TNC - NYSE

Good morning. My name is Brianna, and I'll be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's Fourth Quarter and Full Year 2023 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 fourth quarter and full year 2023 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 fourth quarter and full year 2023 earnings conference call. I'm 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 review our fourth quarter and full year performance, as well as our initial guidance for 2024. Dave will provide you an update on our operations and enterprise strategy, and Fay will cover our financials. After our prepared remarks, we will open the call to questions. An earnings press release and slide presentation that accompanies this conference call are available on our Investor Relations website. Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations of future performance. Such statements are subject to risks and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement, for a description of the risks and uncertainties that may affect our results. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items. Our 2023 fourth quarter and full year earnings release and presentations include the comparable GAAP measure and a reconciliation of these non-GAAP measures to our GAAP results. I'll now turn the call over to Dave.

Thank you, Lorenzo, and hello, everyone. On the call today, I will be discussing highlights from the fourth quarter and full year 2023, our outlook for 2024, and our new enterprise strategy and long-term growth targets. I am pleased to report our fourth quarter performance, underpinned by strong revenue growth and margin expansion. Our team's dedication in navigating supply chain challenges and executing on our enterprise strategy drove the momentum we carried through the year, which resulted in record highs in net sales, adjusted EBITDA and EBITDA margin. For the full year, net sales reached $1.243 billion, while our adjusted EBITDA rose to $192.9 million, resulting in an EBITDA margin of 15.5%. We saw year-over-year organic growth across all geographic business units and product categories led by equipment sales in North America. Our full year organic growth rate of nearly 14% was fueled by a combination of approximately 9% price growth and a 5% increase in volume. Order rates remained resilient and we meaningfully reduced backlog throughout 2023. Additionally, we converted 150% of net income to free cash flow during the year as we continued to make improvements in working capital. This enabled us to focus on making strategic investments for future growth and return capital to shareholders through dividends and share repurchases. Turning to Slide 4, as we close a strong year, I'd like to point out several key accomplishments the team made in 2023. First, our teams across the company made incredible efforts and collaborated to stabilize our supply chain, maintain backlogged orders and translate strategic investments made during the recovery into profitable net sales. This dedication has not only generated sales, but also improved customer satisfaction and kept new orders flowing in. Second, we introduced our new sustainability framework, Thriving People, Healthy Planet, featuring ambitious goals validated by the science-based targets initiative. This framework is now integral to our business operations as we commit to both near-term and long-term targets. Third, our Autonomous Mobile Robots or AMR have surpassed $200 million in cumulative sales since the launch in 2019. That equates to over 6,500 units delivered to more than 200 individual customers. In 2023, 30% of our AMR revenue came from customers who previously purchased AMR machines and made larger investments to expand their fleet, illustrating the growth opportunity this program continues to present. Fourth, we have been disciplined in how we allocate capital consistent with our priorities. We've invested in our core business, managed our debt leveraged, returned capital to shareholders and activated our M&A strategy. Lastly, we exceeded our targeted financial results, achieving a 15% EBITDA margin and closing out our prior enterprise strategy one year ahead of schedule. This success came from executing selected initiatives that drove permanent structural improvements into our business. This remarkable achievement has set the stage for us to launch a new enterprise strategy, building on the momentum of a record setting year and positioning us for continued growth. These accomplishments are a testament to the dedication and hard work of every member of our global team. We are proud of our 2023 results and we are carrying significant momentum into 2024. Looking at Slide 5, I am pleased to unveil more details on our next enterprise strategy for the years 2024 through 2026. Our new enterprise strategy is centered on three pillars, growth, performance, and people. We've already resourced and activated initiatives across these pillars and I'd like to provide you with a couple of key updates. In our growth pillar, we are innovating through new product launches. In our most recent product launch, we introduced the T1581 Ride-on Scrubber, a medium-sized floor cleaning machine designed specifically for applications in light industrial cleaning in the logistics, retail and manufacturing industries. The T1581 offers enhanced productivity to customers with expansive environments, and it is commercially available to order now. In the second quarter of 2024, Tennant will launch the new X4 ROVR, the company's first purpose built Autonomous Mobile Robot or AMR. Building on the momentum of our earlier robots, we are committed to iterating and refining our AMR solutions, aiming to enhance adoption rates. 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 X4 ROVR is driven by Brain Corp's next generation navigation software and hardware suite. Also within our growth pillar is our M&A framework, which prioritizes opportunities that provide Tennant with the right strategic value, operational fit and financial return. Our focus will be on growing the core, driving value through connected autonomy and expanding into select adjacencies. Thanks to our strong cash flow generation and disciplined capital allocation strategy, we have reduced our debt leverage and strengthened our balance sheet, paving the way for strategic acquisitions to be a growth opportunity moving forward. We are excited to announce our exclusive technology agreement with Brain Corp. Tennant has made a $32 million investment in Brain Corp to accelerate the development and adoption of the next generation of robots in the floor cleaning industry. This collaboration grants Tennant access to Brain Corp's next gen technology that will be exclusively available on Tennant equipment, including the upcoming X4 ROVR launch. Our expanded relationship with Brain Corp creates a differentiated customer support ecosystem led by Tennant sales and service and supported by Brain Corp analytics and insights. As part of Tennant's investment, Fay West will join Brain Corp’s board of directors and bring a wealth of expertise and experience in strategic financial management. Together, Tennant and Brain Corp will seek to dramatically accelerate the transition to robotic cleaning. Aligned with our M&A framework, our investment in Brain Corp enhances our ability to grow our core business, drive value through connected autonomy, and build on our leadership position. The minority share in Brain Corp supports shared objectives, expanding our pipeline of new products and technology developments. This collaboration empowers us to further deploy dedicated sales, marketing and customer support resources to aid customers in the transition to robotic cleaning. With this agreement and starting with the X4 ROVR, Tennant will begin offering an all in one AMR solution with the equipment and autonomy services bundled as a single solution sold by Tennant. This new approach will simplify the buying experience for customers and result in Tennant benefiting from recurring revenue or autonomy services moving forward. This alignment between Brain Corp and Tennant underscores our commitment to driving customer ROI and accelerating the transition to robotic cleaning. In the performance pillar of our enterprise strategy, we are focusing on enhancing processes to drive efficiencies in our business. We will build on the foundation we have established through our disciplined strategic pricing and cost out actions that have expanded our gross margins. The investments we make will enable us to maintain gross margins and allow for incremental improvement going forward. Within our performance pillar, we are also focused on unlocking long-term S&A efficiency by investing to modernize and consolidate our eight existing ERP systems to a best-in-class SAP cloud-based solution. This large transformative investment will encompass the entire enterprise and is estimated to cost approximately $75 million inclusive of CapEx and OpEx through 2025. The $75 million all in estimate will be excluded from our adjusted non-GAAP results with approximately $37 million of that investment expected in 2024. When completed, we anticipate that this ERP modernization project will allow us to more easily access data that will enable us to quickly access information for reporting, insight and decision making, and to standardize processes in order to increase efficiencies. Our new ERP system will include improvements that allow us to better anticipate and react to market dynamics, deliver a better customer experience, and be easier to do business with. It will provide a scalable foundation to grow and increase our operating leverage. Beginning in 2026, we are targeting approximately $10 million to $15 million in annualized savings as a result of this investment. Our ERP modernization timeline is centered on three phases. The planning phase that occurred in 2023 focused on data gathering, assessment, scope definition, and resourcing. We allocated a significant amount of time and resources to complete a thorough benchmarking of risks to prepare us for this journey, partnering with a top tier implementation consulting firm that brings a wealth of experience in helping companies with change management and SAP integrations. 2024 will include the design phase focused on the development and design of the ERP system across the entire company. The implementation phase will occur in 2025 where we will define our future state with a standard first approach utilizing pre-configured industry best practices. Our growth and performance goals can only be met if our organization attracts and retains talented people who can drive change and help deliver our exceptional products and services to our customers. In 2024, the work on our people pillar will center on our employee value proposition. We will invest in aligning and articulating our employee value proposition so that we can deliver a clear, consistent and compelling promise to employees and prospects about why they should choose Tennant Company as the place to grow their careers. In summary, I am very excited about the future and the opportunity it represents. The last four years have showcased our capabilities reaffirming we have the right strategy and people in place to drive future growth. As we drive growth and continue to meaningfully reduce backlog in 2024, we will continue to reinvest in the business and are setting the stage for our long-term targets to include, one, achieving revenue growth of 3% to 5%, two, expanding EBITDA margins by 50 to 100 basis points, and three, continuing to generate a 100% free cash flow conversion rate. With that, I will turn the call over to Fay for a discussion of our financials.

Thank you, Dave, and good morning,, everyone. In the fourth quarter of 2023, Tennant delivered GAAP net income of $31 million, an increase of 30.3% over the prior year period. Adjusted net income in the fourth quarter of 2023 was $36.2 million compared to $27.2 million in the prior year period. And adjusted EPS for the fourth quarter of 2023 increased 31.5% to $1.92 per diluted share compared to the prior year period. Full year 2023 GAAP net income was a record $109.5 million, an increase of $43.2 million, or 65.2% from the prior year. Full year 2023 adjusted net income was $123.4 million, an increase of $46.9 million compared to $76.5 million in the prior year. and adjusted EPS for the full year of $6.57 per diluted share increased 60% compared to the prior year. Strong net income performance both for the fourth quarter and the full year of 2023 was driven by higher net sales and a significant improvement in gross margin, which benefited from higher price realization, cost out activities and increases in productivity. Operating expenses were higher in the current year due to higher variable costs, which were linked to improved operating performance. Operating expenses were also impacted by incremental spending on strategic investments aimed at fostering future growth. Looking beyond operating income in the fourth quarter, we realized an income tax benefit of approximately $15 million related to a discrete, nonrecurring, noncash item, which favorably impacted net income for both the fourth quarter and the full year. Interest expense in the fourth quarter was approximately $1 million lower than the prior year period, driven mostly by lower debt balances as we meaningfully reduced debt throughout the year. On a full year basis, interest expense increased $6.4 million as higher interest rates more than offset lower overall debt balances. Our average interest rate net of hedging for the full year 2023 was 6.27% compared to 2.92% in the prior year. Looking a little more closely at our quarterly results for the fourth quarter of 2023, consolidated net sales totaled $311.4 million, a 7% increase compared to $291 million in the fourth quarter 2022. On a constant currency basis, organic sales increased 5.4%, driven primarily by price realization in equipment sales. We ended the year with approximately $186 million of backlog, a reduction of $28 million from the end of the third quarter. Net sales growth of $20.4 million in the quarter was primarily due to this reduction in backlog. 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 fourth quarter of 2023 as compared to the prior year period. Equipment sales led the way with growth of 9.6%. Tennant 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 China, Australia, Japan and other Asian markets. Organic sales in the Americas increased 7.3% compared to the prior year period. The increase in the Americas was primarily due to higher selling prices in North America, offset by a decrease in volume in Latin America, which was lapping a particularly strong volume quarter in 2022. Organic sales declined 0.6% in EMEA due to volume declines in equipment sales, partially offset by growth in parts and consumables and service. Organic sales increased 9.6% in APAC due to price realization in Australia and volume increases in both Australia and China. Adjusted EBITDA for the fourth quarter 2023 was $41.5 million or 13.3% of sales, down slightly compared to 2022. Adjusted gross margin increased to 42.2% in the fourth quarter, a 250 basis point improvement from the prior year period, which contributed an incremental $15 million to adjusted EBITDA. Offsetting this gross margin improvement were higher S&A expenses and elevated research and development costs due to the timing of project spend. In the fourth quarter, adjusted S&A as a percent of net sales was 29.9% compared to 27% in the prior year period. The year-over-year increase was primarily due to higher variable cost linked to improved operating performance as well as strategic investments made to better position us for future growth. Moving on to full year results. For the 12 months ended 2023, consolidated net sales were $1,243.6 million, a 13.9% increase compared to $1,092.2 million in 2022. On a constant currency basis, organic sales increased 13.6% approximately 65% of the year-over-year growth was attributed to pricing, while the remaining 35% was driven by volume. Each of our regions achieved year-over-year net sales growth. In 2023 net sales in the Americas were $840.3 million, an increase of 19% over the prior year or an 18.9% increase on an organic basis. This significant increase was driven by an approximately equal mix of price realization and volume increases led by strong equipment sales in North America and was favorably impacted by the meaningful reduction in our backlog. Net sales in EMEA increased 4.2% or 2.6% on an organic basis to $314.4 million. The increase was propelled by price realization in all product categories, though EMEA volumes were impacted by weaker than expected market conditions. Net sales in the Asia Pacific region increased 5% over the prior year to $88.9 million, or 8.6% on an organic basis. This was driven primarily by price realization in Australia and volume growth in China as it started to recover from the impacts of the pandemic. We also experienced growth in all categories in 2023 compared to the prior year, most notably in equipment sales, which grew nearly 17% year-over-year. Turning to adjusted EBITDA. Adjusted EBITDA for the full year 2023 was $192.9 million, an increase of $59.2 million versus the prior year. The improvement in adjusted EBITDA was primarily due to strong sales growth driven by both volume and price and adjusted gross margin expansion. Adjusted EBITDA margin was 15.5% in 2023, a 330 basis point increase over the prior year, and benefited from operating leverage created by sales growth. Full year 2023, adjusted gross margin increased to 42.5%, a 390 basis point improvement compared to 2022. The increase was the result of price realization, which more than offset the multiyear impact of inflation as well as cost out efforts and an increase in operating efficiency. We expect to continue to receive a benefit from pricing impact recovered within our existing backlog in 2024. Adjusted S&A expense of $348.8 million increased $44.3 million compared to 2022. Full year adjusted S&A expense as a percentage of sales increased slightly to 28% in 2023 compared to 27.9% in 2022. The rate increase was primarily attributed to higher variable costs linked to improved operating performance as well as strategic and people investments made throughout the year to fund recovery actions, develop and execute strategic initiatives, and to support and foster future growth. Turning now to capital deployment. Net cash provided by operating activities was $188.4 million in 2023 compared to net cash used in operating activities of $25.1 million in the year ago period. Our operating cash flow improved considerably compared to last year, further strengthening our financial position and providing significant flexibility to invest in organic growth initiatives, pursue strategic acquisitions and fund cash returns to shareholders through dividends and opportunistic share repurchases. In alignment with our capital allocation priorities, we reinvested in our core business, investing $22.8 million in capital expenditures, returned capital to our shareholders with dividend payments of $20.1 million and repurchased approximately 291,000 shares of our common stock for $21.7 million. Tennant’s liquidity remains strong with a balance of $117.1 million in cash and cash equivalents at the end of 2023 and $336.8 million of unused borrowing capacity on the company’s revolving credit facility. Our net leverage was 0.43 times adjusted EBITDA, lower than our stated goal of 1.5 times to 2.5 times. We have remained focused on maintaining a strong balance sheet and given our robust cash flow generation in the current interest rate environment, we have directed cash to reduce debt by $100 million in 2023. Moving to guidance. Our strong performance in 2023, well above our original expectations, is a direct result of our ability to effectively manage the global supply chain crises over the last few years and emerge stronger than ever. We navigated both a global pandemic and supply chain disruptions while still delivering on our enterprise strategy a year ahead of schedule. The changes we have made over the past three years demonstrate that our long term growth targets are achievable. Expanding on the success of a record 2023, we will focus on the initial phase of our new enterprise strategy. As Dave mentioned earlier, our aim in 2024 is to grow top-line and bottom line through reduction of backlog, price discipline and go-to-market strategies, as well as offering new products to our customers. We will also focus on managing our cost both at a gross margin and S&A line to achieve expansion in our adjusted EBITDA margin. Overall demand remains resilient, in 2024 we expect net sales will grow between 2% and 4%, with price and volume contributing equally to year-over-year growth. Our guidance assumes some backlog reduction in 2024, but not at the same rate we experienced in 2023. We expect that we will reduce backlog between $80 million and $100 million in 2024 and will end the year at a higher than normal backlog level. We are monitoring global order rates very closely, especially as we see some macroeconomic market softening in EMEA, but anticipate growth in all our geographies in 2024. We expect that we will revert to more historical seasonality and we anticipate that overall performance in the first half of 2024 will be comparable to performance in the second half of 2024. Further, we anticipate continued strong price realization as we work through our backlog and will continue to focus on long term sustainable gross margin initiatives aligned with our enterprise strategy. We will remain disciplined and prudent in our spending, focusing our investments in areas that position us for future growth and increased operating efficiencies. We are targeting 100% conversion of net income to free cash flow on a full year basis and will continue our disciplined approach to allocating capital and maintaining a strong balance sheet. For 2024 Tennant provides the following guidance. Net sales of $1,270 million to$1,295million reflecting organic sales growth of 2% to 4%. Adjusted EPS $6.05 to $6.65 per diluted share, which excludes certain nonoperational 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 the call back to Dave.

Thank you, Fay. I could not be more proud of the results our high performing teams have achieved in 2023 and I’m excited about what our plans are for 2024. 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 non-deal roadshows. The first on March 4 is hosted by CL King and the second on March 14 is hosted by Sidoti. We are also excited to announce Tennant’s Investor Day on May 13, 2024 in the Freedom Hall at the New York Stock Exchange. Senior management team members will be on hand to discuss Tennant’s mission to be a global leader driven by a differentiated growth strategy. We will talk about specific growth opportunities that are compounded by positive global megatrends, as well as our commitment to innovation, superior service, and maximizing shareholder value. Invites will be distributed soon. Please reach out to us directly if you wish to attend, either in person or virtually. With that, we will open the call to questions. Operator, please go ahead.

Thank you. [Operator Instructions] Your first question comes from Steve Ferazani with Sidoti. Please go ahead.

Good morning, Dave, Fay. Appreciate all the detail on the call. Not surprising that I want to start out with a couple of questions on guidance. I’m a little surprised given that backlog conversion, you won’t be converting as much backlog as expected in 2024 and given that the challenging economic environment, organic volume it looked like was down slightly in 4Q I’m a little surprised you’re getting to 2% growth. What are you seeing out there that gives you that optimism?

Thanks, Steve. As we look out at 2024, our guidance indicates growth in the 2% to 4% range, which is in line with our long term targets of 3% to 5%, albeit at the lower end of the range. And the reason for that is really the differential in backlog reduction. So we’ve got $140 million benefit through 2023. We’re targeting $80 million to $100 million benefit coming through calendar year 2024. That’s just a mathematical reality of benefiting from backlog reduction in a given period. When you open the aperture, that backlog was generated over multiple periods. It’s been durable. We’ve held the orders and we have demonstrated we can convert that to profitable revenue. So that’s embedded in our guidance. But certainly on a year-over-year basis, the differential and backlog reduction presents a headwind for us. From a base business perspective and order outlook, orders have remained resilient, albeit different than a typical year. If you go back kind of pre-pandemic, and what our seasonality looked like, we lived through some years, certainly 2023, we started to return to more normal seasonality, but we’re expecting a significant return to normal seasonality in 2024. And that’s implied in our guidance as well. We’ve got to manage and overcome in this business, lumpy deals, the lumpiness of demand from customers, placing future orders and big deals. We have some very large customers on a global basis that can impact performance within a given quarter. And so we predict those to the extent possible, and certainly we pursue those rigorously. And when we land them, we’re happy to report the success. But it does present a challenge, not only to forecast and then predict for a year upcoming, but then we have to lap that. And we’ve seen some of that. When you go down into the 2024 outlook and coming through Q4 as well, we were lapping some big deals in prior periods that become a challenge. When you’re comparing those two periods, when we look out at 2024 and the actions and investments, the actions we’re taking, the investments we’ve made, we’re actually rather optimistic. We’ve pivoted to our new growth strategy. Our over performance in 2023 above our expectations enabled us the opportunity to invest ahead of that curve. And so when you look at what we’re bringing to market in terms of our new products, and I’ll put a punctuation point on the new X4 ROVR robotic cleaning machine, which we’re super excited about, but across the entire suite of our new products, as well as the investments we’ve made to improve our go to market channel reach and coverage. So you can think about this in terms of salespeople, service technicians, distribution and new business models to offer a unique and compelling value props to our customers. We’re actually rather optimistic on the year. A lot of our 2024 guidance is within our control. So when we think about kind of a softening macroeconomic environment in EMEA, for example, and maybe some of the headwind that could represent much of our performance in 2024 is within our control. We’ve made the investments and taken the actions to set ourselves up to deliver on our 2024 guidance, and now we’re getting to work.

Great. That’s very helpful. When I think about the guidance on the margin, a little bit higher than this year coming off of 4Q, which was lower, I guess, Fay, how much of that was if you – I don’t know if you want to quantify it. How much of that was performance based comp that brought down 4Q, because if I – obviously if I were to annualize that you wouldn’t.

Yes. So I would say it’s two-fold. It’s both performance based that drives some of those variable costs higher year-over-year and certainly will not be lapping that in 2024, and also those one time investments that Dave alluded to, and I alluded to in our prepared remarks. And so we saw that come through in Q4 throughout the entire year, as we were looking forward and investing in our recovery, in our strategy, and preparing ourselves for growth. And so we saw that come through in Q4 as well. And that was, I’d say, roughly around $5 million in Q4.

Okay. So when you baked into your guidance is what kind of an SG&A as a percentage of sales in 2024, do you have a range on that?

Yes. Well, we don’t typically guide to that, but inherently in kind of the margin improvement, what underpins that has to be gross margin improvement, which we’re anticipating, as well as S&A kind of improvement. Now, on a year-over-year basis, the quarter was pretty strong. You saw that kind of come through in the quarter pretty meaningfully. But on a year-over-year basis, 2022 to 2023, S&A as a percentage of sales was fairly comparable. But we do anticipate both gross margin improvement in 2024 as well as improvement in S&A.

Okay. That’s helpful. Thanks, Fay. If I could just get another one in, in terms of very low CapEx expected again in 2024, that’s looks like it’s probably not far off of maintenance levels. Obviously, if you do 100% cash conversion, my math isn’t great, but you’re in a net cash position without any additional spending. How are you thinking about that? And if you can give any kind of updates on the development of the M&A pipeline?

Yes, I’d be happy to. We’ve articulated – Fay, please chime in. We’ve articulated our capital allocation priorities, and so maybe I’ll frame my comments in the context of those priorities. When you look out of 2024, our guidance implies kind of a run rate CapEx investment back into growing the core in the $20 million, $25 million range. And that’s sufficient to fund what we need to internally and deliver on the commitments within guidance. And we’ve got the powder. If we can exceed and find the opportunity to overinvest, to further drive and further accelerate results. Certainly, we’re not constrained in doing so. We’ve demonstrated the commitment to paying dividends. As Fay mentioned in her prepared remarks, we took a step change in our debt reduction in 2023, taking debt down by $100 million, which we thought was appropriate given the variable rate environment. We also were active in buying back shares, more so in the beginning of the year, less so as our stock has appreciated nicely in response to our raising guidance and performance through the quarters. And we think we have – we like our position from a cash perspective. We’re committed to converting free cash flow net income at 100% rate. And so we think we’re well-positioned for where we want to take the company. You asked specifically about strategic M&A. We have activated that work. We’ve articulated in the past that our priorities from an M&A perspective are first to defend and grow our core by filling product gaps and expanding our channel coverage, so that we can take the fantastic Tennant brand value proposition and Tennant brand portfolio, brand portfolio of value propositions to more customers on a global basis. We want to win in connected autonomy and the announcement of our agreement with Brain, our exclusive technology agreement with Brain certainly fits in that connected autonomy adjacency from an M&A perspective, although the minority equity stake is not an acquisition per se, we kind of view it in that light. It’s about putting our capital to work to drive value creation for shareholders. And we think that the Brain agreement is a fantastic example of us doing just that. And then the third adjacency, which is further out around mobile equipment adjacencies. And so we’ve activated the funnel. We are out talking to potentially interested partners and telling and selling our story and as soon as we have something more in addition to the action, we just – the agreement we just signed with Brain, as soon as we have something more to announce, we'll let you know. But we are actively engaged and anxious to put the capital to work for the benefit of our shareholders.

Perfect. Thanks, Dave. Thanks, Fay.

Thank you. Steve.

Your next question comes from Tim Moore with EF Hutton. Please go ahead.

Thanks. Dave, I love your bundling comments on Brain Corp andselling the service with the product, I think that's terrific. Can you just go back and talk a little bit more about what you're seeing on an attachment rate? I mean you started doing that more the last couple of years with preventative maintenance packages. I got the field office in there. They're able to address some inferior competitive products and get customers to upgrade and buy a preventative maintenance package. So have you seen that start to accelerate the last year or two on the cross selling and bundling?

Yes. So this is really a step – thanks for your question. This is really a step to change in bundling for us. With the X4 ROVR and our new exclusive technology agreement with Brain, we'll be able to take this value proposition to customers and offer them at a single point of sale with the Tennant salesperson and a single point of service from a Tennant service technician, a bundled solution that includes the leading cleaning robot for their application as well as state of the art navigation software embedded and the data and analytics insights that go along with it. And service and support aftermarket, so that the service technician – qualified service technicians and the parts and consumables that can keep the machine running and deliver on the promise of autonomous productivity and uptime for our customers. We expect that that bundled offering will be popular with customers and that's the reason that we're leading with it. We have a variety of offerings in our hip pocket and we're going to let the customer decide where they want to go with it. We expect that for many customers, buying a bundled solution that includes equipment and software, and the ease and simplicity of moving through that approval process, as well as the kind of consolidated responsibility and accountability the Tennant has to deliver on the promise will be very appealing to customers, but it's new territory for us. So this is not the same as sort of selling equipment and then trying to sell a full service contract with preventative maintenance as well as ongoing maintenance. This is a unique and differentiated value proposition for our customers. We're really excited about it and I think it's going to be very compelling and interesting. What we're trying to do is drive a step change in robotics adoption, and so bundling these together is just one component of that equation. Iterating our product and launching a purpose built ground up AMR like X4 ROVR that has improved maneuverability to navigate tight spaces, leveraging Gen3 Technology and navigation software enabled by AI chips, as well as enhanced sensing and cameras on the machine. That's a differentiated level of performance that allows our robot to perform even better in the application for the customer. And then wrapped in this ecosystem of support that includes sales, customer adoption, service and as you mentioned, kind of the all in bundled packaging from a pricing and an ease of transacting perspective, we think it's a step change in terms of our value prop and robotics we're excited to launch it here mid-year 2024.

Great, Dave. Thanks for differentiating between those two type of paths and that's terrific. And just one other topic and actually before I get to it, I'm not actually worried about your sales guidance for this year. I care a lot about EBITDA margin expansion. I think you guys have a really great track for that, including the ERP spending. The other question I had, I know I’ve asked about this in the past, you’ve got a lot of great things going on. I was just wondering maybe if there’s more progress kind of on the equipment-as-a-service, the leasing model for some of these smaller and medium sized customers in South America and parts of Europe that don’t want to invest in a full fleet, but they know small medium sized spaces. Have you added more people to that business? Because it seems like there could be a lot of potential there, and a high margin.

Yes, it’s a within the suite of value props that we can offer our customer. That is one that we currently offer in select geographies today, and it’s a compelling value prop for the reasons you noted. Now, when we go with equipment-as-a-service, the burden shifts to us to make sure that we can perform a service to deliver the uptime. But then profitability rests squarely on our shoulders. So it does require a level of internal expertise, flow of data analytics to enable service efficiency and deliver on uptime and service infrastructure so that you can respond to any equipment challenges promptly and make sure you’re delivering the uptime. As we migrate into robotics and connected autonomy, the ability to flow data and fault codes and usage codes and flow the data back to us directly from the machine is a key enabler we believe in future offerings from an equipment-as-a-service perspective. And so when you look at the X4 ROVR and you think about the upgraded abilities it has and the potential, because it’s a connected robot, the potential it has to provide the data to allow us to perform EAS [ph] profitability and reliably, it becomes really exciting. On other machines, non-robotic machines, like I said, we offer equipment-as-a-service, competitively and profitably in some geographies. Now, we are working on what it would take and whether it’s going to be an interesting part of our business going forward in other geographies. And really we’re going to let the customer dictate that. So we need to do a little bit of work internally to make sure that we have the capabilities to provide a fantastic customer experience that our customers expect from Tennant. Make sure that we can make commitments we can deliver on and do it profitably, and then go test it with customers and see which customers, in which vertical markets and through which channels will really be interested in that type of offering. But it is clearly on our radar screen, and we are investing in building the building blocks for capability, and the market will tell us which direction they want to go.

Great, Dave, that’s a terrific roadmap. Yes, it seems like it could be a point or two of growth later on. And I just want to congratulate you and the team again on amazing EBITDA expansion and margin expansion. And you guys got stuck with the whole COVID shutdown. It’s a few years ago and you bounced back quite well. So good job. And that’s it for my questions.

Thanks, Tim. I appreciate your comments and compliments. As you know, winning in business is a team sport, and so this is a team Tennant effort on a global basis to deliver these results in 2023 and gives me confidence that we can deliver on our commitments going forward.

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

Thank you. And thank you all for your participation today and your interest in Tennant Company. This concludes our earnings call. Have a great day.