Tennant Company
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Good morning. My name is Kensey, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2020 Fourth Quarter and Full Year Earnings Conference Call. This call is being recorded Thank you for participating in Tennant Company's 2020 Fourth Quarter and Full Year Earnings Conference Call. Beginning today's meeting is Mr. William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations for Tennant Company. Mr. Prate, you may begin.

[William Prate:]

Thank you, Kensey. Good morning, everyone, and welcome to Tennant Company's fourth quarter 2020 earnings conference call. I'm William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Chris Killingstad, Tennant's President and CEO; Tom Paulson, our Interim CFO; and Dave Huml, our Chief Operating Officer. On today's call, we will update you regarding our fourth quarter performance and full year outlook and our guidance for 2021. Chris will brief you on our operations; Dave will provide an update regarding our enterprise strategy and Tom 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 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 2020 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 Chris.

[Chris Killingstad:]

Thank you, William, and thank you everyone for joining us today. We hope that you and your loved ones are continuing to stay safe. 2020 tested us all. And I'm extremely proud of the way the Tennant team rose to the challenge. We did so by remaining true to our guiding principles while continuing to provide the solutions and service that our customers have always expected from Tennant. Our full year 2020 results reflect our speed and effectiveness in responding to the pandemic, specifically in how we prioritized the health and safety of our employees, the measures we took to manage costs and ensure liquidity, and above all, the determination and dedication that our employees showed in meeting the needs of our customers. Their hard work helped minimize the overall operational and financial impact of the pandemic.

[Dave Huml:]

Thank you, Chris, and hello everyone. Before I highlight some of our strategic milestones, I want to echo Chris in thanking our Tennant team members around the world for their hard work this past year in the face of remarkable challenges. Also, I cannot overstate how important our strategy has been in channeling those team efforts to ensure the best possible results. I will walk you through some of our key achievements of the past year in that regard and provide a look at where we are headed. As Chris mentioned, our enterprise strategy is based on three pillars in support of our value creation objectives. One, winning where we have competitive advantage; two, reducing complexity and building scalable processes, and three, innovating for profitable growth. In 2020, the first pillar, winning where we have a competitive advantage, began with a thorough evaluation of all aspects of our business, including products, market geographies, channels and customers in order to identify where we have the strongest competitive advantage. The findings of that comprehensive review have led to meaningful changes within Tennant. For example, as we announced earlier this month, we completed the sale of our coatings business. Although the business represented approximately 2% of our total sales, it was not central to our core strength in professional, industrial and commercial floor cleaning. By divesting it, we can redirect resources toward more strategic and profitable activities.

[Tom Paulson:]

Thanks, Dave, and hello everyone. Please note that in my comments today any references to earnings per share or EPS both GAAP and non-GAAP are on a fully diluted basis. For the fourth quarter of 2020, Tennant reported net sales of $273 million, down 7.4% year-over-year as a result of the pandemic-related slowdown, while our organic sales, which exclude the impact of currency effects, declined 8.9%.

[Chris Killingstad:]

Thank you, Tom. Before we start the Q&A, I want to take a moment to discuss our leadership transition. As you know, Dave Huml will become CEO on March 1 and I will serve as a strategic advisor until the end of this year. I have been at Tennant for almost 18 years, including 15 years as President and CEO. This has been, without a doubt, the most wonderful and fulfilling experience of my professional career. But this is definitely an opportune time for a change in leadership. One of the most important things a CEO can do is ensure a smooth and seamless transition to new leadership. I am proud to say that we have accomplished that with the succession plan we have in place, which is the culmination of more than two years of work in cooperation with our board of directors. I hired Dave a little over six years ago, and we have a very close working relationship. It's been such a great pleasure to see him grow as a leader and become an important contributor to Tennant's success. Dave loves the company and has a deep understanding of our business. He has led our global marketing group. He has been responsible for Asia Pacific and EMEA. He was the executive sponsor of our IPC integration. And he even had us then running our global operations group. Dave has exceptional leadership abilities as well as the vision to take Tennant to new levels of success. His industry knowledge, global experience and foundational understanding of our company have been powerful attributes in working with our senior leadership team to develop and now implement our enterprise strategy. Dave has a keen understanding of where we need to go as an organization to serve all of our stakeholders. And I am excited to see where he takes us. In closing, I would like to say that what has touched my heart most profoundly through all my years with the company are the people. The thousands of wonderful, talented, dedicated and caring people of the Tennant family. They are the lifeblood of this great organization and the reason it has thrived for 150 years and will continue to flourish for the next 150. With that, we will now open the call to questions. Operator, please go ahead.

[Operator:]

Our first question comes from the line of Michael Shlisky with Colliers Securities.

[Michael Shlisky:]

Good morning, guys. And before I start, I want to give the Chris best of luck, and thanks for everything. Appreciate it.

[Chris Killingstad:]

Thanks so much.

[Michael Shlisky:]

So I just wanted to start off by saying - by asking first about the new T16AMR. I know it was developed probably in conjunction with some customers, so I don't think only a few weeks that you've been out publicly talking about it with investors. But what's been the early uptake on some of the orders and interest in that product over the last couple of months or so?

[Dave Huml:]

Yes. It's really - it's too early to tell, but Mike - this is Dave talking by the way. Too early to tell, but I will tell you, and you're aware of this, we develop our products in close proximity with our customers as we gather requirements, pilots and pre-prototype tests. So we're feeling very confident that T16 has a bright future. I would make the point that we have a very talented industrial sales force globally that is very excited to have a robotics offering in their arsenal as they go out and contact our customers. And there's certainly a lot of conversation among that customer base in those industrial verticals about the potential fit for AMR. So remains to be seen, but I would say there is a significant optimism about the fit for T16AMR in our overall AMR portfolio.

[Michael Shlisky:]

Got you. Then I want to just turn quickly to maybe the very neutral outlook here in Q1. The comps don't seem that hard, but Asia was tough last Q1. The other thing that will be potentially up year-over-year in Q1 on the top-line or maybe just close the GAAP numbers we saw this past couple of quarters, maybe not being down quite as much in the first quarter?

[William Prate:]

So Mike, this is William Prate. So I think your question, just to make sure that I heard it, you kind of cracked up there a little bit. You're talking about our Q1 top-line for the enterprise annualizing last year? I want to make sure I clarify your question.

[Michael Shlisky:]

Yes. I was just curious if you think you might see a small increase in Q1 year-over-year from a top-line perspective or at least close the gap. We've seen some downside to low-double-digit the last couple of quarters. Will that at least narrow a little bit here in Q1?

[Dave Huml:]

Yes. Without providing a specific Q1 target, I just want to comment on what we're seeing and feeling in Q1. We know that the pandemic has hit in earnest in the middle of March last year. And so that provides a little bit of upside potential. It's really just the second half of March 2020 that we're up against. Prior to that in 2020, we were having a really robust year and running at or above our expectations for the year. The other dynamic is, we are lapping significant AMR deployment in the first quarter of 2020, and we're lapping that AMR deployment. So that will make it very challenging to have organic growth in the first quarter 2021 versus 2020 at the enterprise level.

[Michael Shlisky:]

Okay. And then maybe another one from me about the year-over-year. We've seen Asia down two years straight here organically. With changes you made in Japan that you just discussed and some of the opening in China. Do you think you could have a year-over-year increase in Asia? Could that be a participant in the overall organic growth for the year?

[Dave Huml:]

Yes, we do. And we see some positive trends in those geographies. Again, barring any unforeseen downturn from some pandemic-related impact, our full year guidance for '21 reflects organic growth across all of our regions, including APAC.

[Michael Shlisky:]

Okay. I wanted to throw one last one in here. Any update you could give us on the opening in the CFO role? I mean, I think some folks don't want to see Tom go. But what is the outlook on getting someone permanent in there at some point soon?

[Dave Huml:]

Well, I'm among those that don't want to see Tom go, but I'm appreciative that he came back to help us in this interim basis. We continue to actively recruit candidates for the CFO role as recently as this week. And so I'm really impressed that we're getting a very qualified slate of candidates. I'm hopeful that we can fill that role very soon. What we are not doing is compromising our search criteria just to get the role filled because we're hiring for the long-term. So really no substantive update other than to tell you it's a top priority of mine to get that role filled with top talent as soon as possible.

[Operator:]

Our next question comes from the line of Chris Moore with CJS Securities.

[Christopher Moore:]

Hey, good morning, guys. I got cut off for a moment when Tom was going through at the end of his remarks on the sequential EBITDA expectations, quarterly dividend '21. Could you maybe just repeat that?

[William Prate:]

Yes. Chris, this is William. I can sit there and take that. So effectively what we're saying is that we expect that Q1 from an EBITDA standpoint is going to be the lowest of the four quarters and we expect to see sequential growth each quarter of this. So we'll see Q2 higher than Q1, Q3 higher than Q2. That's not to say that we will see growth year-over-year each quarter though. Is that how you missed there from Tom's section.

[Christopher Moore:]

That's what I missed. Yes, thank you.

[William Prate:]

The other comment that he would have made is just about our coatings business, and this kind of goes back to Tom - or I'm sorry, to Mike's previous comment. In terms of annualization, just remember, the divestiture of our coatings business has about a $5 million to $7 million quarterly impact as well.

[Christopher Moore:]

Got it. It's helpful. How about a bigger picture? Any supply chain or labor availability issue that - at this stage?

[Dave Huml:]

Yes, I'll take that. We have - we're always actively monitoring our supply chain. I would say the dynamics in the supply chain environment globally right now, there are two topics I would raise that have made the news and so you'll be aware of them from a macro level. One is around transportation-related challenges, and this really affects every mode of transportation, be it container shortages, clogs at ports, which extend lead times as well as some constraints on air freight and obviously the cost impact of having the air freight. And then domestically around the availability of over-the-road truck capacity, mostly limited by the availability of drivers. We are actively managing those transportation-related issues. And our guidance reflects our ability to mitigate those challenges as we move through the year. The other supply chain-related challenge that I'd highlight not because it's necessarily material to Tennant, but because it is in the news and so you may be wondering is around the chips shortage that is making headlines mostly because of the impact on the automotive industry and some other related devices that rely heavily on chips. We are affected at some level by the chip shortage. We are actively managing it. And we've taken mitigation steps, including increasing our safety stocks, both our inventories as well as with our suppliers for those critical components. We have a bit of a benefit because our components tend to be - we are lower volume user and they tend to be more off-the-shelf and less customized. We just don't have the volume to justify our customized component. So it makes it easier for us to source those components either from alternative suppliers or do a spot buy in the primary or secondary marketplace. So we're taking advantage of those opportunities where we see potential risk in supply for chips to shore up our inventory so they are not the reason for a line outage here later in the year. Again, guidance reflects our ability to fully mitigate that risk.

[Christopher Moore:]

Got it. Very helpful. Thanks, Dave. In terms of rising commodity prices, steel and aluminum, any impact there? Any kind of thoughts in terms of what you're seeing and what you would expect in the next quarter or two?

[Dave Huml:]

Yes. We are seeing and feeling commodity inflation especially across the core commodities, steel, resin, lead, etc. Again, we've taken actions to control those within the supply chain and also mitigate the impact financially on our overall operations. It really hits us in two regards where we source primary commodities. And then secondarily, when our suppliers' source those same commodities in the production of their components and try to pass that cost through to us. So supply team has done a fantastic job to pivot and respond to the commodity inflation we see and foresee for the year. And again, we baked that into our guidance for the year that we'll be able to manage and mitigate the impact on us financially as well as keep our manufacturing operations running so we can support our customers.

[Christopher Moore:]

Got it. Helpful. Last one for me just longer term, the autonomous trajectory. Five years from now, could it be 25% of revenue? Is that high? Is that low? Just trying to get a sense in terms of that kind of long-term place that autonomous has within Tennant?

[Dave Huml:]

Yes. It's a great question. I'm not in a position to quantify what the potential could be. I would just note that we are very optimistic about the technology. We've obviously placed a significant bet on having the broadest product range available as well as and importantly to support ecosystem to make sure that our customers have a fantastic experience with these products. Nothing kills a new innovation faster than a customer having a bad experience. And so we're being very planful and intentional about whom we launch to, how we partner with them so that they have a successful deployment and then are able to reap the benefits from the deployment as time goes on. I would just say it remains to be seen if this is going to be a material part of our business or significantly disrupt this marketplace. But we feel like we are well positioned that if a disruption is available then we're going to be the ones to drive it.

[Christopher Moore:]

Got it. That's helpful. And just last one, I'm sorry. With respect to the autonomous margins, my understanding, I don't know if it's correct, that the margins were relatively similar to core equipment, but the concept tell us you'd generate more consumable revenue. Is that accurate or are the margins much different?

[Dave Huml:]

Yes. Without splitting it out between equipment and P&C, aftermarket, we believe that this will be an accretive part of our enterprise and in our offering. To date, our offering is EBITDA accretive both on a dollar and a rate basis. So we feel like we're well positioned from a profitability perspective with this innovation. And our strategy candidly is to deliver the customer a fantastic experience and a positive ROI on their investment, while we maintain our margins and decrease our profitability on the product and be accretive to the enterprise overall. So the time to get prices when you launch a new disruptive innovation. And so we've taken full advantage of that.

[Operator:]

Our next question comes from the line of Marco Rodriguez with Stonegate.

[Marco Rodriguez:]

Good morning. Thank you for taking my questions. I was wondering if we could talk a little bit more about the Americas. I'm just trying to get little bit better of a handle on the Q4 performance. I know that there is a tough comp year-over-year with the large AMR sale in the prior year quarter, but if maybe you could talk a little bit about what that - if you can normalize, what would that growth rate would have both like? And then sequentially, the Americas were down, whereas I understand obviously seasonality - it's normally kind of a flattish quarter. So any sort of a driver that you can talk about there as well would be helpful?

[Dave Huml:]

Yes. Let me make a few comments on the Americas, and we're not going to quantify a normalized rate for the geography. But let me give you some color around the Q4 experience and what we're seeing in the business. As you know that we are lapping large AMR deployment in prior year, which optically makes achieving growth a challenge. We had - we saw softness in the core business across both our direct and our distribution channels in the quarter. And so it's fairly widespread, which gives us the indication it's more of a macro market phenomenon rather than anything specific to our industry or our business. We did see positive growth in Brazil, which was really a great indicator and we're thinking a sign of trend to come, we're hoping. And significantly our aftermarket was down less than our equipment. And so as markets open up, customers are bringing their machines back online and are requiring service and aftermarket parts and consumables to get the machines operational again. Again, this could be a leading indicator of an improving trajectory, which we baked into our 2021 guidance.

[Marco Rodriguez:]

Understood. And then sticking with the Americas and your guidance for fiscal '21, I know that you provided some good information here in terms of obviously your expectations on a sequential basis from an aggregate EBITDA perspective. But just kind of also wondering that organic growth in the Americas, I know that the full year you're expecting organic growth across all regions. But just how should we be thinking about the organic growth rates in the Americas as the year unfolds by quarter?

[Dave Huml:]

Yes. We're not going to provide specific detail by region forward-looking. But again, we have baked in organic growth across all regions on a full year 2021 basis with sequential quarter-by-quarter growth. I will tell you, since we reached the bottom in Q2 of 2020, the recovery has been choppy by month, choppy by geography and choppy by vertical market, and we expect that kind of choppiness to continue as we recover throughout the year.

[Marco Rodriguez:]

Got it. And last one for me. Just circling back on the strategic objective of reducing complexity in your operations, some very helpful data and information in the prepared remarks, in the slide presentation. But I was wondering if maybe you can sort of string where we are on that process? Like maybe what sort of inning we're in terms of reaching that objective? And while I obviously understand that operational efficiency, there's always going to be an ongoing objective. Just kind of like how far along are we with kind of grabbing the low hanging fruit, if you will, from that objective?

[Dave Huml:]

Yes, great question. So our enterprise journey is a five-year journey. We started in 2020 and it takes us through 2024. I think the simplification you're referring to is our product portfolio optimization, the 35% reduction in Tennant model. So let me just give you a little flavor on that and where we're at on that journey. That's really the substance of your question. We did have a robust analysis of our offering. And when we talk about a 35% reduction in Tennant model that includes product access. So we've announced that we exited the Sentinel Outdoor product line as well as our ATLV product line. It also includes pruning existing lines down to only those products that we really need to serve the essential components of someone's application. And so where we thought we had allowed product lines to proliferate, we went in and tuned up the line to get down to the critical few products that our customers really value and serve the application requirements. The third component we talked about standard offerings. So within a model, we've identified and we are promoting our standard offerings versus allowing or forcing customers to customize and pick from options to select the product that's right for them. So those are kind of the three components within that simplification from an operations perspective. Where we're at in the journey? We did a lot of heavy lifting in 1920 to get us to the point of the reductions we've announced. We moved early on this because we believe that it was important to our business. And then now we have time to go back and capture the savings through manufacturing efficiency, productivity, supply chain efficiency, and importantly, selling efficiency. And so while I don't envision 35% reductions year-over-year, continuing to analyze our product portfolio to optimize it both for our customers and for the company is an important component of how we will operate going forward. One other point I'll make is this is not just about cutting products. Importantly, what we're trying to do is to streamline and optimize our operation and our offering. This also allows us to free up space and capacity to bring online the important innovations you've seen. And so where we move product out of our plant because we've streamlined a product or we've exited that space to support bring in innovations like producing AMR, for example, within our existing footprint. So it's really - it's not just a reduction exercise, it's a reallocation of our resources and our footprint to accommodate the innovation. Is that helpful?

[Operator:]

Our next question comes from the line of Michael Shlisky with Colliers Securities.

[Michael Shlisky:]

Yes. Hey guys. Just one quick follow-up question on the coatings business that was sold. Could you tell us whether there is a major EBITDA impact? Was it running in a loss or below average margin? Proud of selling it?

[William Prate:]

Yes. Mike, good question. So to your point, it was even a rate dilutive. So by divesting, we will see a slight pickup. We're not - it's not overly material that we're going to bring out the exact amount. But it was dilutive to the overall enterprise.

[Operator:]

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

[Chris Killingstad:]

Thank you again for joining us. This concludes our earnings call. You may all now disconnect. We hope you have a great day. Thank you.

[Operator:]

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