Good morning. My name is Denise and I will be your conference operator today. At this time, I'd like to welcome everyone to Tennant Company's 2019 Second Quarter 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 2019 Second Quarter Earnings Conference Call. Beginning today's meeting is Mr. William Prate, Director of Global Financial Planning and Analysis and Investor Relations for Tennant Company. Mr. Prate, you may begin..

Thank you, Denise. Good morning, everyone, and welcome to Tennant Company's second quarter 2019 earnings conference call. I am William Prate, Director of Global Financial Planning and Analysis and Investor Relations.

Joining me today are Chris Killingstad, Tennant's President and CEO; Keith Woodward, Senior Vice President and CFO; Tom Stueve, Vice President and Treasurer; Andy Cebulla, Vice President of Finance and Corporate Controller; and Mary Talbott, Senior Vice President and General Counsel.

Today, we will update you on our ongoing progress against our core strategies, our performance during the recent second quarter and our full year guidance. Chris, will first brief you on our strategies and operations, and Keith will cover the financials. After our remarks, we will open the call for questions.

We are using slides to accompany this conference call. These slides, along with a replay of today's call, will be available on our Investor Relations website at investors.tennantco.com until August 31, 2019.

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 those documents, particularly our Safe Harbor statement for a description of the risks and uncertainties that may affect our results.

Additionally on this call, we will discuss non-GAAP measures that include or exclude certain items. Our 2019 second quarter earnings release, includes a reconciliation of these non-GAAP measures to our GAAP results. Our earnings release was issued this morning via Business Wire and is also posted on our Investor Relations website.

Now, I'll turn the call over to Chris..

Thank you, William, and thanks to all of you for joining us today. For the past couple of quarters, we have begun to discuss how Tennant Company is in transition.

We are moving from a period of strategic expansion, designed to extend and diversify our geographic and addressable market footprint to a more concentrated and deliberate focus on unlocking the benefits of this broader platform and driving profitable growth.

This concentration on balancing reasonable growth with stronger EBITDA expansion forms the center of the strategic plan we are developing and will take us into the future. As indicated last quarter, we have already begun to implement certain initiatives from this plan.

And while these efforts continue to develop and mature, they are already beginning to have a positive impact. We will have more to share with you on this plan in the coming months. But today, I want to provide you with some high-level insights into our approach and how it is starting to drive decision-making.

We have a clear understanding of how we intend to shape the future of Tennant Company. Three growth pillars support our strategy and focus on profitable growth. The first is winning where we have competitive advantage.

Within this pillar, we are deeply evaluating all aspects of our business portfolio, which includes our products, geographies, channels and customers to truly understand the components where we have the strongest value proposition.

These insights will help us inform where to better invest our capital and better apply our resources, so we can pursue the strongest opportunities. They will also help us decide what products and services we need to move away from.

This effort has already led to some early decisions in terms of portfolio refinement and targeted sunsetting of certain products. During second quarter, we made the strategic decision to exit the Green Machine and Orbio businesses.

This is just one example of how we believe Tennant can refine our portfolio in such a way that both enhances our category leadership and our profit potential. Tennant is a much larger and more diversified organization than it was three years ago.

This gives us many strengths and advantages, but also significant opportunity to refine our business portfolio and optimize what it is capable of. The second strategic pillar is reducing complexity and building scalable processes across our business.

Our growth has not only diversified Tennant by markets and product tier, but it has also greatly expanded, and in some ways made more complex our operating platform.

This pillar is an integral step toward increasing and improving the profitability of our products, efficiencies within our manufacturing and supply chain, and how we source material and support our overall enterprise.

It means, rethinking each product, process, looking for ways to simplify how we work across our entire business platform and looking for ways to apply technology and automation to create new efficiencies. Our efforts in this second pillar are designed to more fully extract the benefits of this larger platform we have created.

Our third strategic pillar is building on our position as an innovation leader. Tennant continues to build its reputation on innovation and finding creative ways to bring new compelling solutions to our customers. One example of this commitment is our autonomous floor cleaning technology.

As you may recall, earlier this year we announced our relationship with Walmart for this new technology. As Keith will discuss in a moment, our early work with Walmart was, as expected, a meaningful revenue contributor in the second quarter.

Autonomous cleaning technology can deliver enormous value and ROI for our customers, in particular, strategic customers with broad needs and efficiency imperatives. We are pleased with the way AMR is being received and we are very excited by the promising role robotics will play in the future.

We believe we have first mover advantage at large-scale commercialization of this technology and we intend to fully capitalize on it. We have much more work to do on all of these fronts, but our results for the second quarter begin to illustrate the potential impact of these initiatives.

Like most industrial companies, we continue to operate in an environment marked by uncertain end-market conditions and economic headwinds in the form of tariffs and raw material cost pressures. Furthermore, we face the opportunistic challenges that come with our own efforts to transform, efforts that we intend to further invest in this year.

All this change means we have and will continue to operate the business with discipline and prudence. This approach guided our performance and outlook in the first half of this year and is informing the adjustments to our outlook we are making today. Now, I'll turn the call over to Keith..

net sales of $1.15 billion to $1.165 billion with organic sales growth in the range of 3% to 4%; full year reported GAAP earnings of $1.80 to $2 per diluted share; adjusted EPS of $2.65 to $2.85 per diluted share; adjusted EBITDA of $131 million to $135 million; capital expenditures of approximately $35 million to $40 million; and an effective tax rate of approximately 16%.

Our revised guidance accounts for the impact of new autonomous cleaning technology we are bringing to market, known macroeconomic and end-market factors and the additional investments we intend to make in the business to help achieve profitable growth. With that, we'd like to open the call up for questions..

[Operator Instructions] Your first question comes from Brett Kearney with Gabelli Funds LLC. Your line is open..

Hi, guys. Thanks for taking my question..

Hey, Brett..

Very strong cash flow generation in the quarter, further paying down debt. I think net leverage is close to two times now.

Just wanted to ask, how you are thinking about capital deployment, I guess, in the back half of this year into 2020?.

So, Brett, just to clarify, you are talking about just overall capital expenditures and investments?.

Yes. Yes, debt pay down versus anything you might do, even on the M&A front as well..

Yes. Here is what I'd say is that, we've been fairly open about our goal to pay down our debt and our leverage, which we continue to do, is our first priority. We'll continue to be a dividend payer as we have been for 74 years. And we continue to make those investments, where we think we have the highest returns from a CapEx standpoint.

We did make a slight adjustment in our overall capital expenditure guidance. We took that down $5 million just based on truing up our real estimates in that regard. But, I think you'll see more of the same in terms of where we're going in the back half with our capital allocation.

We will speak to that more as part of our overall kind of longer term strategy when we come out with that and get more specific, Brett. But for now, the way we've been approaching it is, it will be very consistent in the back half..

All right. That's great. Congrats on a terrific quarter..

Thanks, Brett..

Thank you..

[Operator Instructions] Okay. Since there are no more questions queued up at this time, I'll turn the call back over to management for closing – oh sorry, we do have one question. Chris Moore from CJS Securities. Your line is open..

Hey, good morning, guys..

Good morning, Chris..

Good morning. Maybe go back to topic we talked about quite a bit on the gross margin side. Again, just trying to get a sense as to that new normal that we are heading toward, keeping in mind strategic account sales bring it down a little bit, low as the IPC gross margin although they tend to kind of add back on the operating margin side.

Given some of these improved efficiencies that you are putting in place now and continue to, can you give a sense of what that – can we get back to the 42% gross margin level? Is that aggressive or?.

Yes. Here is what I'd say, Chris, we've made the shift to really focusing on EBITDA margins given the nature of different businesses around the globe. But we certainly have our eye on gross margins and we know that's an important piece of this.

What we are saying is, as our mix of business shifts a bit in the second half, that's a little bit of the pressure on EBITDA in the back half. And – but overall, we are just trying to navigate through what we see is just – the tariffs that we were anticipating in the first half got delayed a bit. Now, those are back to more of our expectations.

So we don't see the upside there. And then it's just more of this mix of business that's coming through in our overall margins and what we expect.

In terms of your question around longer-term, I would just put that in our overall just our EBITDA goals and where we are headed in the future and we'll get a lot more specific about that longer term algorithm as we come out and talk about that longer term strategy. But we need good gross margins to deliver good EBITDA.

And so, it's really the totality of the P&L, EBITDA and the right mix, really good SG&A management and discipline around that and making sure that flows through to EBITDA on a consistent basis..

Got it. Yes. That was – I know that EBITDA is kind of longer-term goal is 15% up. I'll leave that alone for now until you guys talk further to it. Historically, you have kind of talked about the last six weeks of Q3 being really crucial to that quarter's results.

Is that still the case? And then, kind of how much visibility do you have for the balance of Q3 and into Q4?.

Yes. Again, because I am relatively new, Chris, I am not as familiar with that six weeks. What I would say is, the balance of this business across quarters is pretty consistent. So, from my standpoint, it's just consistent delivery across each of the quarters, each of the months and just making sure that we are focused appropriately.

You might be talking about seasonality and buying cycles, et cetera. We have factored all that into our thinking and our planning. And so, we just need to make sure that we are doing – laying out and executing our plans as expected. And so, that's factored into our guidance..

Got it. And then the last question, somewhere in the commentary you talked about S&A and R&D shifts into the second half of the year.

Can you just talk to that a little bit in terms of was there some delay on that front that that improved results a little bit in Q2?.

Yes. So I talked specifically to R&D. We delayed a little bit of our timing of our investments there. And now we are ramping up as we really get after AMR. We see additional opportunities in the automated robotic area. So, heavier investments around that in the second half.

And then we have a couple of other just kind of core platforms around these sustainable processes. Just in terms of our service platform and investing in that and getting that to the level that we expect around mobility, et cetera. And just IT investments is another key part of that S&A investment in the back half..

Got it. All right. Appreciate it, guys..

Sure..

Our pleasure..

There are no further questions queued up at this time. I'll turn the call back over to management for closing remarks..

Before we conclude, I need to thank our global Tennant team members, who are pushing forward on initiatives around each of the three strategic pillars and are helping to drive Tennant toward delivering higher levels of value to both our customers and our shareholders.

We are pleased with our performance in the first half of 2019 and excited as we move into the back half. Thank you for your time today and for your questions. Take care, everybody..

This concludes today's conference call. You may now disconnect..