Tennant Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 7 speakers on the call.

Operator

Morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Tennant Company's 2023 Second Quarter Earnings Conference Call. This call is being recorded. There will be time for Q and A at the end of the call.

Operator

After the Q and A, please stay on the line for closing remarks from management. Call. Thank you for participating in Tennant Company's 2023 Second Quarter Earnings Conference Call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance for Tennant Company.

Operator

Mr. Bessie, you may begin.

Speaker 1

Good morning, everyone, and welcome to I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Hammel, Tennant's President and CEO and Fay West, Senior Vice President and CFO. Today, we will provide you with an update on our Q2 performance. Dave will provide you an update on our operations and enterprise strategy, and Faye will cover our 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.

Speaker 1

Tenantco.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 filed 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.

Speaker 1

Additionally, on this conference call, we will discuss non GAAP measures that include or exclude certain items. Our 2023 Q2 earnings release and presentation include 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. Tenonco.com. I'll now turn the call over to Dave.

Speaker 2

Thank you, Lorenzo, and hello, everyone. On the call today, I will be discussing highlights from the 2nd quarter, New product innovations, our new sustainability framework, Thriving People, Healthy Planet and our outlook for the remainder of 2023. Before analyzing the details of this quarter, it is important to frame our performance in relation to the prior quarters. In 2021, as the economy started to recover and reopen, we experienced a spike in demand for our products and services, And we have continued to benefit from strong and resilient demand since that time. Also beginning in early 2021, we started to experience Supply chain issues, labor shortages and high inflation, conditions which have persisted for 7 straight quarters, which impacted our ability to increase production to fully meet demand.

Speaker 2

This led to a substantial increase in our order backlog, which reached unprecedented levels. To address these circumstances, our team took significant actions and made incremental investments to mitigate the short term disruptions and enable us to increase production. Leveraging our enterprise strategy, we also implemented structural changes such as optimizing plant capacity and securing labor to support increased parts availability that helped address the immediate production and supply chain issues as well as position us for long term future success. These actions and investments have started to yield results as evidenced by our performance in the last 2 consecutive quarters. The availability of critical parts has increased And the impact of supply chain challenges and inflation has abated.

Speaker 2

Lead times are reverting to normal in almost all of our locations And we have been able to reduce our backlog substantially. Our elevated backlog is testament to the strength of our brands, Quality of our products and service and commitment to supporting our customers, and we appreciate our customers' loyalty and patience during this extended period. We will continue to work diligently to reduce lead times and satisfy customers with our exceptional products and services. We anticipate that we will be able to reduce backlog further in the back half of the year. However, backlog will remain elevated, specifically in North America Industrial Products.

Speaker 2

Now moving on to some specifics about the quarter. In the Q2, we achieved record net sales of $321,700,000 which was underpinned by organic growth of 15%. We expanded gross margins to 43.4 percent and delivered adjusted EBITDA of $57,600,000 or 17.9 percent of net sales. Additionally, we converted over 100% of net income to free cash flow. Key drivers of our 2nd quarter performance were a noticeable improvement in parts availability and in general a more stable and predictable supply chain environment, which resulted in an increase in volume and a reduction in backlog.

Speaker 2

Continued price realization and moderating inflation, which drove an improvement in gross margin And a cautious approach to S and A spending, which benefited adjusted EBITDA. Regarding supply We have seen a significant improvement in parts availability and have experienced fewer line disruptions. This allowed us to operate our plants more increased volumes and as I just mentioned, meaningfully reduced backlog. We are pleased with the improving supply chain landscape and are Cautiously optimistic that we will continue to see stability and predictability, but we do not think that we are fully recovered. Therefore, this remains an area of significant focus, continued action and necessary agility.

Speaker 2

Strong price realization, moderating inflation and careful cost control have benefited both gross margin and adjusted EBITDA in the quarter. Based on our first half performance, resilient demand and continued backlog reduction, we are pleased to increase our full year 2023 guidance. We are cautiously optimistic that inflation will remain at moderate levels and that the global economy will continue to recover. Turning now to recent product launches and our innovative technology. We continue to see success in utilizing our global network of Design and Engineering Facilities.

Speaker 2

This quarter, we broadened our portfolio of innovative products and solutions By leveraging the Italy based IPC product platforms and launched the Tennant branded S680 and S880. These ride on sweepers in our mid tier range are the right fit for light to medium duty tasks requiring high maneuverability in both indoor and outdoor environments. These products improve existing offerings of similar sized legacy equipment, but are presented at different price points. This allows us to reach a broader set of customers across the broad array of vertical markets we serve through our multi channel distribution approach. Our acquired product platforms allow us to bring a diverse range of equipment to market at different price points for our customers with minimal financial investment and resources from Tennant.

Speaker 2

Turning now to our innovative technology products. The most disruptive and innovative technology with the highest Potential in our industry is the autonomous mobile robot or AMR. This equipment operates in complex environments Not only does this ensure consistent cleaning operations, but also reduces the cost of ownership by helping to minimize the impact of labor expenses for cleaning in today's tight labor market. These products work alongside cleaning And allow them to focus on the difficult and variable cleaning tasks, while the more repetitive and expensive floor cleaning can be handled by our equipment. Tennant currently offers 3 autonomous mobile robots, including our most recent product, the T-sixteen AMR 4 Scrubber.

Speaker 2

This was the 1st autonomous scrubber designed for industrial applications like warehousing and manufacturing markets. Tennant has been traditionally strong in these industrial vertical markets and our customers value our high performance equipment, Reputation for quality and durability, as well as our ecosystem of support, including our factory direct field service organization. The T-sixteen AMR is a natural progression for us. Since 2022, about 30% of our T-sixteen sales have been the AMR version of the equipment. We believe autonomous equipment and large space industrial markets Has significant growth potential and the adoption rate will continue to expand.

Speaker 2

The industrial market has already adopted automation and robotics in the areas outside of cleaning and employees in these settings are accustomed to working alongside robotics. We also believe that it is easier to manage and measure the ROI of automation in the industrial space, allowing our customers to fully realize the value of our AMR products. We are excited about the T16 AMR potential and believe we are uniquely positioned to enable customer success And drive AMR adoption in these verticals. Now turning to sustainability. In April, we announced the launch of our new sustainability framework, Thriving People, Healthy Planet.

Speaker 2

Along with our first set of goals and our commitment to reduce greenhouse gas emission and achieve net 0 by the year 2,040, In the coming weeks, we will plan to release our 2023 Sustainability Report, which will detail Tennant's progress on our goals and ESG metrics. We also plan to announce our 2nd set of goals under the Thriving People, Healthy Planet framework. Specifically, we aim to increase The percentage of women in leadership by 50% by the end of 2,030. Ultimately, we believe that there are opportunities to deepen the diversity of our organization and expand the perspectives on our teams. We believe that combining this objective with providing an inclusive work environment will positively support our business success.

Speaker 2

With that, I'll turn the call over to Faye for a discussion of our financials.

Speaker 3

Thank you, Dave, and good morning, everyone. This morning, I'm going to discuss our Q2 results, cash flow and liquidity, as well as our full year 2023 guidance. In the Q2 of 2023, Tennant delivered net income of $31,300,000 an increase of $14,700,000 from the prior year period. Strong operating performance was fueled by higher net sales and improved gross Margins. Net sales growth and gross margin improvement were driven by both volume increases and higher price realization.

Speaker 3

Selling and administrative expenses were higher in the quarter as compared to the prior year period due to higher variable costs associated with the increase in operating performance as well as higher employee related costs. As a percentage of net sales, S and A expense for the Q2 of 2023 decreased by 120 basis points to 27% from 28.2 percent in the prior year quarter. The decrease in the period was driven by the leverage attributable to our sales and gross margin growth as well as our cost containment initiative. Also impacting net income was Higher interest expense and higher income tax expense. Net interest expense increased to $4,000,000 in Q2, up from $1,200,000 in the prior year period.

Speaker 3

The increase was due to higher debt levels coupled with rising interest rates on our variable interest rate Debt, income tax expense of $8,600,000 was $4,900,000 higher than the prior year. The comparisons between periods was impacted by a decrease in discrete tax benefits recognized during the quarter, partly offset by favorable changes in the mix and forecasted earnings by country. The 2nd quarter's effective tax rate of 21.6% is in line with our full year expectations. 2nd quarter adjusted earnings per diluted share, which excludes amortization, gains on the sale of assets and restructuring charges more than doubled to $1.86 per share from $0.92 per share in the prior year period. For the Q2 of 2023, Tennant reported net sales of $321,700,000 a 14.8% increase compared to the prior year period or 15% on an organic basis.

Speaker 3

Approximately 60% of the year over year growth was attributed to pricing and the remaining 40% was driven by volume. We ended the quarter with approximately $255,000,000 a reduction of $43,000,000 from the end of the Q1. Increased parts availability allowed us to increase our production to service outstanding backlog and fulfill customer orders. Net sales growth of $41,500,000 in the quarter was primarily due to this backlog reduction. Tennant groups its sales into 3 geographies: The Americas, which include North America and Latin America EMEA, which covers Europe, the Middle East and Africa and Asia Pacific, which includes Australia, China, Japan and other Asian markets.

Speaker 3

All of the geographic regions achieved year over year net sales growth. Net sales in the Americas grew 21.4 percent to $216,600,000 or 21.7% on an organic basis, while FX had a net unfavorable impact of approximately 0.3%. This significant year over year growth in our largest region was driven equally by price realization and volume increases, led by strong equipment and parts and consumables sales in North America. Net sales in EMEA in the second quarter 3.5 percent over the prior year to $80,000,000 or 2.4 percent on an organic basis. This was driven by price realization in both equipment and service product categories across the region, partly offset by volume decline.

Speaker 3

The region also had a net favorable impact from foreign exchange of approximately 1.1%. Net sales in the Asia Pacific region increased by 2.4% over the prior year to $25,100,000 or 6.3% on an organic basis. This was driven primarily by price realization in Australia and volume growth in China. However, it was partly offset by a net unfavorable impact from foreign currency exchange of approximately 3.9%. We also group our net sales into the following categories: equipment, parts and consumables, and service and other.

Speaker 3

We experienced growth in all categories in the Q2 of 2023 as compared to the prior year period, most notably in equipment sales, which grew 18.1% year over year. Turning to adjusted EBITDA. Adjusted EBITDA for Q2 was $57,600,000 an increase of $27,300,000 versus the prior year period. Adjusted EBITDA margin was 17.9 percent, an increase of 7 10 basis points versus the prior year. Our sales growth driven by both volume and price and expanded gross margins were the most significant drivers of adjusted EBITDA growth.

Speaker 3

Gross profit of $139,500,000 was $33,400,000 higher than the Q2 of last year. Gross margin of 43.4 percent in the Q2 of 2023 improved 5 50 basis points compared to the same period in the prior year. We have successfully returned to pre pandemic gross margin rates based on strong price realization, which offsets the multi year impact of inflation on Materials and Labor. S and A expense of $87,000,000 was up $7,900,000 compared to the prior year quarter due to higher variable costs associated with increased operating performance, such as warranty costs and employee compensation costs. As a percentage of net sales, adjusted S and A expense for the 2nd quarter decreased 140 basis points to 26.7 percent from 28.1 percent in Q2 of the last year, driven by both the leverage attributable to our Top line and gross margin growth as well as our cost containment initiatives.

Speaker 3

Turning now to capital deployment. Net cash provided by operating activities was approximately $39,100,000 in the 2nd quarter compared to net cash used in operating activities of $13,500,000 in the year ago period. The increase was the result of improved operating performance, coupled with a significant reduction in strategic inventory spend. In previous quarters, we increased our inventory with Targeted investments in safety stock as well as Tier 2 components, which we procured on behalf of our suppliers. Those direct actions are now reading through in our results as we have been able to increase our output and fulfill orders without further increasing our inventory position.

Speaker 3

Capital expenditures of approximately $5,000,000 were in line with our expectations and we are on pace to meet our full year guidance. In alignment with our capital allocation priorities, we returned capital to our shareholders with dividend payments of $4,900,000 and repurchased approximately 70,000 shares of our common stock for $5,000,000 Tenant's liquidity remains strong with a Cash balance of $95,800,000 at the end of the second quarter $261,900,000 of unused borrowing capacity on the company's revolving credit facility. At the midpoint of our full year guidance range, Our net leverage was 1x adjusted EBITDA, lower than our stated goal of 1.5x to 2.5x. We have remained focused on maintaining a strong balance sheet. And given the current interest rate environment, we have directed cash to reduce debt by $21,100,000 in the 2nd quarter.

Speaker 3

Moving to guidance. We are pleased with our 2nd quarter results and based on the strength of the first half of the year, we are raising our full year guidance. Our year to date results have benefited greatly from a significant increase in the availability of parts, and we believe we will continue to see overall improvement and our supply chain. The improvement in parts availability allowed us to increase our production to fulfill open orders and meaningfully reduce backlog. While many of our locations are approaching normal backlog levels and lead times, our backlog remains elevated and heavily concentrated in North America, particularly in our industrial products.

Speaker 3

We anticipate that we will be able to further reduce backlog in the back half of the year, but not at the same rate that we experienced in the 1st 6 months of 2023. Overall, demand has been resilient We are monitoring global order rates very closely. We expect that the Q3 will experience the same level of seasonality as it has historically, especially in our EMEA region and net sales will be slightly lower in the Q3 as compared to the Q2. We believe our pricing actions will continue to read out in the second half of the year. Further, we anticipate that gross margins will remain strong in the second half of the year as cost out actions coupled with improved productivity and strong price realization will continue to materialize.

Speaker 3

Based on the timing of spend, we expect R and D expense will be slightly higher in the back half of the year. As we have discussed on prior calls, we have been very cautious on all discretionary spending, specifically S and A, as evidenced by our low S and A We will remain cautious and prudent in our spending, but anticipate that S and A will be higher in the back half of the year as we invest in employees, Strategic initiatives and revert back to normal travel, which will put some pressure on adjusted EBITDA. Given these factors and the strong profitable growth in the first half of the year, we are raising our outlook for the full year of 2023. Specifically, we now expect net sales to be in the range of $1,200,000,000 to $1,250,000,000 reflecting organic sales growth of 10% to 14% and adjusted EBITDA to be in the range of $175,000,000 to $190,000,000 With that, I will turn the call back to Dave.

Speaker 2

Thank you, Faye. It was a record first half for Tennant and I couldn't be more proud of team who have worked diligently for years executing our enterprise strategy, managing the supply chain crisis and working tirelessly on behalf of Tennant Globally. With that, we'll open the call to questions. Operator, please go ahead.

Operator

Thank you. The first question is from Chris Moore with CJS Securities, your line is open.

Speaker 4

Hey, good morning, guys. Amazing quarter. Thanks for taking a couple of questions. So backlog $255,000,000 down $71,000,000 year to date. It's going to come down a little bit further in the second half.

Speaker 4

Can you just remind me kind of what the is there an optimal backlog range that you look at this point?

Speaker 2

Thanks, Chris. Thanks for the question and I'll accept your kudos on the amazing quarter. It's really a testament So the entire Tennant team that delivered these results. Yes, backlog, we exited with the $255,000,000 backlog. Normal backlog is in the $50,000,000 range, obviously, but the price we put through the significant amount of pricing we put through in the past several years, We're having to readjust what our normal levels of backlog are, but I would use $50,000,000 as a normal backlog range.

Speaker 2

So With Faye's comments in mind, we exited Q2 with $255,000,000 Half as that will reduce down to around the $200,000,000 range as we exit 2023.

Speaker 4

Got it. That's helpful. I'm not sure if they said or not, but orders in Q2 year over year, what did they look like?

Speaker 2

Yes. Orders are surprisingly resilient, is the word I would choose. Sequentially, orders are flat. And so we've if you look at how that we didn't plan it that way. And so we are closely monitoring orders As an indication of underlying demand as we work diligently to reduce backlog.

Speaker 2

We're kind of flat to plan on orders year to date. As Fay mentioned, we're expecting kind of normal seasonality as we outlook In the Q3, Q3 is historically our lowest quarter and then we'll need to generate the orders to fulfill our Q4 and Deliver on the full year.

Speaker 4

Got it. Very helpful. And just from a It sounds like it was sixty-forty pricing versus volume. Is there still much pricing kind of catch up coming in Q3 and

Speaker 2

Q4? I think you're referencing pricing that's trapped in backlog?

Speaker 1

Yes. Or what's

Speaker 2

up for an inflation? Yes. Yes. So We've got as the backlog reduces, there'll be less catch up in pricing as a result of products and orders That are trapped in backlog. If you just look at that component, I think it's important to note our future results sixty-forty price versus volume.

Speaker 2

So we are getting underlying volume growth in our results. Backlog reduction in the first half Was about $70,000,000 and implied in our guidance is about $50,000,000 reduction in the second half. We'd expect a similar sort of impact, slightly lower in the second half, but similar kind of impact on the revenue line. And as we get as we work backlog down, there will be building orders that were placed at more recent pricing and so less pickup in price.

Speaker 4

Got it. I will leave it there. I appreciate it.

Speaker 2

Thanks, Chris.

Operator

The next question is from Steve Farzani with Sidoti and Company. Your line is open.

Speaker 5

Good morning, Dave. Good morning, Faye. Obviously, huge record revenue quarter. I'm trying to understand and I think, Faye, you tried to address this a little bit in your comments in terms of guidance. The guidance implies second half revenue is lower than first half and obviously EPS lower.

Speaker 5

And I'm just trying to Yes. I'm just trying to understand, are there some capacity constraints at this point given how healthy the backlog and orders remain, either on the labor on just Plant size?

Speaker 2

Thanks, Steve. Let me take that and just comment on the assumptions underpinning our second half And implied in the full year guidance. It's not necessarily capacity constraints. As Fay mentioned, Most of our assembly lines around the world have returned to a normal level of output in response to the demand signals they're getting, any normalized level of backlog. I think we've mentioned in earlier calls, our backlog is over weighted in industrial products and in our North America region.

Speaker 2

And so as we reduce backlog, our backlog becomes more consolidated and concentrated in fewer and fewer lines production lines. Those are industrial products and primarily in North America. And the reason that's important is it is more challenging to effect Change because our backlog is so concentrated in fewer and fewer products. We've shown that when we can get parts, we've got the plant capacity and the labor to respond And productive drive productivity and get the product out the door that becomes increasingly more challenging as it's fewer and fewer lines and fewer and fewer products They were trying to effect change. It doesn't mean we can't effect change.

Speaker 2

It just means it will take longer time to work the remaining backlog down. And you're right, Steve. First half revenue is higher than kind of what's implied in guidance for the second half. Part of that is seasonality, which is normal and especially in EMEA, which we anticipate Q3 will be down slightly versus Q2. The other

Speaker 3

piece is the rate at which we're going to be able to reduce backlog as Dave was just talking about. We said we'll probably be right around the 200 Range. And so that implies roughly a $50,000,000 reduction in backlog, which is a bit lower than what we saw in the first half.

Speaker 1

And Stephen, adding to that, you also had a question on EPS. And I think worth mentioning, Faye mentioned it already during the presentation. But H1 also benefited from deliberate restrictions on S and A. And while we'll remain cautious, we'll anticipate that some of the S and A will be higher in the second half as a result of investments in employees, strategic investments and also reverting back to some normal level of operational spend around travel. So that's part of kind of the type of NOI items.

Speaker 5

Okay. That makes sense. Asia Pacific, nice bump This quarter, is that China coming opening up again or is it more widespread than that? And can you give us any kind of Color on regional differentiation in order books?

Speaker 2

Yes, I'd be happy to. Specifically on APAC and I think Pei mentioned this, we're having a strong A year in Australia and New Zealand, in our marketplace there, we have a commanding position of the market there and we're really capitalizing on a strong macro economy To launch new products, including AMR and realize price as well. China had a strong start to the year. And so we're pleased with the early returns. I will tell you that we're seeing some softening in China as kind of the post COVID surge Appears to be stolen on a macroeconomic basis.

Speaker 2

The government is putting stimulus in place to try to stimulate the broad economy, but We're cautious whether that will read through into our markets and what we're hearing from customers is they're cautious as well. So much of The China economy is driven by export and exports are down. You look at China exports June versus prior year, June was down 12%. And so We don't think it's going to be a quick solve for China on a macroeconomic basis. Having said that, we're still bullish on China.

Speaker 2

We like our position there. We look at our go to market and our product portfolio and we've got line of sight and confidence in our ability to deliver China results in line with our full year guidance. From an order perspective, we've seen softening in EMEA. We believe it's driven by broad macroeconomic. We've heard other competitors echoing the same sentiment.

Speaker 2

We've seen it in our product portfolio On the lower end kind of commercial product categories, including high pressure washers, we've seen some broad based softness across the geography across Countries within EMEA, but I would note Germany in particular, has seen a softening in demand and it's driven by macroeconomic conditions, Hyperinflation within that particular country. So we are monitoring EME closely to make sure that we are positioned to capitalize on Opportunities that present themselves, but also that we've right sized our cost structure and calibrated our spending given the opportunities we have in the short term. And Americas, both Latin America and North America, very robust. Orders are holding up. We're able to operate productively when we have parts.

Speaker 2

We've demonstrated the ability to book orders when our lead times are extended, but reduce Backlog when we can get parts, and we're getting strong price realization against a moderating inflation backdrop. So We're kind of hitting on all cylinders in those geographies. And while we're cautious about our outlook and we need demand to remain resilient Heading through Q3 and Q4, we have line of sight to the order pipeline to feel confident in those geographies delivering to support our full year guidance.

Speaker 5

Great. Thanks, Dave. Thanks, Faye.

Speaker 3

Thanks, Steve. Thank

Operator

The next question is from Tim Moore with EF Hutton. Your line is open.

Speaker 6

Thanks and congratulations on the very strong organic sales growth and the very, very impressive guidance raised for both growth and EBITDA this year. Yes. I have three questions. So maybe first, I'll just start off a bit on the aftermarket services penetration. You've added some service trucks.

Speaker 6

I think that service truck count might have been up to 556 in March. And I've been estimating just based on some other competitors that Possibly maybe 1 third of your equipment orders could be triggered from leads from your on-site technicians. They get focused there and they're on there telling the customer about new things. So can you just give us a little bit more color on the aftermarket service and you think it will be more of a focus this year?

Speaker 2

Yes. Thanks, Tim, and thanks for the compliments. Really proud of the results and focused on delivering the second half of the year. Service remains a critical component to the business and our view of service is not to run service just as a standalone business. We do measure it on its own P and L and its own metrics, but service as part of an integrated ecosystem as a value we provide to the customer over the life Cycle of ownership in the product.

Speaker 2

And the reason that's important and you noted one facet of it, what we want is satisfied customers That are pleased with Tennant, getting the full benefit and ROI from our machines and by coming back to buy more and by Tennant the next time. If you run service solely as a standalone business, you run the risk of keeping customers in old products Require too much investment in service when they really should be in a new product that gives them better functionality, better performance and a better ROI. And so It's an integrated part of our go to market channel strategy and that's how we approach it philosophically. We are investing in our service capabilities. We have invested in training our service technicians, so they're fully capable across Our broad product portfolio, including AMR, and that's an entirely new set of capabilities that our service technicians need to have in order for our customers To have the experience so that we can drive adoption in that category, we've invested in you mentioned additional trucks.

Speaker 2

What that gives us is additional capacity and coverage so that we can deliver on service level agreements for all customers, but especially largest customers Where we can go in and make a commitment to a large national or regional retailer in terms of response time, you need to have the service truck coverage in order to deliver on that commitment. We believe we are uniquely positioned because of our factory direct service organization and we're adding the coverage in strategic areas to make sure that we can make Differentiated commitments to customers and earn new business for the largest customers in each of the verticals. And last but not least, we're investing in the digital infrastructure that enables our service capability and that's broad reaching. That's everything from Working on telemetry as well as our protocols for dispatching as well as the actual infrastructure IT system we use for Processing orders and improving the efficiency and capability of our service technician, so they can spend less time sitting at a computer Entering orders or parts orders, or looking at customer data and spend more time hands on with equipment Performing necessary maintenance and repairs to deliver uptime to our customers.

Speaker 2

So significant investment in kind of the IT side of service as well to make sure that we can Deliver fantastic customer experience the first time every time for our customers.

Speaker 6

Well, thanks Dave for those deep insights and color. That was very helpful. And my second question is, how is the equipment maybe as a service model going for rental and leasing to smaller customers in South America and Europe? I remember, I think You had a reconditioning infrastructure in place, service infrastructure. Are you seeing any notable uptick in sales or interest there?

Speaker 6

Or do you think maybe That's more of a story for

Speaker 3

next year.

Speaker 2

Well, I'll start with the we call equipment as a service, kind of that long term All in leasing model. And I think I'll set the backdrop first. We have a variety of ways of transacting with our customer today from a capital purchase model, From a break and fix service to a full contracted service model, we partner with banking partners for leasing models. We serve as short term users through a rental channel relationship and treat them as strategic partners to serve People that need a machine for a day a week a month, we're not set to do that directly. So we partner with the industry's best rental channel partners.

Speaker 2

And then we have this equipment as a service model where it's really one price all in equipment and service. We've demonstrated success With this model in several geographies around the world, notably LatAm and parts of Western Europe, And really we've used it as a tool to get deeper with very targeted customers in very specific verticals where we have the capability to provide The service the customer expects and we can do it profitably. And so you have to have a significant amount of embedded infrastructure to support Equipment and Service models, we've been successful, demonstrated success in a few pockets and we're using that learning As well as leaning into some additional analysis to understand what it would take to scale that more broadly outside within those geographies and outside of other geographies. We want to make sure that we can deliver a fantastic customer experience that it's compelling to the customer to move this direction for all the reasons it's appealing to us. Want to make sure it's compelling for the customer as well.

Speaker 2

And last but not least, we want to make sure we can do it profitably. And so we're spending time to understand What works and what doesn't, what infrastructure we need to support the model and then we'll look at scaling it in a very targeted fashion where it makes sense Around the world, it's an opportunity to differentiate ourselves versus smaller regional local competitors that don't have the infrastructure to support this. And as well as so it's a differentiated offering versus competition and it's a potentially really compelling business model proposition, value proposition To some target customers and target verticals that could over time make us much more sticky. And so we all know the appeal of a recurring revenue model and we would Look to take advantage of that, again, where we're capable and where it makes sense financially for both us and our customers.

Speaker 6

Dave, that was great. And once again, terrific color. So for my final question, Dave and Faye, I believe you might have started that inorganic study and review for larger targets and adjacencies to leverage your core assets. I don't want to steal your thunder in case You detailed this maybe at a possible Investor Day early next year, whenever it may be. But is there any update on that review for acquisitions?

Speaker 6

Or It's still only maybe halfway completed at this point.

Speaker 2

Yes. Thanks for the question. We are actively engaged in that work now. I would we're a little bit Halfway, but it's starting to come into view. I don't think it's stealing thunder at all.

Speaker 2

We're really proud of the fact that we're heading in this direction. And actually this investment in defining our M and A strategy is one of the incremental investments that we're making in the business To set ourselves up for future value creation, that's the reason why you see the first half, second half disparity kind of in terms of the performance and results. The reason we're looking at this is we think it's a really compelling value creation opportunity for us as an enterprise. We think that we've got some unique and compelling assets and capabilities that we can leverage that would make us a more rightful owner of some other companies Out there, we believe that our strategy will be a hybrid of some close in near sort of Core investments to support and accelerate growth and defend our core space in the mechanized cleaning market globally, As well as some near and maybe even some further out adjacencies that we will find interesting and attractive from a strategic and a financial Perspective, so that we can lean into it and add to create some serious value for incremental value above just our core business For our investors, I don't want to fully unveil our strategy yet and it's not that I'm holding it.

Speaker 2

I just want to make sure that We're fully lined out. I will tell you, we are assessing our potential opportunities in terms of their strategic value, Their operational fit and their financial return. And so across those three facets, we're taking we're opening the aperture very wide and we're leveraging a Tier 1 consulting partner to help us make sure that we are really taking a solid look at the potential opportunities in the marketplace on a global basis. We do anticipate providing more definition around our M and A strategy in upcoming quarters and we do have an eye towards an Investor Day First half of twenty twenty four, we will not only unveil the full strategy, but have more time to go into greater depth and take Q and A at that time.

Speaker 6

Dave, thanks for that sneak peek. That's it for my questions and have a well deserved nice weekend.

Speaker 5

Thanks, Tim.

Operator

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

Speaker 2

Thank you. I'd just like to congratulate the entire global Tennant team on a fantastic quarter and a great start to the year. I to thank everyone on the call for your interest in Tennant Company. This concludes our call today. Have a great day.

Operator

This concludes today's conference call. Thank you for participating.

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Earnings Conference Call
Tennant Q2 2023
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