Q4 2024 Tennant Co Earnings Call
Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today.
At this time, I would like to welcome everyone to Tenant Company's 4th Quarter and Full Year Fiscal 2024 Earnings Conference Call. Today's call is being recorded. There will be time for Q&A at the end of the call. Please press star 1 if you would like to ask a question today via telephone.
After the question and answer session, please stay on the line for closing remarks from management.
If you have joined our call today via telephone and are logged into the conference call presentation on your computer, please mute the audio on your computer to avoid potential quality issues during the call.
Thank you for participating in Tenant Company's 4th Quarter and Full Year Fiscal 2024 Earnings Conference Call. And beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tenant Company. Mr. Bassi, you may begin.
Good morning, everyone, and welcome to Tenant Company's fourth quarter and full year 2024 earnings conference call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations.
Speaker Change: Joining me on the call today are Dave Huml, President and CEO, and Fay West, Senior Vice President and CFO.
Speaker Change: Today, we will review our fourth quarter and full year performance, as well as our initial guidance for 2025.
Dave Huml: Dave will discuss our results and enterprise strategy and Fay will cover our financials.
Dave Huml: After our prepared remarks, we will open the call to questions.
Dave Huml: Our earnings press release and live presentation that accompanied this conference call are available on our investor relations website.
Dave Huml: 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.
Dave Huml: Such statements are subject to risks and uncertainties, and our actual results may differ materially from those contained in the statement.
Dave Huml: These risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission.
Dave Huml: We encourage you to review those documents, particularly our Safe Harbor Statement, for a full description of the risks and uncertainties that may affect our results.
Dave Huml: Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items.
Dave Huml: Our 2024 fourth quarter and full year earnings release and presentation include the comparable gap measures and a reconciliation of these non-gap measures to our gap results.
I'll now turn the call over to Dave.
Dave Huml: Thank you, Lorenzo and hello everyone. On today's call, I will be discussing highlights from the 4th quarter and full year 2024, the progress on our enterprise strategy and our outlook for 2025.
Dave Huml: I am pleased to report our strong finish to a successful 2024. Our team's commitment to executing our enterprise strategy initiatives drove results aligned with our long-term targets, achieving new highs for the company in net sales, adjusted EBITDA, and EBITDA margin.
Dave Huml: For the full year, net sales reached $1.287 billion, while our adjusted EBITDA rose to $208.8 million, and our adjusted EBITDA margin expanded to 16.2%.
Dave Huml: Our full year organic growth rate of 3.2% was driven primarily by price growth across each of our regions, and the second half of 2024 also showed positive volume trends.
Dave Huml: In the fourth quarter, our team achieved volume growth of over 5%, concluding the year with robust momentum following three consecutive quarters of nearly double-digit order growth.
Dave Huml: Looking at the full year, our orders increased 6.4% over 2023, well above our long-term targets.
Dave Huml: In 2024, teams across the company worked diligently to meet our customers' needs, successfully reducing our backlog by $125 million and closing the year with normalized levels and market competitive lead times.
Dave Huml: With backlog levels now stabilized, going forward, incoming orders will more closely align with revenue.
Dave Huml: Regional highlights for the year varied. In the Americas, order rates during the year were up high single digits compared to the prior year period.
Dave Huml: This was driven by our enterprise strategy initiatives, specifically within our new products like the X4 rover, which contributed to our record $75 million in AMR equipment sales in 2024.
Dave Huml: In contrast, we experience lower than anticipated demand for our industrial equipment, specifically in the rental channel driven by extended fleet replacement cycles.
Dave Huml: This sluggish industrial demand enabled us to draw down backlog as previously stated.
Dave Huml: Overcoming currency-related headwinds in Brazil, our strategic investments in the Americas continue to deliver order rates, outpacing market growth, reinforcing our confidence that our strong leadership position is growing.
Dave Huml: In a maya despite strong execution of growth strategies continued market demand softness during the first three quarters was compounded by lapping a previous year with higher backlog reduction benefit
Dave Huml: In the fourth quarter, we saw signs of market rebound, and we drove revenue growth across all product categories within the region, led by double-digit growth in Spain.
Dave Huml: Additionally, in Eastern Europe, our first quarter acquisition of TCS continues to perform very well. This business drove 2.6% inorganic growth for the region during the year, and we are excited about the opportunity it provides in this attractive region.
Dave Huml: Turning now to APAC. Continuing the trend from previous quarters, business performance on APAC was impacted by stark demand declines in China and government-induced overproduction, which is creating price and margin pressure in the mid-tier commercial product categories.
Dave Huml: Australia is also showing signals of slower demand. Customers are either delaying equipment orders or shifting to rental units, reflecting their growing uncertainty in their economic outlook.
Dave Huml: These macro market driven challenges more than offset the positive impacts from our growth strategies in the region, and we have pivoted our approach to focus on more favorable areas in this market environment.
Looking at 2024 as a whole.
Dave Huml: Our aim in 2024 was to grow top-line revenue and expand bottom-line margins through pricing discipline, launching innovative new products, improving our channel reach and capacity, and reducing backlog to normal levels.
Dave Huml: Our results give us confidence that we are on the right path to carry this positive momentum into 2025 and beyond.
Speaker Change: I'd like to point out several key accomplishments the team made on these sprints.
Speaker Change: First, our 2024 results were primarily driven by price growth across each of our regions.
Speaker Change: At an enterprise level, we target approximately 50 to 100 basis points of annual price impact. In 2024, we exceeded our target, delivering over 200 basis points.
Speaker Change: Each region contributed to this performance and the backlog reduction also contributed materially to price realization in the year.
Speaker Change: Second, we activated multiple go-to-market initiatives in 2024 aligned with our enterprise growth strategy. In North America, we increased our service capacity, which helped drive an increase in service revenue year over year.
Speaker Change: Additionally, go-to-market initiatives drove growth in the UK and investments in expanding our distribution network in Italy resulted in strong organic growth.
Speaker Change: Many of our go-to-market initiatives delivered year-over-year growth, but that impact was overshadowed by the previously communicated declines within the North America Rental Channel and China.
Speaker Change: Lastly, we drove successful product innovations in three key areas, AMR,
Small Space, and Product Line Extensions.
Speaker Change: Within AMR, the X4 rover that we launched mid-2024 has received strong reception and, coupled with continued high demand for our existing AMR products, reinforces our confidence in our AMR growth strategy.
Speaker Change: Within small space, we introduced our IMOB family of products into new geographic markets, including Brazil, France, Portugal, and Spain.
Speaker Change: This international expansion drove incremental growth of IMOP products in 2024.
Speaker Change: We are pleased to announce that beginning in 2025, we have further expanded our sales rates by 30 additional countries.
Speaker Change: We see this expanded footprint as an exciting opportunity to gain share in the rapidly growing small space segment.
Speaker Change: We expanded our product line extensions portfolio with the release of the T1581 Ride-On Scrubber in the first quarter and the T291 Small Walk-Behind Scrubber in the third quarter of 2024.
Speaker Change: New product driven growth in AMR, small space, and product line extensions exceeded our long-term growth target of 150 to 200 basis points per year.
Speaker Change: Built into our enterprise strategies, our commitment to adjusted EBITDA margin expansion. As we drove pricing and cost-out initiatives across each of our geographies in 2024, we also maintained discipline in our spending to generate operating leverage on the volume increase.
Speaker Change: This resulted in a 70 basis point improvement in adjusted EBITDA margin in line with our long-term target of 50 to 100 basis points per year.
Speaker Change: In addition to these accomplishments, we also activated our M&A framework in 2024 through our investment in BrainCorp and our acquisition of TCS, Tenet's long-standing distributor serving countries in Central and Eastern Europe, Africa, and the Middle East.
Speaker Change: These investments will contribute to our long-term target of adding $150 million of net sales growth from our M&A strategy over three years.
Speaker Change: We continue to evaluate potential M&A targets, prioritizing opportunities that provide tenant with the right strategic value, operational fit, and financial return.
Speaker Change: Overall, our first full year of our enterprise strategy is yielding positive results, and we are excited to continue to execute on our initiatives in 2025. Given the importance of AMR to our future, I wanted to spend a few minutes discussing the acceleration of AMR.
Speaker Change: Sales momentum from our legacy AMR products has been very strong. In 2024 we had AMR equipment sales of 75 million dollars.
Speaker Change: Customers are choosing Tenant AMR machines supporting our belief that we have a winning product portfolio, differentiated service capability, and strong value proposition in the market.
Speaker Change: We continue to see AMR as one of the fastest-growing floor care segments, and we believe the investments we are making into AMR through new products put us on the path to increase customer adoption and drive long-term growth.
Speaker Change: I'm excited to announce the newest model in our AMR product portfolio, the X6 Rover.
Speaker Change: We designed the X4 rover as a scalable platform, allowing us to bring new products to market more quickly and cost-effectively.
Speaker Change: building on the early success of the X4 rover and our accelerated product roadmap enabled by our strategic partnership with BrainCorp. The larger X6 rover targets customers in retail, education, healthcare, manufacturing, logistics, and warehousing, and large public space vertical markets.
Speaker Change: The F-6 rover features an optional autonomous charging station, eliminating the daily need for an operator to remember to charge the machine.
Speaker Change: The new X6 rover offers superior cleaning performance, improved maneuverability, and nearly three times the cleaning capacity of the X4 rover.
Speaker Change: We plan to start shipping our first X6 rover units in the second quarter of 2025.
Speaker Change: The rapid growth of AMR is driven by the global megatrends of labor shortages and rising labor costs. That is why we continue to focus and invest heavily in automating the floor cleaning process to create and capture value by solving one of our customers' most pressing floor cleaning challenges.
Speaker Change: We are now targeting AMR revenue to exceed $100 million in annual net sales by 2027.
Speaker Change: Reaching this goal requires outpacing the market growth and solidifies our position as the industry leader in the robotics market disruption.
Speaker Change: Looking ahead to 2025, we enter the year with significant momentum in the business.
Speaker Change: Globally, outside of AIPAC, we are expecting a stable market environment and are forecasting to grow our order demand in the range of 3.5% to 7%, driven by pricing discipline, go-to-market investments, and new product innovation.
Speaker Change: However, it is important to note that strong order growth will not directly translate into similar organic sales growth due to the $125 million backlog headwind year over year. As a result, we anticipate negative 1 to negative 4% organic sales decline.
Speaker Change: We also anticipate significant foreign currency headwinds, which Fay will address later.
Speaker Change: We remain focused on expanding margins in 2025 and are taking decisive actions to achieve this goal. We anticipate gross margin expansion in 2025 through our proven pricing discipline and cost reduction initiatives.
Speaker Change: We have proactively optimized our organization through strategic restructuring, enhancing operational efficiency, and prudent cost management.
Speaker Change: To fund our journey, as we have streamlined S&A costs, we have intentionally reinvested these savings into strategic growth initiatives.
Speaker Change: We are committed to prioritizing investments that align with our strategic objectives and directing resources to drive growth while maintaining discipline in our spending to deliver sustained profitable growth.
Speaker Change: With that, I will turn the call over to Fay for a discussion of our financials.
Fay West: Thank you, Dave, and good morning, everyone. In the fourth quarter of 2024, tenant delivered gap net income of $6.6 million compared to $31 million in the prior year period.
Fay West: Focusing on the full year performance, net income benefited from a 3.5% increase in net sales and an improvement in gross margin.
Fay West: However, results were impacted by higher R&D costs due to increased investment in new product development, which supports our long-term growth initiatives.
Fay West: Operating expenses also rose year over year and included costs associated with our ERP modernization project, transaction and integration related costs, restructuring related charges, and legal contingency costs.
Fay West: Let me provide a little color on these costs, which we have classified as non-GAAP.
Fay West: Regarding our ERP project, in 2024, we invested approximately $37 million in the design and build phase of this project and successfully completed our 2024 milestone.
Fay West: Of this amount, $14 million was expensed and reflected in the P&L, and $23 million was capitalized.
Fay West: We are well positioned for the next phase of this critical project and are excited about the operational efficiencies that this project will unlock.
Fay West: We expect to save about $10 million annually from these actions beginning in 2025.
Our 2024 results also include a legal contingency expense.
Fay West: In November 2024, we received an adverse jury verdict related to an intellectual property dispute.
Fay West: The dispute involves a plaintiff alleging that Tenant infringed a patent through its manufacture and sale of the EC Water option on commercial floor scrubbers sold between 2015 and 2023.
Fay West: A jury ruled against Tennant and awarded $9.8 million in damages plus pre-judgment interest of $4.7 million to the plaintiff.
Fay West: We strongly disagree with this verdict and are exploring all available options, including seeking to overturn the verdict and the resulting judgment through an appeals process.
Fay West: This ruling does not impact our ability to sell any of our products and is not expected to affect our long-term financial performance.
when excluding non-GAAP costs.
Fay West: Looking beyond operating income, interest expense decreased due to lower interest rates. Our average interest rate net of hedging for the full year 2024 was 4.6 percent compared to 5.3 percent in the prior year.
Fay West: Our effective tax rate was 20.1% for the full year compared to 11.6% in 2023.
Fay West: The increase in the effective tax rate was primarily driven by the value of certain non-cash discrete items in each period, which will not reoccur in the future years.
Fay West: Absent these items, the effective tax rate for each period would have been approximately 24 percent.
Fay West: Looking a little more closely at our quarterly results, for the fourth quarter of 2024, consolidated net sales totaled $328.9 million, a 5.6% increase compared to $311.4 million in the fourth quarter of 2023.
Fay West: On a constant currency basis, organic sales increased 6.3%. Approximately 90% of the year-over-year growth was attributed to volume, while the remaining 10% was driven by pricing.
Fay West: Overall, we delivered 7.2% growth in equipment sales and 6.8% growth in service revenue in the fourth quarter of 2024 as compared to the prior year.
Turning to the geographic breakdown.
Fay West: Organic sales in the Americas increased 10% compared to the prior year period. The increase in the Americas was driven by volume and price growth in both North America and Latin America.
Fay West: Organic sales increased 4% in EMEA, primarily driven by growth in all product categories, and organic sales decreased 19% in APAC.
Fay West: Adjusted EBITDA for the fourth quarter of 2024 was $47.4 million, up $5.9 million compared to the prior year period.
Fay West: Adjusted EBITDA margin increased 110 basis points to 14.4% of sales.
Fay West: Adjusted growth margin decreased 90 basis points to 41.3% in the fourth quarter due to inflationary pressure on materials as well as elevated freight costs.
Fay West: Adjusted S&A expense decreased $3.1 million in the quarter, driven primarily by lower variable compensation.
Fay West: As a percent of net sales, adjusted S&A improved 250 basis points to 27.4%, compared to 29.9% in the prior year period.
Moving on to full year results.
Fay West: On a constant currency basis, organic sales increased 3.2%. Approximately 80% of the year-over-year growth was attributable to pricing, while the remaining 20% was driven by volume.
Fay West: We drove 4.2% growth in equipment sales and 8.5% growth in service revenue in 2024 compared to 2023.
Fay West: Parts and consumable sales were down 1.9% year-over-year, in part due to the unfavorable impact of distributor consolidations during the year.
Fay West: Turning to the geographic breakdown, in 2024 net sales in the Americas increased 5.7 percent over the prior year or a 6.3 percent increase on an organic basis.
Fay West: The increase in net sales was driven by a relatively even split between volume and price.
Fay West: Volume growth across the region was generated primarily from our commercial equipment sales, while volume growth in our industrial equipment was flat.
Fay West: Nest sales in EMEA increased 1.3% primarily due to the acquisition of TCS which contributed 2.6% of inorganic nest sales growth.
Fay West: Organic net sales declined 1.6 percent due to lower volumes in both equipment sales and parts and consumables, partially offset by price realization in all product categories.
Fay West: And male volumes were impacted by weaker than expected market conditions and a smaller contribution from backlog reduction in the current period.
Fay West: Net sales in the Asia-Pacific region decreased 10.3% or 9.5% on an organic basis. This was driven primarily by volume declines in China and Australia, partially offset by price growth in Australia.
Fay West: Turning to adjusted EBITDA. Adjusted EBITDA for the full year 2024 was $208.8 million, an increase of $15.9 million versus the prior year.
Fay West: The improvement in adjusted EBITDA was primarily due to strong sales growth driven by both price and volume, specifically in the Americas.
Fay West: Adjusted EBITDA margin was 16.2% in 2024, a 70 basis point increase over the prior year and benefited from operating leverage driven by sales growth.
Fay West: Full Year 2024 Adjusted Gross Margin increased to 42.7%, a 20 basis point improvement compared to 2023.
Fay West: Our pricing and cost-out initiatives more than offset the impact of inflation for the full year of 2024.
Fay West: Adjusted S&A expense of $352.1 million increased $3.3 million compared to 2023, primarily due to higher compensation and benefit expense associated with an increase in headcount.
This was partially offset by lower variable compensation in 2024.
Fay West: The SNA leverage benefit was primarily due to improved operating performance throughout the year.
Turning now to Capital Deployment.
Fay West: Net cash provided by operating activities was $89.7 million in 2024, compared to $188.4 million in 2023. And we generated free cash flow of $68.8 million for the year.
Fay West: The decrease in cash provided was the result of working capital usage, mainly related to inventories, and $37.3 million for our ERP project.
Fay West: Excluding amounts related to the ERP project, we converted 113% of net income to free cash flow in 2024.
Fay West: The company continues to deploy cash flow towards operational capital needs and to return capital to shareholders in line with its capital allocation priorities.
Fay West: In 2024, we reinvested in our core business, investing $20.9 million in capital expenditures.
Fay West: returned capital to our shareholders with dividend payments of $21.4 million, deployed $57.8 million to M&A, and repurchased approximately 200,000 shares of our common stock for $19.6 million.
Fay West: As part of our commitment to deliver value to our shareholders, on February 11, our Board of Directors authorized a new share repurchase program of 2 million shares of the company's common stock, in addition to the approximately 580,000 shares remaining under our current repurchase program.
Fay West: Tenants' liquidity remains strong with a balance of $99.8 million in cash and cash equivalents as of the end of 2024 and $449.3 million of unused borrowing capacity on the company's revolving credit facility.
Fay West: Our net leverage was 0.48 times adjusted EBITDA, lower than our stated goal of 1 to 2 times, thanks to our strong cash flow generation and disciplined capital allocation strategy.
Fay West: We maintained our leverage and strengthened our balance sheet, paving the way for strategic acquisitions to be a growth opportunity going forward.
Fay West: Moving to guidance. As Dave mentioned, we plan to build on our 2024 momentum to drive order growth in the three and a half to 7% range.
Fay West: Accounting for the impact of the 2024 backlog reduction headwind, this translates to a negative 1 to negative 4 percent organic sales decline in 2025.
Fay West: In addition to this organic sales decline, our net sales guidance also includes a foreign exchange impact of a negative 2%, given the recent developments in the FX market, particularly in Europe, Brazil, and China.
Fay West: We anticipate a return to our historical quarterly sales seasonality patterns beginning in 2025, as our business will no longer be impacted by the elevated backlog levels of 2023 and 2024.
Fay West: This shift is expected to align our sales more closely with order demand.
Fay West: Typically the first quarter and the third quarter of the year exhibit seasonally lower sales volumes.
Fay West: We will also focus on managing our costs, both at the gross margin and the operating margin level. At the gross margin level, we anticipate favorable pricing actions and cost-saving initiatives to drive expansion and outpace our inflation assumption of approximately 2 to 3 percent.
Fay West: Our guidance does not anticipate any unforeseen incremental costs from tariffs, but we are taking all the necessary steps to minimize our exposure.
Fay West: At the S&A level, the strategic restructuring actions will provide approximately $10 million of savings to be used for strategic investments and to also help offset inflation.
Fay West: We will remain disciplined and prudent in our spending, focusing our investments in the areas that position us for future growth, including R&D spending and increased operating efficiencies.
Fay West: We are also targeting 100% conversion of net income to free cashflow on a full year basis, excluding the impact of the ERP modernization costs, which we anticipate will be approximately $50 million in 2025.
Fay West: We will continue our disciplined approach to allocating capital and maintaining a strong balance sheet.
Gap EPS of $3.80 to $4.30 per diluted share.
Fay West: Adjusted EPS of $5.70 to $6.20 per diluted share, which excludes ERP costs and amortization expense.
Adjusted EBITDA in the range of $196 to $209 million.
Fay West: adjusted EBITDA margin in the range of 16.2 percent to 16.7 percent.
Dave Huml: capital expenditures of approximately 20 million dollars and an adjusted effective tax rate of approximately 23 to 27 percent which excludes an adjustment for amortization expense. With that I will turn the call back to Dave.
Dave Huml: Thank you, Fay. We have a few upcoming events if you wish to learn more about our company and the direction we are heading. In March, we will participate in two virtual investor conferences. The first, on March 19th, is hosted by Sidoti, and the second, on March 20th, is hosted by C.L. King.
Dave Huml: With that, we will open the call to questions. Operator, please go ahead.
Dave Huml: Thank you and we will now begin the question and answer session. If you have dialed in and would like to ask a question please press star 1 on your telephone keypad to raise your hand and join the queue.
Dave Huml: If you would like to withdraw your question, simply press star 1 a second time.
Dave Huml: If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: And your first question comes from the line of Steve Farazani with Sidoti & Company. Your line is open.
Steve Farazani: Morning everyone, appreciate all the detail on the call, covered an awful lot of ground, so I'll try to
Steve Farazani: I'll try to group my questions here, because there's a lot to cover, for sure. You talked quite a bit about expectations for 2025 margins. Generally, it's very hard to keep margins flat, to even grow them in a declining...
Steve Farazani: revenue environment, and we understand completely why the revenue is declining, given the massive backlog conversion last year. That being said, your gross margin sequentially declined in the last three quarters.
Speaker Change: but you're saying it could be flat to up in 2025. I'm just trying to figure out how you get there given what have been clearly there's been inflationary pressures, there's been you don't have the benefit of price realization for backlog conversion. I'm just trying to figure out how you're comfortable getting to that.
Fay West: Morning, Steve. This is Fay. So, from a margin perspective, we are taking action to manage costs both from a COGS perspective as well as from an S&A perspective.
Fay West: When we look at the gross margin line, we're anticipating expansion in line with our long-term targets of roughly 30 basis points.
So that's kind of what we're anticipating in 2025.
Fay West: When we look at kind of all of the components of gross margin, we think that
that
Fay West: cost-out initiatives that have been very successful for us in the past, as well as productivity initiatives that we've implemented will help offset inflation.
Fay West: More Than Offset Inflation, and we also believe that our pricing realization, which will be net of kind of any mixed impact that we might be anticipating, will drive the gross margin expansion.
so those are the components as we're looking at that.
Speaker Change: Okay. And then the restructuring that's resulting in $10 million in cost savings, is that all out of SG&A?
Speaker Change: Some of it is, most of it is from SNA. There is some component that's coming from COGS as well. And so, you know, we've, on a year-over-year basis, we, SNA is decreasing on an absolute.
Speaker Change: spend. Year-over-year, we're going to be reducing the spend, but we are deleveraging slightly in 2025, just given the top-line performance. So most of the EBITDA expansion will come from our gross margin line.
Speaker Change: Excellent, appreciate that. You may have said it, you covered a lot of numbers, did you give the 4Q order rates and after that if you could talk about trends in the first month and a half of 2025?
The order rates for...
Speaker Change: Steve, I want to make sure we understand your question. Are you asking about order rates in Q4? Yes, and then also, and then I asked on top of that, you know, if you can give any kind of color on how the start of 2025 has been.
Speaker Change: Yeah, let me let me dimensionalize 2024 order rates. Really proud of what the team accomplished, although the impact was somewhat muted with the backlog reduction benefit on top of it. But we were providing order rates in 2024 to give you a sense of the momentum we're building in the business. So after a pretty tough start to the year in 2024 in Q1, we delivered almost double digit order rates coming Q2, Q4. So in each quarter, Q2, Q3 and Q4, hosted double digit order rates.
Speaker Change: year-over-year. We didn't specifically call out order rates in Q4, but suffice to say that as a result of executing our enterprise strategy, we've developed significant momentum coming through the second half of the year, and we exit the year with significant momentum in order rates driven by execution of our Elevate strategy.
when you look at our guidance.
Speaker Change: And you know this, Steve, we have to overcome this mathematical headwind of the backlog reduction benefit for 2024, but when you look at the midpoint of our guidance,
Speaker Change: We're going to drive 5-6% order rates in 2025 to deliver on our plan.
And so we think the momentum that we've generated.
in the second half of 2024 gives us confidence.
Speaker Change: have been coming, you know, without backlog dynamic, we've been coming to order rates at 6%. We would have put up a 6% growth year. So I think it's a reason that we have confidence in our 2025 guidance and feel good about the set of actions that we're executing against for growth.
Speaker Change: That's great. If I could get one more, Ian, it's just about the share repurchase announcement last week.
Typically, you've used the share repurchase just to offset dilution.
This was a March
Speaker Change: bigger number. I mean, it's more than 10% of your float. Can you just give us a sense of the strategy here? Is there a time limit on this? And how are you changing the way you think about the share of a purchase moving forward?
So there's no time limit on the shared purchase.
Speaker Change: And so if we just kind of look over the last few years, Steve, right, we've been in the market every year since, you know, 2021 and 2021 to 2024, we purchased roughly 770,000 shares, right?
Speaker Change: Roughly 60 million dollars. So so over that time period, you know, we're 770,000 shares repurchase
Speaker Change: We continue to repurchase shares in the market and our primary focus is to offset dilution.
Speaker Change: But we can be opportunistic as well, and the authorization allows us flexibility and gives us runway over the next few years in order to execute against that strategy.
Speaker Change: Of course, share repurchases are part of our overall capital allocation framework where we're balancing all of our capital priorities, including kind of returning shareholders, returning...
Speaker Change: value to shareholders via dividends, reinvesting in our business, maintaining kind of the right leverage, and also pursuing M&A, right? And and so, you know, it's part of our it's part of our playbook and gives us kind of the right runway.
Speaker Change: So, you know, when we think about from a cash flow perspective, from a free cash flow perspective kind of, you know, how to utilize that cash, right, you know, we're contemplating kind of, right now, I mean, right now, just offset dilution has been kind of our big one, but we have the opportunity to pull that lever a little bit stronger if needed.
Okay, great. Thanks, everyone.
Bye, Steve.
Speaker Change: And your next question comes from the line of Tom Hayes with CL King. Your line is open.
Speaker Change: Hey, good morning Dave Fay. Appreciate the color and congrats on a nice finish of the year.
Thanks, Tom.
Tom: Hey Dave, I was just wondering, you provide a lot of color on geographic markets, maybe use your thoughts on the opportunities for you guys in the Asia-Pacific markets in 25 after kind of a challenging 24.
Speaker Change: Thanks for the question. Happy to comment. It's certainly been a rough ride for us in APAC coming through 2024.
Speaker Change: Our planning assumption heading into 2025 is not for recovery in China specifically. We're sort of acknowledging the reality on the ground that it will take...
Speaker Change: governmental action, governmental level action at a country level to right the ship and the China from a macro market perspective, so that's not something the tenant is likely going to be able to influence. And instead, we kind of up you know acknowledge the operating environment within China and the halo effect of that operating environment throughout Asia, Pacific, we noted some of the market uncertainty, there were any signals from
Speaker Change: from Australia. We've acknowledged that reality and taken steps to pivot our approach and for us what that means is
focusing on vertical market areas, product categories.
Speaker Change: and customers, candidly, where we think there's less competition, less price and margin pressure, and we are advantaged to compete, whether that advantage is in product performance, our service capability, or just, frankly, our reach with our channel. So, you know, we've taken a step back and said, listen, assuming that the market does not afford us the opportunity to, the market doesn't improve,
Speaker Change: And what are we going to do to win in that environment? So I'm really proud of the team demonstrating significant agility to take the market reality and adjust course heading into 2025 specifically in APEC. But again, we're not counting on any recovery underneath our guidance for APEC. So if we get any, that'll be a positive development for us. We're going to...
Speaker Change: pivot a bit and go drive success in the market as it exists.
No, I appreciate that. It's great. Maybe on the...
Speaker Change: Yeah, glad you asked. We continue to be very, very bullish on our AMR opportunities. We kind of dimensionalize the entire AMR space and put X6 kind of in context because I think it's important to always...
Speaker Change: you know, refer to a product in terms of the broader market opportunity. You know, AMR solves for our customers major challenge in the space of labor availability and labor cost. That's a global dynamic that will provide us a tailwind well into the future.
Speaker Change: Our products provide a solid customer ROI and solve that labor challenge. I'm very proud of the results We've delivered an AMR here in our first five years
of Availability. Cumulatively, we've shipped over 9,000 units.
Speaker Change: to about 900 customers in 25 countries. And when you look at the sales we've generated in AMR, it's about $250 million in profitable sales cumulatively over that period. So if you just...
Speaker Change: Straight line the 250 million over five years at about a 50 million dollar per year run rate although as we talked about in prior calls our AMR sales have been anything but linear as we've launched new products and had large wins and have been lapping large wins with
Chief Account Customers.
Speaker Change: Let's use $50 million as kind of our run rate coming through 2023.
Speaker Change: I think 2024 was really a breakout year for us. We delivered $75 million in sales in our AMR portfolio in 2024. That was a combination of a fantastic reception to our X4 rover, as well as some significant fleet repurchase on our existing legacy product. We continue to scale our T16 AMR industrial product.
Speaker Change: As you know, we're benefiting from our BRAIN exclusivity agreement, participating in ARR from navigation software subscriptions as well. So when you think about X6, this is really the next evolution in market disruption of robotics.
Speaker Change: We mentioned in the script that it's really benefiting from the...
Speaker Change: which allows the robot to charge itself, return to its own charging dock, and doesn't require human interaction to charge itself, recharge the batteries.
Speaker Change: The x6 you asked about vertical market coverage and kind of use case applications
Speaker Change: You can think about it as kind of a high-end commercial product and a mid-to-low-end industrial product. So, when you think about larger retail store formats, large-scale educational institutions, large hospitals and healthcare institutions, that's a great fit for the X6.
Speaker Change: on the sort of low to mid-end of manufacturing, warehousing, and logistics. That's a great picture for the X6. So, you know, another reason to be excited about this X6 is we can sell it across a very broad range of our vertical markets, our core vertical markets we serve, and we can activate our entire selling organization to take the X6 to market. I think it's going to be another addition to the game-changing X.
platform for us at AMR.
Just let me follow up on that.
Speaker Change: Would you imagine that there's some customers that would have or order the X4 and the X6 or are they pretty separate?
Speaker Change: I think it's possible. It probably won't be the norm. I would envision that more people would have. When you think about the cleaning capacity of an X4, it's around, on kind of one tank of water and one charge, it's around 20,000 square foot, where the X6 is about 75,000 square feet.
Speaker Change: And so, you know, I doubt that somebody would want to go with a combination fleet of X6 and X4. They're probably going to look at the majority of their cleaning application and size the appropriate piece of equipment for that site, and then buy multiples either for that site or if they operate multiple sites, you know, across a region or across the country.
Speaker Change: Okay, I appreciate it. Maybe just one last question for Fay. On the ERP charges, I think you said in your prepared remarks about $50 million in charges in 25, I guess two parts. One, is there any
Steve Farazani: view you could provide as far as how those charges progressed during 25 and any split between SG&A and capital between that $50 million?
Steve Farazani: So the $50 million is really kind of a very comprehensive and inclusive view of the total project cost,
Steve Farazani: internal resources and that support the project as well as other things like license costs, you know, before go live. And so the $50 million, I think that, I mean, you know, the calendarization of that throughout the year is going to be, I think, evenly split. There's nothing that we're anticipating going to be.
Steve Farazani: 5, versus 2024. When you're in the design phase, you're able to capitalize more than you are. And then as you go live, certain components of those costs will be more likely to be capital excess versus capital.
Capitol.
You know, 64D, Expenses to Capitals.
because he came out of that way.
Cool, appreciate the call, Eric. Thank you. Thanks, Tom.
Steve Farazani: And as a reminder, that's star one if you would like to ask a question. And your next question comes from the line of Erin Reed with North Coast Research. Your line is open.
Erin Reed: Thanks for the opportunity and great quarter David. So one thing I want to follow up on Tom's question and I just want to make sure that I have this correct here so you after the deployment of the X6 you're going to be up to five AMR products available correct?
Speaker Change: Correct. Okay, so can you tell me a little about where those are deployed? I know a lot of those are starting in the US. You know, how much of those have made their way across the pond and kind of what does that look like in terms of the footprint for those different AMR products?
Yeah, great, great question. So
is fully capable of selling, demonstrating selling in.
and deploying AMR across the geographies that we serve.
Speaker Change: roughly follow our geographic mix as an enterprise. Having said that, we really just launched X4 Rover in Q2 in the US and later in the second half in EMEA. So we haven't really had a full year experience with X4 Rover in any geography. And as 2024 showed us,
The customer response to that product has been...
Speaker Change: very positive. So I think that we have an opportunity with DX4 to drive accelerated adoption, not only in mature markets, but in some of our ancillary markets as well, just given the performance and price points.
et cetera, on the ground.
Speaker Change: So we've got a five-product portfolio. You know, our strategy, when we fleshed out our portfolio, we were trying to make sure that we had a robotics offering to serve all of the core vertical markets we serve across the geography that we compete. And we tend to have a fairly consistent set of core vertical markets we serve.
Speaker Change: And the reason we did that was, A, the labor challenges are consistent across vertical markets regardless of whether it's education, health care, retail, BSC, manufacturing. So the need is real. And we weren't sure where the uptake would be fastest.
Speaker Change: across the vertical market customers. So we wanted to have an offering that we could talk to virtually any customer that was interested about robotics. And that's where the T7, T380 and T16 AMR were born out of, you know, with this desire to have full vertical market coverage across our serve vertical markets. Now, X4.
Speaker Change: Launching product on the Generation 3 navigation software platform, removing the seats so we get a smaller form factor, better maneuverability, improved performance. It really gives us a chance to go back in and build out a
Speaker Change: an even more advanced set of products on the X platform so although it's
Speaker Change: five models across the range, I really view the X platform as a step change in terms of the improvement in maneuverability, performance, et cetera. So we will continue to, as the X6 demonstrates, we're gonna continue to upgrade our capabilities and performance, come to market with exciting new products.
Speaker Change: and expand our reach as we determine where the uptake is going to be accelerated across the vertical markets and perhaps flex in the future, but for now, you know, the strategy is make sure we have a robotic offering across the entire range of vertical markets we serve.
Speaker Change: And make sure that we're bringing the latest and greatest technology to bear on this robotics disruption for our customers today that's represented by the X-Platform products.
Speaker Change: Okay, great. That's super helpful. And then, kind of piggybacking off of that, I can kind of, and I almost view the, so you had a new manufacturing facility come online for the T-16 AMR. Is that fully up and running? And can you tell me a little bit more about that?
Speaker Change: Can you clarify your question, but I'm not sure what you're referring to with the manufacturing facility. Yeah, maybe I mis...
Speaker Change: I thought there was a new manufacturing facility in the Netherlands, or is that not correct?
Speaker Change: Okay, my mistake. Okay, and then just a second follow-up question. This is more on the ERP side. So, you know, I'm excited to see the progress on the implementation. Can you provide us an update on the status or any milestones you've achieved so far? And really, how does the timetable look for completing the rollout? And lastly, you know,
Speaker Change: How can we expect those benefits to be deployed throughout 25 and going forward?
Speaker Change: Yeah, let me dimensionalize it for you, if you want to jump in.
Speaker Change: as we go. This ERP consolidation is on a very aggressive timeline as a project. We plan to complete this whole thing in three years.
Speaker Change: The first year was largely devoted to planning, lining up our resourcing, picking our partners, negotiating contracts. That was 23. 24 was largely focused on designing the system and building the system. So gathering and scoping requirements and then
Speaker Change: is to complete those goal lives within calendar year 2025. This is a very aggressive timeline and so
You know, we're doing that because we want to keep...
Speaker Change: Keep the pressure on ourselves to make progress. You asked about milestones. I think the fact that we find ourselves
here in kind of.
Speaker Change: two years of a three-year program, and we are in user testing as we speak.
Speaker Change: Preparing for business readiness and go live as we enter it, you know move to the first half and enter in the second half of
Speaker Change: So, we're sitting in a really good position. We have a lot of work yet to go.
to get through the user testing.
Speaker Change: and to make sure that we're prepared for the go-lives in the second half of 2025. Our overarching strategy.
and our investments.
reflect our desire to minimize the potential risks of go-live?
Speaker Change: and reduce or eliminate any impact on the customer as we migrate to new ERPs. So we are spending a lot of time and effort to make sure that we feel really solid about the system capability, our performance, and our people's ability to work in the new way and the new system before we switch live. And we're spending time, effort, energy, investment
Speaker Change: to mitigate the risk to the enterprise and to insulate our customer.
Speaker Change: We'll keep you posted since 2025 is kind of the third year of this program and really a pivotal year as we head into go lives We'll keep you posted on how the testing is going and as we approach go lives by region as we move through the quarters Fay, anything you would add?
Speaker Change: The second part of your question, at completion of the project, we anticipate that we'll see a savings roughly between 10 and 15 million dollars, kind of on an annual run rate basis.
Speaker Change: And so that's going to come from a lot of the efficiencies that will be unlocked by harmonizing kind of our ERP platform into one platform. So run rate, 10 to 15.
Great, thank you for the color.
Speaker Change: And your final question comes from the line of Iva Priscilla with North Coast Research. Your line is open.
Hey, good morning guys. Good morning.
Iva Priscilla: So you did talk a little bit about it on the call, but I was just wondering, how much exposure do you have to parts manufactured in China? And then what is your level of concern regarding potential trade wars?
Speaker Change: Thank you for the question. Tariffs are kind of top of mind for all of us, but especially for our operations and supply chain folks, our commercial teams.
Speaker Change: specifically related to China and the 10% tariff. I think it's important first to just dimensionalize, like you asked, what's our exposure to China as a source, as a country?
You know, it's...
Speaker Change: China is less than 10% of our cogs. It's around a $50 million exposure.
Speaker Change: for the company. About 20 million of that is direct import by tenant company, where we would have to be exposed to the tariff directly. And the remainder of it is exposure through our suppliers, where we know that they are sourcing subcomponents.
Speaker Change: on our behalf are adding value to subcomponents from China that we expect to, you know, to impact us.
Speaker Change: So that kind of dimensionalizes the size of the exposure. Are we worried about it? You know, absolutely, but we're taking decisive action.
to attempt to mitigate the impact.
Speaker Change: We have a range of alternatives available to us in terms of offsetting.
the impact of tariffs.
Speaker Change: We obviously, we can negotiate to eliminate, reduce tariffs with our existing partner suppliers. We have improved our local for local sourcing, so we now have a network of suppliers that allow us to flex and dual source components to avoid tariffs.
Speaker Change: Over longer term, we can design around products that are tariff challenged.
Speaker Change: You know, using the muscles we've built over the last several years, you know, versus having to go out and issue a new price change, when candidly, we just put out our 2020 class racing in early January, and we're working to realize that impact.
All right, yeah, thank you. That was super helpful.
Speaker Change: Since there are no further questions at this time, I would like to turn the call over to management for closing remarks.
Speaker Change: Thank you. I could not be more proud of the results that our high-performing teams have achieved in 2024, and I'm really looking forward to our plans for 2025. I'm confident that we have the investments, initiatives, and talent in place to achieve our strategic objectives and deliver on our financial commitments.
Speaker Change: I want to thank you all for your participation today and your interest in Tenant Company. This concludes our earnings call. Have a great day.
Speaker Change: And ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.