Good morning. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's 2021 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] Thank you for participating in Tennant Company's 2021 Fourth Quarter and Full Year Earnings Conference Call.

Beginning today's meeting is Ms. Fay West, Senior Vice President and Chief Financial Officer for Tennant Company. Ms. West, you may begin..

Good morning, everyone, and welcome to Tennant Company's Fourth Quarter and Full Year 2021 Earnings Conference Call. I am Fay West, Senior Vice President and CFO. Joining me on the call today is Dave Huml, Tennant's President and CEO. Today, we will update you regarding our fourth quarter and full year performance and our guidance for 2022.

Dave will brief you on our operations and enterprise strategy, and I will cover the financials. After our prepared 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 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 conference call, we will discuss non-GAAP measures that include or exclude certain items. Our 2021 fourth 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'll now turn the call over to Dave..

to win where we have competitive advantage, to reduce complexity and build scalable processes, and to innovate for profitable growth. The first pillar, win where we have a competitive advantage, began in 2020 with critically important foundational work.

In 2021, it led to the profitable sale of our Coatings business, as well as the expansion of successful value capture programs in specific geographies, resulting in targeted areas of margin expansion. Turning to the second pillar, reduce complexity and build scalable processes.

The pandemic-related challenges over the last 2 years have compelled us to accelerate this initiative, particularly for our local-for-local programs. Our localization efforts align to our long-term strategy and help us to mitigate the current transportation challenges.

At the same time, it has led to new supplier relationships and enabled dual-source opportunities that minimize production bottlenecks. Additionally, we have multiple line move and production capacity shift projects underway to optimize our operations.

Our engineering teams have launched new value engineering project that yield tactical and strategic benefits, ranging from cost mitigation to reduction in SKUs. The implementation of our enterprise strategy is a continuous process, particularly with respect to the third pillar, innovate for profitable growth.

More specifically, this means leveraging innovation to unlock value for our customers and for Tennant. A great example is Tennant's new Inventory Scan, the first add-on for our robotic floor scrubbers that provides multipurpose autonomous solutions specifically for retailers.

Inventory Scan is an integrated solution that enables Tennant's floor scrubbers to autonomously scan on-shelf inventory and to collect data in real time to enhance inventory management and operations.

In addition to the near-term opportunity and partnering with the value customer, Inventory Scan also represents an exciting move for Tennant Company into an attractive adjacency. We remain laser-focused on winning new customers and serving our existing customers as they grow and expand.

For instance, we have recently expanded our partnership with Sunbelt Rentals, the premier rental equipment company in North America.

Sunbelt Rentals offers a highly diversified product mix, including general construction equipment, industrial tools, power generation and, of course, floor scrubbers and sweepers which we have provided to Sunbelt for more than 15 years.

Tennant has been Sunbelt Rentals' exclusive strategic provider of floor care equipment, and we will now support their network of dedicated floor care centers, which will serve as one-stop shops for their customers in need of cleaning solutions.

Sunbelt Rentals is a valued strategic partner and the relationship has been mutually beneficial, particularly with respect to lead generation.

In short, we remain committed to providing our customers with high-quality products and exceptional service as we execute on our enterprise strategy, and we will continue to take decisive and appropriate actions to maintain our customer experience while pursuing our growth objectives.

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

the Americas, which includes all of North America and Latin America; EMEA, which covers Europe, Middle East and Africa; and Asia Pacific which includes China, Japan, Australia and other Asian markets. For the full year 2021, sales in the Americas grew 4.3% year-over-year or 7.4% organically.

Growth drivers include service, parts and consumables and strong industrial sales in North America. At the same time, strong organic growth in Latin America was driven by industrial sales in Brazil and the sale of IPC branded products in Mexico.

Sales in EMEA grew 19.3% year-over-year or 14.2% organically, with demand and order backlog strengthening throughout the year. Results reflected growth across all countries and product category. Sales in Asia Pacific increased 9.6% year-over-year or 5.6% on an organic basis.

Strong demand in Australia and Korea more than offset the decline in China, which was impacted by supply chain disruptions and labor constraints. Looking at adjusted EBITDA. Adjusted EBITDA for the full year 2021 was $140.2 million or 12.9% of sales compared to $119.4 million or 11.9% of sales in 2020.

We are pleased with our ability to convert a 9.1% organic sales increase to a 100 basis point improvement in our adjusted EBITDA margin, especially in a year where we experienced such inflationary headwinds in material, manufacturing and freight costs.

These headwinds contributed to a year-over-year 90 basis point decrease in adjusted gross margin to 40.2% in 2021. Adjusted S&A expenses were 29.2% of net sales compared to 30.9% in the year ago period.

The year-over-year improvement in leverage was a result of continued cost saving actions and lapping the previously mentioned strategic investments in the year ago period. Overall, we are pleased with our full year adjusted EBITDA performance, which was the result of our ability to capture volume, deliver on net price realization and manage expenses.

Turning now to our fourth quarter performance. For the fourth quarter of 2021, Tennant reported net sales of $276.4 million, up 4.5% year-over-year on an organic basis. While we were encouraged to see price realization ramp up and read through in the fourth quarter, the impact was somewhat muted given our existing backlog.

Foreign currency impacts from the strengthening U.S. dollar and the sale of the Coatings business were unfavorable drivers year-over-year. In the fourth quarter, sales in the Americas grew 1.3% year-over-year or 4.9% organically despite widespread supply chain challenges and labor constraints.

Growth drivers included service parts and consumables and strong industrial sales in North America. At the same time, strong organic growth in Latin America was driven by industrial sales in Brazil and the sales of IPC branded products in Mexico.

Sales in EMEA were 3.9% year-over-year or 7.4% organically with demand and order backlog continuing to strengthen. Tennant achieved growth across all product categories and markets, except for France, which was more heavily impacted by supply constraints. Sales in APAC declined 7.5% or 7.2% on an organic basis.

The decline was attributed in part to supply chain disruptions and labor constraints in China with new pandemic-related shutdowns in the region, impact of which was partially offset by strong demand in Korea and Australia. Turning to adjusted EBITDA.

Adjusted EBITDA for the fourth quarter of 2021 was $28.4 million or 10.3% of sales compared to $25.4 million or 9.3% of sales in 2020. We were able to achieve a 100 basis point improvement in our adjusted EBITDA margin.

Parts availability and inflationary pressures were particularly acute in the quarter as adjusted gross margin declined by 460 basis points from the prior year period to 36.7%. During the fourth quarter, our adjusted S&A expenses were 28.1% of net sales compared to 33.9% in the year ago period.

Drivers for the quarter were consistent with those of the full year. Turning to capital deployment. In 2021, we generated operating cash flow of approximately $69 million, which reflects strong operating performance and incremental investments in working capital, specifically inventory.

The cash flow generation allowed us to make good progress on our capital allocation initiatives. CapEx of approximately $90 million in 2021 was lower than guidance as capital investment activity was impacted by supply chain constraints and has shifted slightly into 2022.

As we discussed in our previous conference call, we refinanced our debt, which both extended our maturity profile and lowered our cost of debt. The interest rate savings resulted from the debt refinancing are in excess of $12 million on an annual basis. Additionally, we reduced debt outstanding by approximately $44 million.

We ended the quarter with net leverage of 1x adjusted EBITDA, which is lower than our stated goal of 1.5 to 2.5x.

We also returned capital to our shareholders in 2021 by paying approximately $17.5 million in annual dividend and by repurchasing approximately 197,000 shares of our common stock for $15 million under our existing share repurchase authorization.

In total, we ended 2021 with a cash balance of approximately $124 million and strong liquidity of approximately $403 million, setting the stage for continued progress against our capital allocation priorities.

We continue to be disciplined in our capital allocation strategy, which is first to fund operations and investment in growth, appropriately manage leverage, pursue strategic and accretive M&A and then to return excess free cash flow over time to shareholders through dividends and share repurchases.

Switching gears, I would now like to talk about our guidance expectations for 2022. As Dave mentioned, our guidance for the full year 2022 reflects what continues to be an uncertain operating environment with macro level happenings that are likely to persist for much of the year.

We anticipate that supply chain constraints such as component availability will continue to impact our ability to produce and deliver products to meet increased demand levels and we expect that we will continue to operate with record-level backlog throughout 2022.

We will take necessary actions like local-for-local and region-for-region manufacturing and sourcing to help maximize output and to address and offset inflationary pressures. We announced further price increases in the first quarter of 2022, and will continue to monitor the competitive end market backdrop.

We anticipate our quarterly sales cadence will be driven more by our ability to produce than by our demand pattern. We also expect that gross margins will improve sequentially throughout 2022.

In terms of profitability, we expect increased price realization, cost out initiatives and strong expense management to drive sequential adjusted EBITDA improvement throughout the year. For 2022, Tennant provides the following guidance. Net sales of $1.125 billion to $1.17 billion, reflecting organic sales growth of 4.5% to 8.5%.

Full year reported GAAP earnings in the range of $3.90 to $4.50 per diluted share. Adjusted EPS of $4.40 to $5 per diluted share, which excludes certain nonoperational items and amortization expense. Adjusted EBITDA of $145 million to $160 million. Capital expenditures of $25 million to $30 million.

And an adjusted effective tax rate of 20% to 25%, which excludes the amortization expense adjustments. Overall, our 2022 guidance is in line with our long-range financial commitment. With that, I will now turn the call back over to Dave..

Thank you, Fay. To sum up, I am very proud of the global Tennant team's dedication and agility that delivered record earnings in 2021. And we are prepared to build on that success as we deliver another strong year in 2022. With that, we will open the call to questions. Operator, please go ahead..

[Operator Instructions] The first question is from Chris Moore of CJS Securities..

Maybe we could start with the revenue guidance, 4.5% to 8.5% organic growth.

Can you just kind of give your sense from where you're sitting today in terms of how that breaks down between volume priced, and is the higher end of that more kind of price driven?.

So Chris, I think when we look at guidance and the growth that we're anticipating in 2021 -- or 2022, there is both price and volume impact. And I would say that it's heavily weighted -- well, it's more weighted towards price than volume, but not that much of a difference..

Got you.

And is the higher end that would -- if you get it closer to the 8.5%, that's going to be driven by price as opposed to volume at the higher end of the guide?.

Yes, it will be both, right? I think it's going to be both. I think you're going to see volume increase on the higher end and price contributing to that. But in the -- at the midpoint of the range, I think it's fair to say it's majority price, but it's pretty close with volume contribution..

Yes, Chris, I would just add, our pricing is being dictated to us by the inflation we're taking on. And so we're compelled to move on price commensurate with what we're seeing and forecasting from an inflation perspective.

Our demand -- the demand for our product remains robust, and we have a significant backlog available to us to monetize over the coming year to the extent we can given the supply chain constraints.

So we've guided appropriately given what we can see today with the mix of a volume, a modest volume increase as well as the pricing we've announced, and want to manage it as we move through the year..

Got it. That's helpful. So on the quarterly cadence, Fay's talked about driven more by ability to produce than perhaps kind of the typical Tennant patterns. From -- so that means second half is -- I know you said EBITDA margin is going to increase.

From a revenue standpoint, we should expect kind of sequential quarterly growth on revenue or just what kind of visibility do you have at this stage?.

So What we're planning for is we anticipate seeing growth in revenue sequentially throughout the year, Q1 through Q4. We also think that we'll see margin improvement Q1 through Q4 from a gross margin perspective and also EBITDA margin improvement in Q1 through Q4. So it's straight down the P&L, Chris, sales, gross margin and EBITDA..

Yes, Chris, I would just add, our view -- we had to plan something on a quarterly basis. But really, generally speaking, we think the second half will be stronger for us than the first half.

And so while we make it an individual quarter on as we move through it, that's our general outlook, although we don't have any better data points in the rest of the world as they try to figure out what the supply chain recovery looks like..

Understood. Makes sense.

Just any -- in terms of the Russia-Ukraine situation at this point, any specific impact that you can see on Tennant?.

Yes, let me first say it's a pretty remarkable time for living in, and I'm sure -- I ask the thoughts of everyone, it's pretty shocking to see what has occurred despite the fact that there were telegraphic warnings of this. So our hearts go out to the people in Ukraine as they work through what this means to them and their lives and their country.

While we don't have any direct assets or employees in the affected regions, we do have channel partners who operate in those regions who represent Tennant. So we are reaching out to them to see how they're doing and personally and then any potential how we'll weather this from a business standpoint.

So while we don't have a direct presence, like other employees or manufacturing footprint in the affected regions, we do expect that this will have some ripple effects through the macro economy that we'll have to deal with..

I suspect energy costs will probably increase as a result of that. And you might see some disruption -- further disruption in kind of freight and supply chain. But it's early days to tell..

Got it. I have a last one for me. Just on the M&A front, certainly part of your capital allocation strategy.

Just are you spending much time looking at opportunities at this point? Is there -- kind of how would you characterize the pipeline?.

We're always exploring opportunities on how to best grow Tennant and how to provide value to our shareholders. And that -- and [indiscernible] in to that is M&A. And the pipeline is something that we are working and we'll evaluate opportunities that make sense and would be accretive to the shareholders and to Tennant..

Yes, Chris, I might just add, when you look at our capital allocation priorities, protecting the core and funding our core business, both for growth and recovery from supply chain challenges is our first priority.

With what's going on in the macro environment, we identified significant opportunities to reinvest back in the business aligned with our long-term strategy, but in items that can help us overcome the short-term challenges, whether that be localizing production or overcoming labor constraints by automating factories, et cetera.

So we're -- as Fay said, we're open-minded and looking for the greatest value creation opportunities on all fronts. But from a priority allocation perspective, protecting the core is job one..

[Operator Instructions] Your next question is from Steve Ferazani of Sidoti..

I appreciate the information on the call. I do want to dive back into the top line guidance to think about that's still significantly better than the 2% to 3% long-term growth and certainly pricing is a factor.

But given the way you ended the year and given the geopolitical risks that are out there, I'm just trying to kind of put it all together in terms of thinking about that's still pretty good guidance.

And given the risks that are out there, is that supported by -- are you thinking about your backlog or what you're hearing from customers? How do you get to that number? And is it really supported in actuality by pricing?.

So Steve, thank you for the question. So I think we ended the year with really strong organic growth, 9% organic growth from a consolidated perspective and growth across all regions. So very, very good. And we also ended the year with a pretty significant backlog with 3x to 5x what normal ranges.

What that does for us is it gives us insight into what demand will look like in 2022, and we feel demand will be strong in 2022. And therefore, when we compiled our guidance of top line growth, there's an element of it that's demand, there's an element of it that's price. They're fairly equally weighted in 2022.

But we feel that the demand is strong, and it really is supported by the backlog that we see and the conversations that we're having with our customers..

This translates into cash flow in 2022. And so just a modest increase in CapEx. I'm trying to think about how you're thinking about working capital and how we might be looking at cash flow in '22..

Yes. So we did make a significant investment in working capital at the end of the year, primarily in inventory, as we were building up safety stock and ensuring that we were positioned in order to meet the growing demand that we're seeing. And so there was an investment in working capital.

We suspect that that will unwind in 2022 as we progress throughout the year. And so when I look -- we did not give specific free cash flow guidance, but it will be higher than what we delivered here in 2021 for 2 reasons. One, we're anticipating an increase in EBITDA. So the midpoint of that range is about $15 million of increase in EBITDA.

And then we also anticipate kind of a return to normal from a working capital perspective. And so a decrease in inventory and other working capital items. So I think net-net, you're going to see a free cash flow increase in 2022 for those reasons..

[indiscernible] detail on autonomous, but since we haven't heard a lot about larger contract wins, I'm just -- beyond generalizations, can you give us some sense of how the Autonomous market has been developing over the last few months and how you're thinking about '22?.

Yes. So when we spend time talking about Autonomous which we call AMR, over the last several calls, the market is developing about how we expected it to, and we were blessed to have a very large customer win early in our launch of our Autonomous portfolio, which is fantastic.

It was Walmart, and landing Walmart is a fantastic flagship customer to earn and generates significant volume in the year. But it didn't really represent -- there's only one Walmart in the world, but it didn't really represent the way other customers are approaching adoption of new technologies.

Walmarts have a strong balance sheet against a differentiated way of investing in technology. So it's a great win right out of the gate.

It helped us improve our -- I'll say, our deployment methodologies and gave us confidence that once we deployed it, that this can actually work in a real-world application and deliver an ROI for the customer that's compelling.

Since then, what we've seen of the marketplace from an adoption perspective is high interest levels across the broad array of verticals that we can serve, no longer questioning as much about the technology, but more questioning about what would it take to achieve the ROI driven by the labor shortages primarily where customers are looking for solutions where they can't keep labor or they can't find labor to do the cleaning test within their locations.

And as customers get over the hump of moving towards a purchase, they're tending to want to pilot in a few stores, in a few locations with a few units to prove out the concept before they go with the wholesale deployment, which is a logical approach.

This is a significant CapEx and customers want to be convinced that they're going to get the return as they move into it. So we've seen some piloting programs amongst customers across verticals. We've also seen some hybrid approaches where they're deploying some robotics equipment, but then they buy standard Tennant equipment.

So maybe they put the robot in the higher volume, high-traffic stores, larger floor footprint and then use nonautomated or manual machines for the other locations. So it's more of a traditional technology adoption curve, I would say, what we're seeing. We do expect our AMR sales to increase significantly over 2021. So we expect growth in 2022.

And so we're forecasting that accordingly.

I would say this, our teams are very involved in the AMR discussions with customers and anyone that wants to talk about it, we're capable of taking someone from interest to educating them and moving them into a trial period and deploy and make sure they can realize their ROI on the investments and move towards a more full-scale deployment.

But it takes time for customers to prove it to themselves. And that has been hampered a bit by the pandemic and our ability to operate in these environments as well as our AMR products are not immune to supply chain challenges as well. And so we have customers that want a product. We can't get it to them as quickly as we would like.

And so that's the latest things as well. We are still very bullish on the AMR opportunity in this marketplace. And I said it before, if the potential exists to disrupt this industry, we are going to be the ones to disrupt it and moving AMR into a material position in terms of the entire portfolio of products used in the mechanized cleaning market.

A really interesting innovation that we launched this year, and I spoke about it in the prepared remarks, is our Inventory Scan launch. And the reason I'm so excited about the Inventory Scan is that it really solves a core issue for our customers in retail.

And the core issue that we solve for is when a brick-and-mortar retailer does not have the right products in the right place at the right price, that represents a loss of sale.

And so retailers spend a lot of time trying to manage the on-shelf inventory to make sure it's in the right place, priced correctly, facing the customer and available to be bought.

Today, those are manual solutions, meaning people walk in the aisles, and when they see something out in the place, they run the to the other box in the storeroom and restock. Very manual. So manual introduces a human error. It also is not real time. There's a delay in it.

And let's face it, retailers are facing the same labor challenges as the rest of the economy. So the amount of people who do the work. So we're solving a very real problem for our customers. It allows our customers to leverage the AMR investment that they would make.

So now when they look at an ROI and investment on robotics, they can look at the return on the investment from a cleaning perspective, but now from a data capture perspective and how much of improvement in their off-the-shelf sales would they need in order to justify this investment. So it improves the ROI for the customer.

And I think we're also beginning to prove the hypothesis that retailers are not going to want multiple robots running around their store floors.

They don't want to standardize on a consistent platform for robotics so they can train their people, how to use it so that they can be confident in its performance and that they can importantly hit its service to keep it running over the long haul.

And so I think what you see with the Inventory Scan and our significant win -- early win there is that customers chose Tennant because of our quality, yes, because of our deployment expertise and our training in the field on new equipment, but then also our aftermarket support so that we can keep the machines running and the retailer can enjoy their ROI.

That's why I'm excited about it from a customer perspective. I'm equally as excited about it from a Tennant perspective. And I think it's an incremental profitable sale, multimillion-dollar sale, which is always a good thing. But it really opens us up to a potentially attractive adjacency around this idea of mobile data capture.

And so we could become the chosen platform for mobile data capture in these environments.

And that's really exciting because that moves us from floor cleaning into solving this problem for retailers and potentially solving other problems as we're able to bring real-time data from the store floor over to key decision-makers and up into their supply chain, helping them optimize their operations.

The other reason I'm excited about this from a Tennant perspective is it really demonstrates our agility and innovation when you think about how close to customers we are, understanding the real-world problems, coming with solutions. And we did all this despite the pandemic, despite the supply chain.

Innovation is alive and well at Tennant, and this is an important proof point of that. The other interesting point, I think, for Tennant and also for investors is that we're not doing it alone. We're partnering with world-class partners. We're focused on what we do best, we're partnering for the rest to solve the problem.

It gives us a front-row seat to these potentially attractive adjacencies, which could become attractive for Tennant -- more attractive for Tennant in the future. But it really solidifies our position as the problem solver for our customers when we're able to partner with others and bring our complete solution to bear.

So listen, I'm still very bullish on AMR. I think Inventory Scan is a really important development in our complete robotic solution, and I expect it will accelerate what was already a kind of a typical adoption curve for AMR technology in our served markets..

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

Thank you. Before we close, please note that we will be posting to Tennant's IR website the second on our series of quarterly videos that offer a deeper look into our business and growth strategy. You can be notified of each new video by signing up for e-mail alerts at investors.tennantco.com. This concludes our call. Stay safe, and have a nice day..

This concludes today's conference call. Thank you for your participation. You may now disconnect..