Q3 2024 Tennant Co Earnings Call

In This Article:

Participants

Lorenzo Bassi; Vice President - Finance; Tennant Co

David Huml; President, Chief Executive Officer, Director; Tennant Co

Fay West; Chief Financial Officer, Senior Vice President; Tennant Co

Steve Ferazani; Analyst; Sidoti

Tom Hayes; Analyst; CL King

Aaron Reid; Analyst; North Coast Research

Edith Priscilla; Analyts; Northcoast Research

Presentation

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's third quarter 2024 earnings call. This call is being recorded. (Operator Instructions) thank you for participating in Tennant Company's third 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.

Lorenzo Bassi

Good morning, everyone, and welcome to Tennant Company's Third Quarter 2024 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 provide an update on our 2024 third quarter performance. Dave will discuss our results and enterprise strategy, and Fay will cover our financials. After our prepared remarks, we will open the call to questions. Our earnings press release and slide presentation that accompany 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 third quarter earnings release includes the comparable GAAP measures and a reconciliation of non-GAAP measures to our GAAP results.
I'll now turn the call over to Dave.

David Huml

Thank you, Lorenzo, and hello, everyone. On the call today, I will be discussing highlights from the third quarter 2024, our outlook for the remainder of the year and the progress on our enterprise strategy. I am pleased to report on our strong third quarter results, lapping a record high third quarter in the prior year, we delivered both organic net sales growth and increased adjusted EBITDA.
As we anticipated, this quarter's performance was driven more by incoming order demand and less from backlog reduction. With this growth momentum, we are well positioned to achieve our 2024 guidance and continue to execute our enterprise growth strategy effectively.
For the third quarter of 2024, net sales increased 3.6% to $315.8 million. Adjusted EBITDA rose to $47.9 million, yielding an adjusted EBITDA margin of 15.2%. Order rates were very strong in the third quarter, increasing high single digits compared to the same period in 2023. On a year-to-date basis, order rates have increased mid-single digits and are above our long-term revenue growth target of 3% to 5%.
This quarter also marks the second consecutive quarter with strong order growth across all our geographies, a trend we believe will continue in the fourth quarter. Unpacking the third quarter, our business results varied by geography.
In the Americas, order rates during the quarter were up compared to the prior year period significantly outperforming the average growth rates we have seen in the region over the past few years. This was the result of both pricing and volume growth driven by our enterprise strategy initiatives. We reduced our backlog in the quarter at a faster pace than expected due to order softness within our North America industrial product.
Overcoming currency-related headwinds in Brazil, our strategic investments in the Americas continue to deliver order rates outpacing market growth, reinforcing our confidence that our strong leadership position is growing. In EMEA, continued market demand softness this year was compounded in the third quarter by lapping a previous quarter with higher backlog reduction benefit. Despite the overall sluggishness, we continue to see some positive signs in the region.
Third quarter order rates increased double digits and year-to-date orders are up mid-single digits. Go-to-market initiatives helped drive double-digit growth in the UK compared to the prior year period and Italy saw strong organic growth as we expanded our distribution network.
Lastly, TCS, our previously announced acquisition in Eastern Europe, continues to perform ahead of expectations. This business drove nearly 6% growth for the region in the quarter. Integration is on track, and we are executing aggressive growth plans for this business in this attractive region.
Turning now to APAC. Our APAC region accounts for 7% of our enterprise-level sales, with China and Australia combined, accounting for over 60% of this region's revenue annually. Business performance in this region was primarily impacted by start declines in China, where overall market demand has slowed considerably. Australia is also showing signals of slower demand, reflecting customers' growing economic uncertainty.
As has been widely reported, excess manufacturing capacity and government-induced overproduction in China are pressuring market prices in our mid-tier product offerings and impacting our results. We do not see this dynamic changing for the remainder of the year.
To counter this, we have strategically shifted our focus to vertical markets and product categories that are more insulated from this broader market dynamic, particularly through our Tennant branded legacy product offerings, which delivered strong growth in the third quarter.
Turning now to strategic initiatives. Last year, we introduced the three pillars of our new enterprise strategy: growth, performance and people. We continue to resource, invest and execute targeted initiatives across each of these pillars, and I'd like to take the opportunity to provide you with several key updates from the quarter.
Within the growth pillar, pricing is a critical piece to driving growth. During the third quarter, we continued to see price growth across each of our geographies. At an enterprise level, we are targeting approximately 50 to 100 basis points of annual price growth as part of our long-term goals. We are well positioned to achieve that in 2024 and expect our pricing realization to more than offset inflationary pressure for the full year 2024.
New product development is another important focus area in our growth pillar. By launching innovative new products, we help our customers solve their most pressing challenges, capitalize on emerging technology and market trends and differentiate our offerings from our competitors.
At an enterprise level, we are targeting new product development to add approximately 150 to 200 basis points of growth as part of our long-term goals. Bolstered by the release of the X4 ROVR earlier this year, we are on pace to achieve that in 2024.
As part of our new product development efforts, we are placing a strong emphasis on small space and product line extensions. Earlier this year, we introduced our i-mop family of products into new geographic markets, including Brazil, France, Portugal and Spain.
This international expansion has driven incremental growth of i-mop products during the current year, and we anticipate continued growth through increased country, channel and brand access as we look ahead to 2025 and beyond.
In September, we launched our new T291 small walk-behind scrubber into the North American market. Designed for use in both hard-to-reach spaces and open areas, the T291 is a walk-behind scrubber built to simplify and improve facility management by combining cleaning power and maneuverability.
The T291's versatility and small size make it an excellent fit for midsized retail, health care and education environments. Our product line extensions have proven to be an effective strategy, positioning our mid- and premium-tier products to grow share and generate incremental revenue and margin.
The third area of focus for our new product development efforts is AMR. The strong market reception for the X4 ROVR, combined with continued high demand for our existing AMR products has been encouraging.
Customers are choosing Tennant AMR machines supporting our belief that we have a winning product portfolio, differentiated service capability and strong value proposition in the market. Customers are actively upgrading and expanding their AMR fleets with new X4 ROVR and our other AMR models.
In the third quarter of 2024, we saw significant repurchases from existing key retail customers and are reaching new AMR customers with the X4 ROVR, which officially launched in EMEA during the quarter. In the first nine months of 2024, we have deployed over 2,200 units bringing our cumulative AMR total to over 8,700 units deployed since introduction.
We continue to be pleased with our progress on driving disruption in robotics and growing our AMR portfolio, which now accounts for approximately 5% of net sales at the enterprise level for the first nine months of 2024.
The launch of the X4 ROVR alongside our strong AMR performance fuels our optimism as it relates to our long-term growth strategy. We designed the X4 ROVR as a scalable platform allowing us to bring new products to market more quickly and cost effectively. This includes accelerating the development of new products based on the X4 ROVR platform with additional launches now planned for 2025.
Shifting to the performance pillar of our enterprise strategy, our ERP modernization journey is one of the key components within our performance pillar. The project is on track, and we have hit our current year milestones related to the design and build phase of the implementation with staggered go-live launches planned for 2025.
Our significant investment in this ERP 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.
Looking ahead, we anticipate a strong finish to 2024, driven by increasing order growth across all geographies. This momentum, supported by our strategic initiatives, is expected to continue promoting higher order growth in 2025. While this order growth bodes well for our long-term outlook, other dynamics will shape our 2025 performance.
As previously discussed, our 2024 backlog was primarily concentrated in North America industrial equipment. Initially, we anticipated reducing our backlog by $80 million to $100 million within the year. However, we are now on track to reduce our backlog by $130 million by the end of 2024. This accelerated reduction is attributable to lower-than-expected incoming orders for industrial equipment.
In 2024, we experienced lower-than-anticipated demand for industrial equipment across various vertical markets including the rental channel, where we are experiencing extended replacement cycles. This market dynamic has contributed to a larger-than-expected backlog reduction in 2024, presenting a headwind for 2025. Despite anticipated strong order growth in 2025, this significant backlog reduction, coupled with continued softness in certain regions, is likely to result in muted top line performance in 2025.
We continue to see success in the first year of our enterprise growth strategy. The investments we are making are reading out in the current year illustrated by our strong double-digit order growth. We believe we will see continued order growth from these initiatives as we navigate the short-term backlog challenges in 2025.
Our key enterprise growth drivers, pricing, new product development and go-to-market investments, will continue to fuel our growth and help drive our long-term revenue growth targets of 3% to 5%. Additionally, we will continue to prioritize investments aligned with our long-term growth pillars while maintaining strict spending discipline.
With that, I will turn the call over to Fay for a discussion of our financials.