TENNANT CO Q1 FY2025 earnings call

Enterprise Level - Order rates increased 13% for the fourth consecutive quarter, book-to-bill rate above 1, and maintained normal backlog levels. - Forecast to grow orders in the range of 3.5% to 7% for 2025. ### Regional Highlights - Americas: Order rates up 20%, enterprise strategy initiatives like X4 ROVR drove incremental growth, overcoming currency headwinds in Brazil. - EMEA: Grew 2% on constant currency basis, positively impacted by acquisition in Eastern Europe and price realization across product categories. - APAC: Impacted by continuing market challenges and demand decline in China, with Australia showing slower demand signals. ### Go-to-Market Initiatives - North America: Increased service capacity drove service revenue growth. - EMEA: Investments in direct selling in the U.K. and expanding distribution coverage in Italy delivered growth. ### New Product Development - AMR sales grew 30% YoY, with AMR portfolio accounting for ~5% of net sales in Q1 2025. - Clean 360 program launched to make AMR adoption more accessible, offering autonomous subscription model with AMR machine, software, and maintenance contract. - X6 ROVR to launch in Q2 2025, offering superior cleaning performance and nearly 3x cleaning capacity of X4 ROVR.

Tennant Company reported net sales of $290 million for the first quarter of 2025, with an organic decline of 5% and adjusted EBITDA of $41 million, or 14.1% of sales. In the Americas, organic net sales declined 6.9%, but order rates were up 20% compared to the prior year period. In EMEA, organic net sales grew 2% on a constant currency basis, driven by a previously announced acquisition in Eastern Europe and price realization. APAC business performance was impacted by market challenges in China and Australia. AMR sales grew 30% over the first quarter of 2024, accounting for approximately 5% of net sales at the enterprise level during the first quarter of 2025.

2025 Guidance - Net sales expected to be $1.210 billion to $1.250 billion, reflecting organic sales decline of negative 1% to negative 4%. - Adjusted EPS forecast $5.70 to $6.20 per diluted share. - Adjusted EBITDA in range of $196 million to $209 million. - Estimated tariff impact of ~$40 million for full year 2025, mitigated by pricing actions (7%-10% price increases in North America mid-May) and sourcing actions (negotiating with suppliers, alternative sourcing).

• Macroeconomic uncertainty and tariffs creating economic uncertainty for customers. - Potential adverse impact on results if tariff situation deviates from current assumptions. - Impact of tariffs on cost of goods sold, requiring mitigation strategies.

Q: Good morning, Dave. Good morning, Fay. I appreciate all the detail on the call. A lot of it was extremely helpful. Dave, I got to ask about the margin guidance. Your EBITDA margins declined sequentially for three straight quarters. I know Fay touched on some of the reasons for the mix this quarter. But to hit that margin guidance in this environment for this year, you need probably more than 200 basis points improvement over the average next three quarters compared to what you've reported in the previous three quarters. And I don't see what's in your order book in fairness. But given the inflationary pressures, and it sounds like you're doing some things to offset it, still, if you can - it just looks like a challenge. Can you walk us through how you get to the confidence level to get there in the next three quarters, right, because your revenue was about 24% of the midpoint of sales. So it's not through throughput like just how do you get there?

A: Thanks for the question, Steve. I appreciate it. And it certainly is a challenging environment to manage. And so let me give you the high-level context for how we arrived at our bottom line EBITDA guidance and then we can dive into - I think much of the story is around our first quarter experience. And so Fay touched on in her remarks, I touched on it as well. When you look at the margin mix from a customer perspective in Q1, there were two components of the margin decline. One was the known challenge to overcome the backlog headwind from the $50 million worth of industrial equipment that we shipped in Q1 of 2024. And this was a question that we've had from analysts throughout the year, this outsized margin impact and benefit in the 2024 baseline, from shipping high-margin industrial products, how do we think about that as we head now into 2025. And so, we planned for that margin hit in our operating plan and then certainly in our full year guidance as well. So the correct course for that is that the $125 million worth of backlog reduction benefit we got in 2024 was populated in the first quarter. It was $50 million in the first quarter. And so the lapping the hurdle, becomes much easier as we move through Q2, Q3 and Q4 of 2025. In addition to that, we expect that the mix will return to more normalized mix, particularly from a customer perspective. And I think we touched on in the script, but in Q1, we were fortunate to ship some large strategic customers as well as some big project wins. And I'm talking about people like Walmart, Morrisons, Home Depot, T.J. Maxx. These are Carrefour. These are the world's top retailers, and we're fortunate to have won business with these customers. We are always shipping key customers. We just had a concentration of key customer shipments in Q1 that adversely affected our margins. So you had this impact of the year-over-year backlog reduction benefit from industrial mix, now to a more normalized mix. In addition to that, we shipped an abnormally high amount of strategic account customers at lower margins. So that kind of explains the first quarter experience. I would note, though, that our first quarter margins were sequentially in line with Q4. And so although they were a bit lower than we had anticipated because of this strategic account mix issue, they're kind of in line with how we exited the year. Your question specifically is how do we get back to guidance range for EBITDA margins on the full year. And that's a combination of both gross margin and how we manage our SMA as we move through the rest of the year. We can't answer the gross margin question without getting into the tariff discussion. So with your permission, maybe I'll give you a bit of a glimpse into how we're thinking about tariffs from a broader perspective.

Q: Hi, thanks for taking my call. So at the end of the day, kind of my takeaway from this is, and I've always looked at this as a somewhat lumpy business. So this is almost just kind of par for the course, especially since you're really just reaffirming guidance. Is that a fair way of looking at it?

A: Well, I'm not exactly sure what you - I'm not sure what you mean by lumpy business, but let me sort of talk about what's implied in our guidance. And I'll anchor back. There's a significant amount of uncertainty, and assumptions we've made in how we're going to offset the tariff impact and the demand will hold going forward. We expect and we are returning to normal seasonality and normal seasonality in our business, Aaron, I know you're newer to the story, so let me just take a step back. Typically, quarters two and four are our larger quarters and quarters one and three are our lighter quarters, both from a demand perspective. And there's multiple reasons for that, mostly driven by our vertical market exposure and buying trends and behaviors within the vertical markets we serve in each of the quarters. Our business has certainly been lumpier than normal in -- over the past several years, because we've been managing through supply chain challenges, and shipping down over $300 million worth of backlog, we generated through the supply chain challenges after the pandemic. So that has caused a certain amount of lumpiness. And the other -- I'm using your word lumpiness. The other thing that drives lumpiness for us within a given period, and I view this as a long-term positive, we are consistently winning, and we're very fortunate and grateful. We're consistently winning business with the world's largest accounts, and they tend to swing big orders in a big way and has a material impact on our quarter. We talked about the margin impact in Q1, from our shipments to strategic accounts, and big project wins. That's an example of kind of a positive sign for the business, but it creates lumpiness within a given quarter.

Q: Okay. That makes sense. I appreciate that. And then this kind of leaning to not necessarily, but more of the seasonality to it as well. One thing I want to learn a little bit more about is that the Clean 360 program, and it sounds like you're leaning into that. Is that something to where you are coming out with that because it's a way that you think it would be an additional way to drive sales and further accelerate the AMR side of the business? Or did that come from customers really asking that? I'm kind of just figuring out where did that come from? Where is the impetus of that? And how exactly is that going to be levered going forward?

A: Yes. Thanks for the question. Excited to talk about Clean 360. And the answer to your question is both. We generated as a growth idea in our business model to drive accelerated adoption of robotics. And also, we were listening to customers. And as we listen, to customers that were interested in robotics, and maybe on the fence or contemplating a purchase, one of the challenges they brought up was, hi, your AMR products are great. They have a high sticker price. And so it's a significant CapEx, and we want to be comfortable that we can get the return on the investment by adopting robotics once we move into it. So we're really excited about offering this all-in bundle, for one monthly price with a 90% uptime guarantee, because what it says to the customer, listen, you're going to have controllable costs, one monthly low price. The monthly bundle includes the equipment, the service contracts, the navigation software subscription. So you have a known cost to operate. And because of our broad service coverage and service capability, we're able to guarantee uptime, which says Mr. Customer, when you want to use the robot, we can guarantee it's going to be available to use. In other words, we can ensure you you're going to achieve your ROI. I think it's really a fantastic program. It gives our selling organization something different to talk about when a customer is interested in robotics. And if they have a little bit of sticker shock over the CapEx price, we can talk about leasing. We can talk about a Clean 360 program. I think it's generating a lot of interest. So today, it's available on the T16AMR, which is our industrial-focused robotic scrubber. It's generating a lot of excitement with our selling organization. I think it will be a significant part of the winning combination, for AMR adoption here in North America.

Q: And I guess the last question on the Clean 360 part of it is, especially with price hikes coming and a lot of people going through the natural life cycle of their equipment. Is there a chance that this could actually meaningfully accelerate, the AMR adoption even faster than initially anticipated? Someone looking and say, hi look, I have to buy another large machine, or I can now break this into monthly payments, and actually get a better quality product, or something that's going to really reduce labor. Is there a chance that this could accelerate the AMR adoption beyond what you initially thought possible, what it looked like last year?

A: Yes. Listen, that's what we're hoping for. We signed on to achieving $100 million in revenue from AMR by 2017. It would be great to beat that by a year or two. And again, I don't think Clean 360, is a silver bullet for every customer. But I think for customers that are having a challenge with the sticker price of a capital purchase, this gives them a really attractive alternative that gives them controllable costs, guaranteed uptime and a consistent ROI on the investment. So I think it's - I do think it has the potential. We'll have to see how it's adopted. Early returns are good. We've already booked orders on the Clean 360 offering. And so, we'll pace it throughout this year. And if it looks to be a significant mover in driving adoption, then we'll have to bake it into our forward-looking projection. But I'm really excited, and I want to give kudos to the team. We have historically been an equipment company. We've built great equipment. We service the equipment really well. Now we're leaning into the business model that really solves -- helps solve one of the challenges for our customers. And so I really think the combination of the market-leading AMR robot along with our market-leading aftermarket service. Our partnership with Brain on the navigation software side, and now unique selling propositions like Clean 360, I think we've got a really attractive value prop when we stand in front of a customer and more tools in the tool bag, to go drive adoption of robotics.