Tennant Company (NYSE:TNC) Q1 2024 Earnings Call Transcript May 3, 2024
Tennant Company beats earnings expectations. Reported EPS is $1.49, expectations were $1.45. Tennant Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Pam and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company’s First Quarter 2024 Earnings Conference Call. This call is being recorded. There will be time for Q&A at the end of the call. [Operator Instructions] Thank you for participating in Tennant Company’s first 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.
Lorenzo Bassi: Good morning, everyone and welcome to Tennant Company’s first quarter 2024 earnings conference call. I am Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Huml, Tennant’s President and CEO and Fay West, Senior Vice President and CFO. Today, we will provide an update on our 2024 first quarter performance. Dave will discuss our results and enterprise strategy, and Faye will cover our financials. After our prepared remarks, we will open the call to questions. An earnings press release and slide presentation that accompanies this conference call are available on our Investor Relations website. Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company’s expectations of future performance.
Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today’s news release and the documents we file with the Securities and Exchange Commission. We encourage you to review these documents, particularly our safe harbor statement, for a description of the risks and uncertainties that may affect our results. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items. Our 2024 first quarter earnings release includes the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results. 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 first quarter of 2024, our outlook for the remainder of the year and the progress on our enterprise strategy. Building on the momentum of our record-breaking year in 2023, we delivered a strong first quarter supported by our new enterprise strategy, which we activated at the beginning of the year. Lapping a previous record-high first quarter in the prior year, which also marked our first full quarter in our journey to meaningfully reduce backlog, we achieved organic net sales growth, gross margin expansion and EBITDA growth. For the first quarter of 2024, net sales increased to $311 million and adjusted EBITDA rose to $54.9 million, resulting in an adjusted EBITDA margin of 17.7%.
We meaningfully reduced backlog for the fifth consecutive quarter, capturing the pricing benefits embedded within it and expanded gross margins. Pricing realization and increased sales mix in higher margin equipment and channels drove our gross margin performance in the quarter. I am pleased with the enterprise performance during the quarter in line with our expectations and setting us up to deliver on our 2024 full year guidance. While we had a strong first quarter as a company, our business results vary by geography. In the Americas, we are driving strong order rates as we continue to reduce backlog, which is primarily isolated to our industrial machines. Based on a strong pipeline of opportunity within the region, including growth investments we have made in new products and go-to-market expansion, we are confident that we will continue to build on our success in the region.
In EMEA, we had a challenging first quarter. We continued to see a declining macroeconomic environment and we were lapping a previous quarter with higher backlog benefits. While results are below our expectations, we believe that our market position in the EMEA region remains strong and we expect to be able to deliver stronger results in the latter half of the year through new product launches and go-to-market investments, including our acquisition of TCS and expanded countries to sell i-mop products. In APAC, our performance in the quarter was impacted by phasing of customer order timing. We anticipate continued demand for our products and have confidence in our full-year growth targets in the region. Dave will provide additional context on our overall financial performance for the quarter and our full year guidance, which we are reaffirming.
Our performance to start the year has given us a solid foundation to continue to execute on our enterprise strategy. Last year, we introduced the three pillars of our new enterprise strategy: growth, performance, and people. We continue to resource and activate targeted initiatives across each of these pillars and I’d like to take the opportunity to provide you with a couple of key updates. Within our growth pillar, we are leveraging product innovation to drive differentiated revenue growth. The X4 ROVR is our first purpose-built autonomous floor cleaning machine and our fourth robotic scrubber. The X4 ROVR offers greater maneuverability specifically designed for operation in smaller spaces. Its compact size, improved obstacle detection and enhanced mobility will result in fewer assists and deliver a step change improvement in customer ROI.
The new X4 ROVR is the first machine to be powered by the next generation Brain OS robotics platform available exclusively on Tennant Company AMR machines. The X4 ROVR offers a competitive price point for customers and includes an all-in-one AMR solution with the robot, service contract, and autonomy services bundled as a single solution sold by Tennant. This new approach simplifies the buying experience for customers and results in Tennant’s benefiting from recurring revenue for autonomy services moving forward. Interest from our customer base has been strong and we are evaluating options to capitalize on anticipated demand. We have teams reviewing strategies to: one, increase the manufacturing capacity of the X4 ROVR to maximize production and delivery commitments in 2024 and two, accelerate the launch of new ROVR products beyond the X4.
The X4 ROVR is an important addition to our complete suite of AMR products, complementing a lineup that has seen over 6,500 units deployed globally and has driven more than $200 million in revenue since launch. Each of our AMR products are designed to meet the unique needs of our customers, offering tailored solutions for a variety of applications. Retail customers will appreciate the X4 ROVR’s compact design and maneuverability, while our industrial and warehouse customers benefit from the increased efficiency and larger capacity provided by our larger AMR models like the T16 and T380. We continue to see strong demand and interest in each of our AMR units, demonstrating the potential for continued growth across our full AMR portfolio. Improving the customer ROI is one of the key drivers of customer adoption and we are well positioned with our expanded AMR portfolio and deployment capabilities to deliver to customer expectations.
Within the growth pillar of our enterprise strategy, we are also focused on innovation within the small space segment. Small spaces today are largely still cleaned with the labor-intensive manual cleaning tools. This presents an opportunity for Tennant to help our customers solve their largest challenges with labor cost and availability, by delivering mechanized solutions that greatly enhance labor productivity while delivering better cleaning performance. Today, we are excited to announce the international expansion of the i-mop family of products. Tennant-branded i-mop Lite and i-mop XL Plus scrubber products will now be available in Brazil, France, Portugal, and Spain. This product portfolio expansion will enable a broader range of customers an opportunity to elevate their cleaning standards.
The international launch of the Tennant branded i-mop family of products represents the next phase of Tennant Company’s partnership with i-team Global, a developer of innovative solutions for the small space cleaning industry. Cleaning teams worldwide have already embraced the i-mop for its efficiency, durability, and reliability. This technology brings together advanced mechanized cleaning with the unmatched responsive expertise of Tennant’s service and support to help our customers deliver more efficient and effective cleaning performance. Also within our growth pillar is our M&A strategy, which prioritizes opportunities that provide Tennant with the right strategic value, operational fit and financial return. Aligned with our M&A strategy, our previously discussed minority equity stake in Brain Corp has allowed us to unlock the commercial advantages we articulated with the X4 ROVR launch, including exclusivity and annual recurring revenue participation.
In addition to the investments in Brain, we also announced our acquisition of TCS, Tennant Company’s longstanding distributor based in Austria and with branches serving countries in Central and Eastern Europe, Africa, and the Middle East. The acquisition of TCS gives us direct access to an established customer base in the EMEA region, allowing us to deepen and extend our customer relationships in these higher growth markets. The acquisition aligns with our M&A priorities, enhancing our ability to defend and grow our cleaning core by strengthening our channel position and is expected to be accretive to our EBITDA already in 2024. As a longtime distributor of Tennant products, TCS has experienced teams in these countries who have cultivated a strong customer base that knows and appreciates Tennant’s innovation and quality.
Having a direct presence and broader footprint in these high growth geographies is one of our key enablers of market share growth and strengthens our ability to deploy new products like AMR in this region. We look forward to growing in this region by building on the strong foundation the TCS team has already built. We are already hard at work on integration and working with the local teams to realize the full benefits of our acquisition. Our successful execution on our M&A strategy is due to our financial strength and disciplined capital allocation strategy. In 2023, we prudently managed our balance sheet and converted over 100% of net income to free cash flow ending the year with over $115 million of cash. As we continue to generate strong cash flow and maintain a strong balance sheet, we are well positioned to take action on our target opportunities aligned with our M&A strategy.
We are excited about the opportunity to share more details with you about our new enterprise strategy and invite you to attend our upcoming Investor Day on May 13. This event will be held at the New York Stock Exchange and will include presentations about our unique product portfolio and aftermarket strategy that sets us apart from the competition. Operating in an expanding market underpinned by global megatrends and backed by a strong balance sheet, we are excited to have the opportunity to share our vision for continued growth and innovation in mechanized and sustainable cleaning. To register for the event, please visit our investor webpage. We encourage you to attend the event in person to meet with additional members of our management team and view our innovative new products, including the X4 ROVR.
With that, I will turn the call over to Faye for a discussion of our financials.
Fay West: Thank you, Dave, and good morning, everyone. In the first quarter of 2024, Tennant delivered GAAP net income of $28.4 million, an increase of 16.9% over the prior year period. Strong net income performance in the quarter was driven by higher net sales and a significant improvement in gross margin from higher price realization and favorable product and channel mix. Operating expenses were higher in the current year due to ERP implementation costs and transaction costs associated with our investment in Brain Corp and the acquisition of TCS. We continue to make progress on our ERP implementation journey. The project is on track and this year we will focus on the design and build phase of the implementation. with a phased go-live approach beginning in early 2025.
Looking beyond operating income, interest expense in the first quarter was $1.4 million lower than the prior year period, driven mostly by lower debt balances as we meaningfully reduced debt during 2023. Our average interest rate net of hedging for the first quarter of 2024 was 3.94% compared to 4.29% in the prior year quarter. Income tax expense in the quarter was $1 million lower than the prior year period, and the effective tax rate was 19.1% in the first quarter of 2024, compared to 24.1% in the prior year period. The decrease in income tax expense was driven by a discrete tax benefit associated with employee stock option exercises. We anticipate that our full-year effective tax rate will be within the guided range of 22% to 27%. Excluding ERP implementation costs and transaction-related costs, adjusted net income in the first quarter of 2024 was $34.7 million compared to $27.1 million in the prior year period, a 28% increase.
Adjusted EPS for the first quarter of 2024 increased 24.8% to $1.81 per diluted share compared to the prior year period. Looking a little more closely at our quarterly results, for the first quarter of 2024, consolidated net sales totaled $311 million, a 1.7% increase compared to $305.8 million in the first quarter of 2023. On a constant currency basis, organic sales increased 0.9%, driven primarily by price realization and product and channel mix. Volumes in the current period were impacted by a volume decline in EMEA and a change in product mix, specifically a shift from smaller commercial equipment to larger industrial equipment. Backlog shift in the quarter was largely concentrated in our large industrial equipment, which generally have a higher average selling price per unit.
As a quick reminder, we group our net sales into the following categories, equipment, parts and consumables, and service and other. We experienced growth in both equipment and service product categories in the first quarter of 2024 as compared to the prior year period. Equipment net sales grew 1.8% and service grew 10%. Parts and consumables declined 3.8%, primarily driven by volume decreases in North America and EMEA. Tenet also groups its sales into three regions. The Americas includes all of North America and Latin America. EMEA covers Europe, the Middle East, and Africa. And Asia Pacific includes Australia, China, Japan, and other Asian markets. Organic sales in the Americas increased 5.1% compared to the prior year period. The increase in the Americas was driven primarily by price realization and favorable product and channel mix across the region.
This was partially offset by unit volume decreases in North America, specifically in our commercial application machines, which had a higher backlog benefit in the prior year period. Organic sales declined 9.2% in EMEA due to volume declines in both equipment sales and parts and consumables, partially offset by price realization in all product categories. EMEA volumes, particularly in France and Germany, were impacted by weaker than expected market conditions. Organic sales decreased 1.1% in APAC, primarily due to volume declines in Australia and China, partly offset by price growth in Australia. Adjusted EBITDA for the first quarter of 2024 was $54.9 million, or 17.7% of sales, up compared to $47.9 million, or 15.7% of sales in the first quarter of 2023.
Growth margin increased to 44.2% in the first quarter, a 320 basis point improvement from the prior year period, which contributed an incremental $16 million to adjusted EBITDA. The improvement in growth margin was attributable to price increases as well as product mix, as we saw a higher level of direct sales in industrial equipment, which have a higher profit margin profile. Adjusted S&A expense in the quarter totaled $85.9 million, a $4.2 million increase compared to the first quarter of 2023. Adjusted S&A expense as a percent of net sales was 27.6%, compared to 26.7% in the first quarter of 2023. The increase was driven in part by incremental compensation expense on headcount increases related to the company’s enterprise strategy. Turning now to capital deployment.
Net cash provided by operating activities was $2.9 million in the first quarter of 2024 compared to $31.1 million in the year-ago period. The decrease in operating cash flow was due to increased variable compensation payouts related to the strong operating performance in the prior year, as well as ERP implementation costs resulting in a roughly flat free cash flow. Excluding non-GAAP costs, free cash flow was $7.1 million for the first quarter of 2024. The first quarter tends to be the lightest free cash flow period, and we expect to meet our 2024 target of converting 100% of net income to free cash flow. Our strong financial position exiting 2023 provided us significant flexibility to execute on our M&A strategy, deploying $32.1 million towards an investment in Brain Corp and $25.5 million to acquire TCS.
In addition to M&A, the company continues to prioritize cash flow towards operational needs, investing $3 million in capital expenditures during the quarter. The company also returned $6.4 million of capital to shareholders through dividends and opportunistic share repurchases during the quarter. Tennants’ liquidity remains strong with a balance of $88.8 million in cash and cash equivalents at the end of the first quarter of 2024 and $321.8 million of unused borrowing capacity on the company’s revolving credit facility. The company continues to effectively manage debt and maintain a strong balance sheet. Our net leverage was 1.05x adjusted EBITDA, within our targeted range. Moving to 2024 guidance. Overall, demand remains resilient and we continue to reduce backlog, but expect to end the year at a higher than normal backlog level.
We are monitoring global order rates very closely and anticipate year-over-year growth in all of our geographies. We will remain disciplined and prudent in our spending, focusing our investments in areas that position us for future growth and increased operating efficiencies. For 2024, Tennant reaffirms the following guidance. Net sales of $1.270 billion to $1.295 billion, reflecting organic sales growth of 2% to 4%. Adjusted EPS of $6.05 to $6.65 per diluted share, which excludes certain non-operational items and amortization expense. Adjusted EBITDA in the range of $198 million to $213 million. Adjusted EBITDA margin in the range of 15.6% to 16.4%. Capital expenditures of $20 million to $25 million. And an adjusted effective tax rate of 22% to 27%, which excludes an adjustment for amortization expense.
With that, I will turn it back to Dave.
Dave Huml: Thank you, Faye. In summary, I am very proud of the global team and our ability to continue our growth trajectory as we are lapping a strong prior year. The investments we are making and innovative products we are delivering to our customers position us well to deliver on our full year guidance. We have a few upcoming events if you wish to learn more about our company and the direction we’re heading. In addition to hosting our Investor Day on May 13th at the New York Stock Exchange, we will also be participating in EF Hutton’s annual global conference in New York on May 15th. With that, we will open the call to questions. Operator, please go ahead.
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