Good morning. My name is Debra, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's 2021 Second Quarter Earnings Conference call. This call is being recorded. [Operator Instructions] Thank you for participating in Tennant Company's 2021 Second Quarter Earnings Conference Call.

Beginning today's meeting is Mr. William Prate, Senior Director of Global Financing -- Financial Planning and Analysis and Investor Relations for Tennant Company. Mr. Prate, you may begin your conference..

Thank you. Good morning, everyone, and welcome to Tennant Company's second quarter 2021 earnings conference call. I'm William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations.

Joining me today are Dave Huml, Tennant's President and CEO; Fay West, our Senior Vice President and CFO; and Dan Glusick, our Senior Vice President of Global Operations. On today's call, we will update you regarding our second quarter performance and guidance for 2021.

Dave will brief you on our operations and enterprise strategy, and Fay will cover the financials. After their remarks, we will open the call to questions. Please note a slide presentation accompanies this conference call and is available on our Investor Relations website at investors.tennantco.com.

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 2021 second quarter earnings release includes the comparable GAAP measures and 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 at investors.tennantco.com. I will now turn the call over to Dave..

value engineering, plant optimization, simplifying our product portfolio, divesting non-core businesses, and adjusting our go-to-market approach in specific regions.

I continue to be extremely proud of our global teams for their efforts in addressing these various operational challenges as countries and markets navigate their post-pandemic recoveries.

We are taking decisive actions to safeguard the customer experience and deliver on our financial commitments, while remaining focused on our longer term business objectives.

As Fay will discuss, our full year guidance assumes our continued effective management of a challenging supply chain and operations environment and reflects our growing confidence that the long-term global recovery for commercial and industrial cleaning will continue.

While we remain vigilant in our overall cost management in the face of material inflation, parts availability issues and higher freight costs, we will continue to execute against our enterprise strategy and stay focused on delivering the best possible customer experience.

With that, I will turn the call over to Fay for a discussion of our financials..

net sales of $1.09 billion to $1.11 billion with organic sales rising at 9% to 11%; GAAP earnings of $3.45 per share to $3.85 per share, adjusted EPS of $4.10 per share to $4.50 per diluted share, which excludes certain non-operational items and amortization expense; adjusted EBITDA in the range of $140 million to $150 million; capital expenditures of approximately $20 million and an adjusted effective tax rate of approximately 20%, which excludes the amortization expense adjustment.

With that, we will open the call to questions. Operator, please go ahead..

[Operator Instructions] Your first question comes from the line of Chris Moore with CJS Securities..

Good morning, guys. Thanks for taking a few questions. Maybe just big picture. I think at the beginning of fiscal '21, the expectation was that revenue could approach pre-pandemic levels by the end of 2022. Most recently, you felt that you could get there perhaps by the middle of '22. I just want to get your kind of take on that.

Is that still the case point?.

We are -- we drew some optimism from our Q2 experience. Our demand snapped back in a fairly dramatic fashion across our geographic markets, across channels, and across our product categories. So we feel really good about the demand coming in above expectations within the quarter. Having said that, it's still short of 2019 within the quarter.

And so when you look at it from a trajectory perspective, we are still anticipating the first half of '22 being the position where we cross -- crossed over into pre-pandemic demand level..

Got it. I appreciate that. Understanding no crystal ball, but how would you characterize the current visibility on the -- both the supply chain and the input costs.

I mean, for example, at this stage, do you expect improvement late in Q3? Or it's still going to likely continue to get more challenging into Q4?.

Yes, listen, it's a great question. That's one that we think about on a daily basis. I will tell you the actions we’ve taken relative to our guidance. So we are very close to our supply chain and working closely with our supply partners to understand what challenges they are trying to overcome.

We’ve got our best forward-looking forecast for demand as well as a backlog that we are very interested in working down as quickly as possible. We are acknowledging the reality of the constraints that we have in our supply chain and operations, and that’s reflected in our guidance.

So the forward-looking view on when sort of recovery could occur, we don't see recovery in the foreseeable future. And so I don't want to get into projecting a quarter when things will improve, it's always difficult to tell. I will just tell you that we have fully acknowledged the reality of the challenges we see today in our forward-looking guidance.

And I’m really proud of the actions the team has taken to address the issues that we are aware of and can anticipate being a challenge for us as we go forward..

Got it. Appreciate that. And maybe just in terms of kind of the overall enterprise strategy, obviously, standardization of products is a huge focus, made a lot of progress there.

Can you maybe just talk to kind of where you are in terms of reduction on the SKUs? And what really -- what’s the longer term goal there?.

Yes. So we’ve made fantastic progress across our enterprise strategy, and you're highlighting one of the components which is optimizing our portfolios. You look at some of the moves we’ve made at the enterprise level to exit businesses, divest businesses that were non-core and not accretive to where we are going to business.

From a standardization process, we're standardizing across two facets, both in our models, but then also standardizing across our model portfolio and the individual products themselves, where we value engineering the products to use, harmonize and use more common components. We’ve made fantastic progress.

We’ve got some internal targets that we are striving to achieve. We’ve not pegged an end to that process and I’m not sure if you're ever done with that process. We've made significant progress over the last 18 months, and we've been public about the progress we've made. It will continue to be a focus for us as we go-forward.

We’ve mentioned that we had a 35% reduction in our models within our product portfolio. We are proud of that. That was a step change in our product portfolio, and we continue to refine that offering. At the same time, I think it's important to note, we are launching new innovative products, which represents new SKUs into our product portfolio.

So, really, it's a balance of the life cycle of our product, the new innovative products we are launching, and then enhancing our portfolio by pruning those and streamlining our offering in the existing portfolio..

Got it. Very helpful. I will jump back in line. I appreciate it, guys..

Thanks, Chris..

[Operator Instructions] Your next question comes from the line of Steve Ferazani with Sidoti & Company..

Good morning, everyone. You talked about the supply chain -- supply chain challenges you're dealing with.

Can you quantify that in any way in terms of sales you didn't generate in the quarter because of those supply chain challenge? So are you pushing everything to the right of this year? Or how do we need to think about that?.

Yes. It's a tough one to quantify. I will tell you this, that obviously in a quarter where our demand snapped back above expectations, and we are experiencing significant supply chain and operational challenges, our backlog has grown. And so just -- I will try to dimensionalize that. Our backlog is about 2x normal levels.

And so you think about that, that's a dramatic increase and that's the number of customers that we would have hoped to have service in the quarter that we were not able to due to the constraints on the supply chain and the other challenges that we spoke to in the script..

Okay. That’s helpful. And then in terms of -- I know you haven't wanted to raise prices, you're kind of hesitant to do so. Now it sounds like that’s something you will move forward with.

Can you talk about the timing on that the response from customers and what that might do to margins by Q4?.

Yes. Let me take that. It's not that we haven't wanted to raise price, we are very respectful about raising price because price, there's a couple of things. One, it impacts your customer relationship. It takes your selling organization or selling organizations time away from doing other activities like selling in new and innovative products.

And so it's -- price is a great thing from a financial perspective. But we’ve to make sure that the price increases we put through, we are able to command that premium. We are a premium-based product, and we’ve a fantastic value proposition. We’ve to make sure that we can command the premium that we publish.

So it's not that we are hesitant to put in price. We want to make sure that we can sell it in and make it stick with our customers. So having said that, we’ve implemented a price increase, we’ve announced it. We just recently announced, and so it's obviously early to gauge customer feedback about that increase. I would tell you, this is just my opinion.

I don't think that anyone will be surprised. The challenge is that we are facing within our business are macro market challenges. So the market and our customers are broadly aware of these challenges. So I think they'll -- if they weren't expecting it, I don't think they'll be surprised we have in the conversation with this about the price increases.

And I will just add, I’m really proud of our customer-facing sales and service organization that have to carry this message. They do a fantastic job of selling in the price increase, demonstrating the value that we can deliver and having to stick with our customers..

The one thing I would add is that, while we just recently announced these price increases due to the current backlog, we don't really expect a meaningful impact until the fourth quarter..

Right.

So you are not repricing the backlog?.

Correct..

Okay. Fair enough. To switch topics a little bit.

Obviously, the balance sheet keeps improving given the environment, how are you thinking about uses of cash over the next couple of quarters?.

So our capital allocation priorities really remain the same, haven't changed dramatically. And first and foremost is reinvesting in our business to drive growth and to execute against our enterprise strategy. So that's priority number 1.

We are also managing our balance sheet and we want to be with the stated leverage target of 1.5x to 2.5x because of the financial flexibility that we need that we would like to maintain as well as optionality. We are always in support of our quarterly dividend.

And we have a history of our dividends, and we will continue to return capital to shareholders by way of dividend and potentially opportunistically share repurchases as we evaluate cash flow. And then lastly, is opportunistically evaluating what our opportunities are to enhance shareholder value through M&A. So those are our priorities..

[Indiscernible] one last one in terms of I know that you were lapping the big sales in the autonomous product for your first launch, given that in the last year, you’ve launched two more of the autonomous products.

Can you provide any kind of color in terms of marketing sales, the two more recent autonomous products?.

Let me put some color around that for you. So we are lapping a significant order with the world's largest retailers last year, we are very proud of that order. That took the majority of our capacity, frankly, our time to make sure that, that sold in really well and was deployed to the level our customers expected.

I think it's worth noting that the large customers that -- the large customer orders were lapping since reordered. I think that's an important proof point that the early adopters of the technology have seen the benefits and have bought back in. They're doubling down on the technology. So it gives us confidence that we are on the right track.

We since launched two additional products that you've noticed T380AMR and we are just in the process of launching our T16AMR. I would say the customer feedback for both of those products has been fantastic.

The volumes they are talking about don't approach the levels of the orders we lapped last year, but we still have a significant customer interest in both of those products. I think the power of having a three product portfolio is that we can now address an extremely broad range of vertical market applications.

We've trained up our global selling organization and have demonstration units that are deployed on a global basis. So we can now engage customers in virtually all of our important verticals in the robotics discussion and especially important -- I’m especially excited about the T16AMR because it gives us an entree into the industrial verticals.

And when you think about robotics in an industrial vertical, it solves a very important compelling business problem for those customers as being labor shortage, while helping them keep it playing a keen and say, operating environment.

And then industrial setting, typically you don't have the dynamic of having to worry about retail customers walking through your facility. Industrial customers tend to be more at depth at adopting automation and they have robots elsewhere in their facilities. So it's a really friendly environment to try to sell in robotics.

We are getting fantastic customer feedback about all the products, especially the T16AMR. So we are very bullish on AMR.

We are really proud of the fact that we had a couple of large customers and kudos to our selling organizations for landing in a couple of large customers right out of the gate, and now we are pursuing other customers on a global basis, still very bullish about AMR potential for the future..

Great. Thanks, Dave. Thanks, Fay. I appreciate the time..

Thank you..

And you have a follow-up question from the line of Chris Moore with CJS Securities. It appears that question was withdrawn. Since there are no further questions at this time, I would like to turn the call over to management for closing remarks..

Thank you. Thank you again for joining us and for your interest in Tennant. I want to thank our global Tennant teams for all of their hard work and dedication in this extremely challenging environment. I couldn't be more proud of the team and how we are performing. This concludes our earnings call. Have a nice day..

Ladies and gentlemen, you may now disconnect your lines..