Good morning. My name is Karen, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Tennant Company’s Second Quarter 2024 Earnings Conference Call. This call is being recorded. There will be time for Q&A at the end of the call.

[Operator Instructions] Thank you for participating in Tennant Company’s second quarter 2024 earnings conference call. Beginning today’s meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin..

Good morning, everyone and welcome to Tennant Company’s second quarter 2024 earnings conference call. I am Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Huml, Tennant’s President and CEO and Fay West, Senior Vice President and CFO.

Today, we will provide an update on our 2024 second quarter performance. Dave will discuss our results and enterprise strategy, and Faye will cover our financials. After our prepared remarks, we will open the call to questions.

Our earnings press release and slide presentation that accompanies this conference call are available on our Investor Relations website. Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company’s expectations of future performance.

Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today’s news release and the documents we file with the Securities and Exchange Commission.

We encourage you to review 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 2024 second quarter earnings release includes the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results. I’ll now turn the call over to Dave..

one, growing the core, two, driving value through connected autonomy; and three, expanding into select adjacencies. Our previously mentioned investment in Brain Corp aligns with our second focus area, driving value through connective autonomy and has been a key driver in our AMR success this year.

Our investment in Brain Corp provides us exclusive access to Gen 3 technology, increased selling efficiency and the opportunity to benefit from annual recurring revenue.

We are realizing the intended benefits of our strengthened relationship with GrainCorp and are excited to continue to lead the robotics disruption of the global mechanized cleaning equipment industry.

Our previously announced acquisition of TCS, Tennant's long-standing distributor based in Austria, aligns with the first focus area within our M&A strategy, growing the core. Our TCS integration is on track to date and the business is performing in line with expectations.

We are impressed by the teams in these geographies and are developing aggressive growth -plans for the business in this attractive region. Our successful execution on our M&A strategy is due to our financial strength and disciplined capital allocation strategy.

As we continue to generate strong cash flow and maintain a strong balance sheet, we are well positioned to act on those target opportunities aligned with our M&A strategy. Now, turning to our performance pillar and sustainability. In June, Tennant published our 2024 sustainability report.

This year's report marks the first year of reporting aligned to our new sustainability framework, driving people Healthy Planet. We are proud of the work we are doing to embed sustainability and how we think, plan and operate our business.

We believe that by setting ambitious goals, we will drive progress for our customers, our business, our people, our communities and the planet.

The report details the significant progress we made, including integrating our net zero goals into our product line strategies, continuing progress toward our validated net zero targets by reducing our Scope 1 and 2 greenhouse gas emissions 13% and sourcing 92% of our global electricity from renewable energy sources and reducing our Scope 3 emissions by 8%.

Our ERP modernization journey is the second piece of our performance pillar. The project is on track, and our focus in 2024 continues to be on the design and build phase of the implementation.

Our significant investment in this ERP consolidation project will provide a strong and secure digital infrastructure to enable globally standardized processes and systems for scalable growth by better serving more customers and unlocking operational efficiencies.

Overall, our second quarter results reflect solid execution on our enterprise growth strategy, providing strong momentum for the remainder of 2024 and the years ahead. With that, I will turn the call over to Fay for a discussion of our financials..

the Americas, includes all of North America and Latin America. EMEA covers Europe, the Middle East and Africa, and Asia Pacific includes Australia, China, Japan and other Asian markets. Organic sales in the Americas increased 5.5% compared to the prior year period.

The increase was driven primarily by price realization and favorable product and channel mix across the region. This was partially offset by unit volume decreases in North America, specifically in our commercial machines, which had a higher backlog benefit in the prior year period.

Organic sales declined 0.3% in EMEA, due to volume declines in both equipment sales and parts and consumables, partially offset by price realization in all product categories. EMEA volumes were impacted by weaker-than-expected market conditions and a smaller contribution from backlog reduction in the current period.

Organic sales decreased 11.9% in APAC, primarily due to volume declines in Australia and China, partially offset by price growth in Australia. Adjusted EBITDA for the second quarter of 2024 was $58.6 million, up 1.7% compared to the second quarter of 2023.

Adjusted EBITDA margin for the second quarter of 2024 was 17.7% of sales, essentially flat compared to the second quarter of 2023. Gross margin was 43.1% in the second quarter, a 30 basis point decrease compared to the prior year quarter.

The slight margin rate decrease is attributed to higher inflation, while price realization and cost savings activities materially offset inflation during the quarter. Our overall margin rate is supported by a continued shift to industrial equipment and the direct sales channel.

Adjusted selling and administrative expenses in the quarter totaled $87.5 million, a $1.7 million increase compared to the second quarter of 2023. The increase was driven in part by higher compensation and benefit expense related to incremental resources to support the company's enterprise strategy.

Adjusted SG&A expense as a percent of net sales was 26.4%, essentially flat to the 26.7% in the second quarter of 2023. Turning now to capital deployment. Net cash provided by operating activities was $18.6 million during the second quarter compared to $39.1 million in the year ago period.

The decrease in operating cash flow was primarily driven by increases in working capital due to the timing of sales during the quarter as well as investments in ERP modernization costs totaling $9 million, resulting in free cash flow of $14.4 million for the quarter.

Excluding these non-operating items, free cash flow was $23.4 million for the second quarter of 2024. The company continues to deploy cash towards operational capital needs and to return capital to shareholders in line with its capital allocation priorities.

During the second quarter, the company invested $4.2 million in capital expenditures and returned $13.3 million to shareholders through dividends and share repurchases.

Tenants liquidity remained strong with a balance of $84.6 million in cash and cash equivalents at the end of the second quarter and approximately $321.8 million of unused borrowing capacity on the company's revolving credit facility.

On August 7, the company refinanced its existing debt agreement increasing its revolving credit facility limit to $650 million. This gives the company more flexibility and capabilities for growth through M&A and offers significant potential for driving expansion and creating value for our stakeholders.

The company continues to effectively manage debt and maintain a strong balance sheet. Our net leverage was 0.6 times adjusted EBITDA and below our targeted range of 1 times to 2 times adjusted EBITDA. Moving to 2024 guidance.

Overall, based on the strong order growth rate and demand for our products and services, we are now forecasting slightly higher net sales for the full year 2024.

As backlog returns to normal, removing the higher pricing within we anticipate a shift back to a typical product mix between industrial and commercial machines and the return to a more normal gross margin.

We anticipate higher operating expenses in the second half of 2024 compared to the first half with a targeted focus on new product development within R&D. We will remain disciplined and prudent in our spending, focusing our investments in areas that position us for future growth and increased operating efficiency.

Given these factors and the strong profitable growth in the first half of the year, we are raising our outlook for the full year 2024. Specifically, we now expect net sales to be in the range of $1.280 billion to $1.305 billion, reflecting organic sales growth between 2.5% and 4.5%.

Adjusted EPS of $6.15 and to $6.55 per diluted share, which excludes certain non-operational items and amortization expense. Adjusted EBITDA in the range of $205 million to $215 million; adjusted EBITDA margin in the range of 16% to 16.5% and and capital expenditures of approximately $20 million. With that, I will turn the call back to Dave..

Thank you, Fay. In summary, I am very proud of the global team and our ability to continue our growth trajectory, as we are lapping a record prior year. The investments we are making and innovative products we are delivering to our customers' position us well to deliver on our increased full year guidance.

I wanted to thank everyone who joined us for our Investor Day at the New York Stock Exchange in May. It was well attended, and we received positive feedback from those who have attended in person as well as remotely. A recording of the event, along with the presentation is available on our investor website.

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

[Operator Instructions] Your first question comes from the line of Steve Ferazani from Company Sidoti. Please go ahead..

Hey, good morning, guys. This is Daniel. I'm actually filling in for Steve today.

Given the strength once again of EPS and the good strong orders, can you maybe just provide a little bit of color on why you decided to lower the high range of your EPS guidance?.

Yes. I think as we look at tax rate, as we look at interest expense, as we look at kind of the overall expense, I think that's a contributing factor to our overall kind of EPS..

Okay. Perfect. And then you touched on the geographic areas, but and you -- Italy is promising right now.

But in general, are you seeing any recovery in any other areas within EMEA?.

Thanks for the question, Daniel. We are seeing, I would call it, a still sluggish demand across the region. We highlighted Italy because it's an area that we have made specific investments in, and we're starting to see green shoots of return on those investments.

Coming just on quarter, we just positivity in the UK as well as from our acquisition in Central and Eastern Europe, the TCS acquisition. So those will be points I would highlight as points of positivity coming through the quarter from a market demand perspective..

Perfect. And then just one more, if you don't mind.

Could you just touch a little bit on the M&A pipeline that you see right now?.

Yes, happy to. So we've been very transparent with our strategy around M&A. We're focused on deals that defend and grow our core business that allow us to grow and capture value in the connected autonomy space and then the adjacency of other mobile equipment.

We developed a funnel of over 800 target companies aligned with that strategy, and we are actively working that funnel I would point at the brain agreement, although technically not an acquisition and the equity stake we took in brain and the agreement we signed are providing commercial benefits to accelerate our AMR adoption, our AMR sales in the marketplace, and we are realizing benefits from that investment.

At TCS, which was our acquisition in Central Eastern Europe, is on track and yielding the incentive benefits. We have 2 proof points of action here early in the year within our M&A funnel. We are actively working that funnel and prioritizing targets.

As you know, M&A could be a bit episodic and out of our control as far as pacing, but we are actively engaged working the funnel and when I say we -- this is an enterprise priority.

So Fay and I are hands on with some targets, and we have resources within the company that are also identifying high-priority relationships to form and strategic areas within the funnel that we should be focusing for acquisition. The other thing I would highlight, as Fay mentioned in her opening remarks, we've got our debt leverage below 1 time.

We've expanded our revolver, and so -- and we're showing strong cash conversion on the year. And so we've got the financial firepower that when the right deal comes along, we're prepared to move quickly. We've got the financial firepower to do it. So we look forward to updating you more on specifics as we move through the second half and into 2025.

But I assure you this is an enterprise priority and will be a strong contributor to our value creation strategies in the coming years..

Great. We really appreciate it and best of luck in the second half of the year. Thanks, Daniel..

[Operator Instructions] Since there are no further questions at this time, we would like to turn the call over to management for closing remarks..

Thank you. I want to thank you all for your participation today and for your interest in Tennant Company and a special congratulations and thank you to the entire global Tenant team that may be listening to the call. We were bond of saying that growth is a team supports the tenant company.

And so these results are a direct reflection of your efforts and contributions. This concludes our earnings call. Have a great day..

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect..