them into in this case tenant tenant brands. So that we can take you through our existing channels. That's a great. It's a great representation of that strategy. What we're targeting is smaller store formats with this product line.
Speaker Change: It's really compact and highly maneuverable.
Speaker Change: As capable of cleaning wide open spaces, but it really shines when you get into tighter spaces. So think about smaller format retail environments that have checkout isles or even tight aisles that need to be navigated think about grocery stores think about smaller store format retail general merchandize retail stores et cetera.
Speaker Change: Which is really kind of bread and butter applications for us because we sell the large format stores, but when we get into the smaller format stores. Some of the equipment historically has rather hard to to navigate the space and so we think this gives us an opportunity to penetrate smaller store formats in real and retail vertical market, but also vertical market.
Speaker Change: Like education, and health care as well.
Speaker Change: I appreciate the color. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Erin <unk> with Northcoast Research. Please go ahead.
Speaker Change: Good morning, gentlemen.
Speaker Change: Oh earthquake.
Speaker Change: So based on where I've heard it isn't a full year guidance range right now what is the habit in the fourth quarter to really achieve that is it really coming back to order growth are you thinking more backlog reduction or is it a combination of the two can you provide a little more color on that.
Speaker Change: Yes.
Speaker Change: The math Youll mid point of our guidance, we need to deliver 334 in revenue and into Q4.
Speaker Change: Some of that will be driven by backlog reduction, we exited Q3, having taken backlog down by $109 million and so we've got another another to hit the 130 estimate way up for full year, there's another $20 million to $21 million of backlog reduction.
And then when we will do that that will likely.
Speaker Change: Happened earlier in the quarter, rather than later, but really the activity.
Speaker Change: As important as backlog reduction is the activity to deliver Q4 is around our strong pipeline of opportunity and we've got line of sight to a strong pipeline of orders in <unk> as well as some key strategic accounts that are already planned it gives us confidence that the orders will materialize in those products and customer segments.
Speaker Change: We continue to execute really well against our elevate strategy and inclusive of AMR and we talked.
Speaker Change: Tom's during Tom's questions about kind of the export Rover and that.
Speaker Change: The momentum we have in that in that space as well.
Speaker Change: We've come through the last two quarters with really strong order growth.
Speaker Change: And really that's a direct result of the investments and actions, we're taking our elevate strategy.
Speaker Change: We expect strong order growth in Q into Q4 as well.
Speaker Change: Kind of hovering around that double digit order growth rate year over year, which not only helps us deliver Q4, but sets us up really well, having three quarters of elevated growth rate as we head into 2025.
Speaker Change: No that makes sense I appreciate it.
Speaker Change: And then just kind of building off of that.
Speaker Change: To touch on a little bit but.
Can you tell me about how Ams performing this year compared to our expectations and in addition to that when we look further into 2025 and beyond.
Speaker Change: You see <unk> impacting our overall growth trend.
Thanks for the question. So EMR is continues to perform well and Aaron I know youre a bit newer to the conversation. So I'll fill you in on something we've been talking about over.
Speaker Change: Over the past several years with EMR.
We're really bullish on AMR over the long term.
We are disrupting an industry and so the adoption curve of <unk> for our customers in this industry is anything but a traditional adoption curve. We've seen really spotty adoption marked by significant orders for example in strategic accounts large fleet orders that can really skew the impact of <unk>.
Speaker Change: In a given quarter month or quarter end and even a year because some of these deployments have been significant but when you take a step back and think about the cumulative impact that we've driven for the for the business on EMR.
We're at 200 and over $250 million in sales accumulative cumulatively since we launched the EMR.
<unk> 8700 units to 850 unique customers in 25 different countries and so.
Speaker Change: The reason I bring that up is that we are very pleased that we are getting the product out in front of as many customers in as many geographies channels and vertical markets as possible. So that we can begin to model engage where will the adoption would be the most quick.
Speaker Change: Across those vertical markets that we serve this export Roper is a game changer for us I believe its our first purpose built robot gives us a truly differentiated offering in the marketplace based on its maneuverability and its performance.
Speaker Change: It is enhanced by our agreement with brain, where we have exclusivity on the generation three navigation software, where you'll be having exclusivity amongst any competitors in the marketplace and it's just a superior navigation system. So and we're also participating via as a as a result of that agreement we're participating in the <unk>.
Speaker Change: <unk> of the subscription revenue, which provides us another profitable revenue stream for us as we go forward, we expect <unk> to be a significant contributor not only to the enterprise, but to our growth year over year as we move into $2025 26 27.
Speaker Change: We're continuing to iterate explore is a purpose built ground up machine. It's a platform product. So we are.
Speaker Change: <unk> indicated in the script that we expect to launch more new products off of that platform. Beginning in 2025 that will give us an opportunity to take kind of the benefits of the export platform into even more vertical markets get into more vertical customers and we think we think drive an inflection point of adoption and so we're really bullish on the <unk> opportunity and think it's going to be a.
A significant contributor to the business, but also a disruption of this industry on a global basis in the coming years.
Speaker Change: Okay that makes sense.
Speaker Change: And then drilling down just a little bit further one other question I had was it sounds like right now you are experiencing some longer.
Speaker Change: Lead times on replacement of some of these fleets.
Speaker Change: <unk>.
Speaker Change: Some of that equipment. My question is when do you expect to possibly see any sort of offset in terms of.
Speaker Change: More sales coming through the parts and consumable segment as these vehicles are just getting towards the end of their lives and you start to see higher failure rates on parts is that a possible offset.
Speaker Change: Yeah that comment about the extended replacement cycles was really limited to the rental industry and our partners in the rental channel, let us give you a quick snippet about the dynamic there coming through supply chain challenges when customers couldn't get their equipment from the Oems like tenant and many others the rental.
Speaker Change: Industry in general saw that this was going to be a short term opportunity to capture a demand spike as customers still need equipment, whether it's a backhaul or a floor scrubber or a boom lift they need the product that can't get it from the OEM. So they turned to the rental channel and so the rental industry as a whole broad and inventory to capitalize on that short term opportunity now.
Speaker Change: Now that they have the inventory in place and the demand the Oems have taken their backlog down both tenants and broader base of Oems now the demand is returning to more normalized pace in that rental channel they've got a rent down the inventory they have in place. So it's really kind of a short term shorter term structural challenge to overcome but it's really specific to that rental.
Speaker Change: Industry beyond that yes, we have multiple levers for growth across the vertical markets, we serve and I think I've highlighted.
Many of them on the call, but I think about the fact that we're still seeing growth in our core marketplace.
Speaker Change: We're focused on the highest growth segments within that marketplace, whether it be small space or a product line extensions or <unk>. They are growing at rates faster than the first within the core core business I've already talked about our export Rover and how excited we are about the early returns on that product as well as the platform products to come off of.
Speaker Change: Following on the <unk> yields were driving double digit order growth rate as we as we exit Q3 and Q4 heading into next year, you should think about the trending of order rates are direct result of execution of our elevate growth strategy and so really excited and confident that we can continue to execute that that really well and in our.
<unk> are paying back the Ccs acquisition in Eastern Europe is contributing really really nicely to that region entered the enterprise and our investments in brain is yielding commercial benefits as we take <unk> out to the marketplace.
Speaker Change: Place, so really bullish on our growth prospects outside of some of the softness we articulated in a specific vertical market.
Speaker Change: Channel in North America, or some of the geographic softness like China really bullish on our upside growth opportunities as a business.
Speaker Change: I really appreciate the clarification. Thank you.
Thank you.
Speaker Change: Before we take our next question I'd like to remind everyone that in order to ask a question simply press star one on your telephone keypad. Our next question will come from the line of either the seller with Northcoast Research. Please go ahead.
Speaker Change: Hey, good morning, guys.
Good morning, Good morning, the press release referenced elevated freight costs and inflationary pressures. So I was wondering how are these freight costs and inflationary pressures trending through October and do you see this as a temporary headwind or something that could last well into 2025.
Speaker Change: We really see it as a temporary headwind if you think about what's what's happened in the global freight industry. You've got a few factors at play I think about the unrest in certain parts of the world that are influencing carrier's willingness to pursue certain trade routes.
Speaker Change: And so there are other alternatives other trade routes that are longer a lot more time on the water and add more expensive I think that's one dynamic we've seen have reacted too from a from a freight perspective. There's also been some saber rattling as you recall about port closures in port strikes.
Speaker Change: That have impacted people outlook I will tell you that we took some intentional actions and preparing for a potential port strike to reroute some.
Some products coming from from overseas for domestic markets just to get out ahead of it and and avoid the potential business disruption that came at the expense and I still think that was a prudent move for us as a business, but we don't expect that dynamic to continue into the future quarters.
Speaker Change: Just a few more data points, we anticipate that that pricing will offset inflation on a full year basis and while we don't specifically guide to gross margin. When we look at full year over full year. We still expect it will you will see gross margin expansion on a full year basis.
Speaker Change: Okay, Yes. Thank you that was super helpful.
Speaker Change: And since there are no further questions at this time I would like to turn the call over to management for closing remarks.
I want to thank you all for your participation today and your interest in Tennant Company. This concludes our earnings call I Hope you have a great day.
Speaker Change: Thank you all for joining today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Yeah.