🔵⚪🔴 Edited Transcript of TNC.N earnings conference call or presentation 25-Feb-21 4:00pm GMT – Tunnel de Vente


Q4 2020 Tennant Co Earnings Call MINNEAPOLIS Feb 26, 2021 (Thomson StreetEvents) — Edited Transcript of Tennant Co earnings conference call or presentation Thursday, February 25, 2021 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David W. Huml Tennant Company – Senior VP & COO * H. Chris Killingstad Tennant Company – President, CEO & Director * Thomas Paulson Tennant Company – Interim CFO * William Prate Tennant Company – Senior Director of Finance & IR ================================================================================ Conference Call Participants ================================================================================ * Christopher Paul Moore CJS Securities, Inc. – Senior Research Analyst * Marco Andres Rodriguez Stonegate Capital Markets, Inc., Research Division – Director of Research & Senior Research Analyst * Michael Shlisky Colliers Securities LLC, Research Division – Senior Research Analyst ================================================================================ Presentation ——————————————————————————– Operator [1] ——————————————————————————– Good morning. My name is Kensi, and I’ll 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. (Operator Instructions) 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, Tennant Company – Senior Director of Finance & IR [2] ——————————————————————————– Thank you, Kensi. 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 and full year performance 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. ——————————————————————————– H. Chris Killingstad, Tennant Company – President, CEO & Director [3] ——————————————————————————– 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 that 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. While the business impact of the pandemic was significant across most of our markets, it had little effect on our strategic initiatives within the company. A year ago, I shared with you our enterprise growth strategy, which is based on 3 pillars: to win where we have competitive advantage, to reduce complexity and build scalable processes, and to innovate for profitable growth. We followed through with our plan in spite of the pandemic. In fact, our strategy was integral to everything we accomplished in 2020. For example, our recent launch of a range of new floor scrubbers reflects Tennant commitment to innovation and our focus on winning where we have competitive advantage. Thanks to our unsurpassed engineering capabilities, we’re able to use customer insights to solve real-world problems with products that deliver quality, performance and value. We’ve also made meaningful improvement to our operating model, as illustrated by our adjusted EBITDA as a percentage of sales, for which full year 2020 was in line with that of 2019 despite the decline in organic sales. As part of the ongoing implementation of our enterprise strategy, which Dave will speak to in greater detail in a moment, we’ve made the strategic investments needed to allow us to exit the pandemic in a strong position as markets continue to recover. We recognize that now, more than ever, our customers are relying on us to help them maintain the safety and appearance of their facilities, while at the same time reducing their overall cost to clean. For more on our strategy, I will turn the call over to Dave. ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [4] ——————————————————————————– 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 3 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 strengths in professional, industrial and commercial floor cleaning. By divesting it, we can redirect resources towards more strategic and profitable activities. Our strategy implementation has been truly global, expanding across our operations worldwide. In Japan, for example, after a thorough review of our direct sales go-to-market strategy in that market, we have made the decision and begun to shift to a distributor-only model, which offers compelling S&A saving while delivering a superior customer experience. On the product side, we’ve continued to simplify, and in 2020, managed a 35% reduction in our core Tennant legacy product portfolio, along with a 20% reduction in product options. These changes have far-reaching benefits in terms of manufacturing, supply chain and sales efficiency. Furthermore, after rigorously assessing our product lines, we have created standard offerings across our legacy Tennant products. This helps customers by eliminating guesswork from the buying process. Where customers used to have to pick from literally dozens of options and features, they can now rely on Tennant’s expertise to identify the solutions and features that best suit their needs. In addition to enhancing our sales funnel, this change improves our manufacturing process as well. We will continue to provide customized solutions when needed, but we will do so while prioritizing manufacturing efficiency. The second pillar of our strategy, reducing complexity and building scalable processes, goes to the level of product design and subsystem architecture. 2020 initiatives in this area targeted cost reductions along with customer-facing quality and performance improvements. A great example of this is an industrial tire project review we completed last year. Through an engineering redesign effort across our large scrubbers and sweepers, we introduced new tires that reduced our cost, improved traction and performance for our customers and reduced our tire SKUs by over 50%. Another example of reducing complexity is the plant optimization work we completed in China last year. Our acquisition of Gaomei included a number of benefits, including a skilled workforce based in Hefei, China, where we have now centralized our China manufacturing. These optimization efforts allowed us to close our facility in Qingpu and will enable greater manufacturing flexibility and improved profitability. As Chris noted, the implementation of our enterprise strategy is a continuous process, particularly with respect to our third pillar, innovating for profitable growth. That means using a process of innovation to unlock value for our customers and for Tennant. A great example of how we executed against this pillar in 2020 is the advances in our robotic floor cleaning product category. In November of last year, we introduced our T380AMR robotic floor scrubber. Its smaller size enhances maneuverability and navigation in tight areas, leading to maximum productivity and is ideal for customers with narrow spaces or layouts that may have been too challenging for our other robotic machine. Our customer-centric approach in identifying and solving real-world problems is the reason our customers see us as the market leader. Looking ahead, the continued execution of our enterprise strategy will be central to our success and is what will enable us to deliver on our annual and longer-term goals. This year, we will be diligent and following through on the projects we started in 2020, and we will selectively activate specific initiatives that will further our ability to improve our operating model. Included in our plans are improvements to our service infrastructure, specifically in North America. By investing in new tools to better leverage our teams of service technicians, we are creating additional capacity within our current workforce, improving the way they work and also increasing our ability to meet our customers’ needs. On the product side, we will continue to innovate across our portfolio, such as with the introduction of our new commercial products and the recent launch of our new T16AMR. The T16AMR is an important addition to our product category because it makes our autonomous cleaning technology available to our industrial customers. With this machine, along with the previously introduced T7AMR and T380AMR, we believe Tennant has the broadest robotics offering available that covers the widest range of autonomous cleaning applications. Furthermore, the commercial products we introduced at the beginning of February demonstrate how seamlessly the 3 pillars of our strategy can work together in practice. In addition to leveraging the benefits of our IPC platform from a value engineering perspective, we are offering versions of these products as Tennant branded machines with the full complement of Tennant brand sale and support benefits. The result is a superior value proposition for budget-minded customers backed by Tennant’s reputation for quality and service. On a personal note, I am thrilled with the progress we’ve made and the plans we have in place to continue executing our enterprise strategy. While we are cautiously optimistic about the pace of a global recovery, I look forward to working with our team to seize the opportunities that lie ahead. With that, I will hand the call over to Tom, who will discuss our financials. ——————————————————————————– Thomas Paulson, Tennant Company – Interim CFO [5] ——————————————————————————– 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%. Shifting to our fourth quarter results by geography. As a reminder, we group sales into 3 geographies: the Americas, which includes all North America and Latin America; EMEA, which covers Europe, the Middle East and Africa; and Asia Pacific, which includes China, Japan, Australia and other Asian markets. Sales in the Americas declined by 11.6% year-over-year and were down 10.5% organically. Our results in the region were impacted by continued market weakness driven by the pandemic-related slowdown, which impacted both our direct and distribution sales channels. The region is also lapping an unusually large AMR order in the previous year ago period, which offset the organic growth we experienced in Brazil in the fourth quarter of 2020. Sales in the EMEA region increased by 3.7% year-over-year due to currency effects, but were down 3.4% organically, primarily due to pandemic-related restrictions in the U.K., the Netherlands and the Iberian Peninsula. Despite the negative organic growth, it’s worth highlighting the region did deliver positive organic growth in Italy and Germany in the fourth quarter of 2020, with strong year-over-year growth in the parts and consumables and service businesses. Sales in the Asia Pacific region declined by 10.4% year-over-year and were down 13.9% organically. The year-over-year decline in fourth quarter sales was primarily due to Korea, which was significantly impacted by the pandemic, along with declines in Australia. These results offset organic growth in China from distribution and strategic accounts as well as growth in service across the region. Now on the margins. Adjusted gross margin in the fourth quarter of 2020 was 41.3% compared with 40.5% in the year ago period, increasing due to the positive effect of pricing actions and cost-out initiatives driven by our enterprise strategy, which more than offset regional mix and strategic investments we made during the quarter related to our employees. Turning to expenses. During the fourth quarter, our adjusted S&A expenses were 33.9% of net sales compared with 30.4% in the year ago period. As we discussed last quarter, we made a number of strategic investments to enable us to exit the pandemic in a strong position as the markets continue to recover, as well as investments in our employees to recognize their efforts through the pandemic. Our S&A expenses also include additional plant expenses related to our new corporate headquarters. As for profitability, we reported net earnings of $2.5 million or $0.13 per share, down from $10.9 million or $0.59 per share in the prior year. Adjusted EPS, which excludes nonoperational items and amortization expense, totaled $0.48 compared to the $0.86 in the prior year. In terms of adjusted EBITDA, our results decreased to $25.4 million or 9.3% of sales compared with $34 million or 11% of sales in the year ago period, driven by a lower year-over-year revenue and the incremental investments in the quarter mentioned a moment ago. As for our tax rate, in the fourth quarter, Tennant had an adjusted effective tax rate excluding the amortization expense adjustment of 32.3% compared to 23.3% in the year ago period. The increase was mainly due to the mix in taxable earnings by country and a decrease in discrete favorable tax items compared to the prior year. Turning to cash flow, capital allocation and balance sheet items. In the fourth quarter, Tennant generated $36.3 million in cash flow from operations, primarily driven by business performance and improved working capital levels. We also reduced outstanding debt by $15.2 million and paid $4.2 million in cash dividends to shareholders. Turning now to our full year performance. In 2020, net sales totaled $1 billion compared to $1.14 billion in 2019, reflecting a decline of 11.8% on an organic basis, driven by market weakness due to the global pandemic. As Chris mentioned, our ability to quickly respond to the pandemic and manage costs and ensure liquidity allowed us to deliver an adjusted EBITDA for full year 2020 of $119.4 million or 11.9% of sales compared with $136.9 million or 12% of sales in 2019. These actions also allowed Tennant to generate cash flow from operations of $133.8 million, reduce outstanding debt by $31.1 million and pay $16.3 million in cash dividends to the shareholders. Turning to guidance. While the macroeconomic outlook remains uncertain, we are ready to ramp up quickly as the anticipated recovery continues to gain pace. In addition to improving market conditions, we expect we’ll benefit from our strategic investments and the improvements to our operating model that began last year as part of our enterprise strategy. As included in today’s earnings announcement, our guidance for full year 2021 is as follows: net sales of $1.05 billion to $1.08 billion, with organic sales rising 5% to 8%; GAAP earnings of $3.30 to $3.75 per share; adjusted EPS of $3.50 to $3.95 per share, which excludes certain nonoperational items and the amortization expense; adjusted EBITDA in the range of $130 million to $140 million; capital expenditures of $20 million to $25 million; and an effective tax rate of 20%. We are cautiously optimistic about the overall pace of recovery and expect to deliver on our full year guidance assuming no further pandemic-related issues in 2021. Based on our anticipated pace of recovery in 2021 and our actions to manage costs during the pandemic in 2020, we expect that EBITDA and adjusted EPS will improve sequentially each quarter this year, with Q1 likely being the lowest quarter for EBITDA and adjusted EPS as Q1 2020 was least impacted by COVID last year. Our guidance also incorporates the divestiture of our coatings business, which we estimate having $20 million to $25 million impact of sales. With that, I’ll turn the call back over to Chris. ——————————————————————————– H. Chris Killingstad, Tennant Company – President, CEO & Director [6] ——————————————————————————– 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 adviser 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 2 years of work in cooperation with our Board of Directors. I hired Dave a little over 6 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 a stint 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’m 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. ================================================================================ Questions and Answers ——————————————————————————– Operator [1] ——————————————————————————– (Operator Instructions) Our first question comes from the line of Michael Shlisky with Colliers Securities. ——————————————————————————– Michael Shlisky, Colliers Securities LLC, Research Division – Senior Research Analyst [2] ——————————————————————————– And before I start, I don’t want to forget to say, Chris, best of luck and thanks for everything. Appreciate it. So I just want 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 know it’s been only a few weeks it has 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? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [3] ——————————————————————————– Yes, it’s really — it’s too early to tell, but Mike — this is Dave talking, by the way. It’s 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 preprototype 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 their customers. And there’s certainly a lot of conversation amongst that customer base in those industrial verticals about the potential fit for AMR. So it remains to be seen, but I would say there’s significant optimism about the fit for T16AMR in our overall AMR portfolio. ——————————————————————————– Michael Shlisky, Colliers Securities LLC, Research Division – Senior Research Analyst [4] ——————————————————————————– Got you. Then I want to turn quickly to maybe the very neutral outlook here in Q1. The comps don’t seem that horrible, and Asia was tough last Q1. The other things that will be potentially up year-over-year in Q1 on the top line? Or maybe just at least close the gap that we saw this past couple of quarters, as maybe not being down quite as much in the first quarter? ——————————————————————————– William Prate, Tennant Company – Senior Director of Finance & IR [5] ——————————————————————————– So — Mike, this is William Prate. So I think question just to make sure that I heard it — it 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, Colliers Securities LLC, Research Division – Senior Research Analyst [6] ——————————————————————————– 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 with single to low double digits in the last couple of quarters. Will that at least narrow a little bit here in Q1? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [7] ——————————————————————————– 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 hit in earnest in the middle of March last year, and so that provides a little bit of upside potential. But 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 first quarter of 2021 — or 2020. We’re lapping that AMR deployment. So that will make it very challenging to have organic growth in the first quarter of 2021 versus 2020 at the enterprise level. ——————————————————————————– Michael Shlisky, Colliers Securities LLC, Research Division – Senior Research Analyst [8] ——————————————————————————– Okay. And then maybe another one for me about the year-over-year. We’ve seen Asia down 2 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? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [9] ——————————————————————————– 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, Colliers Securities LLC, Research Division – Senior Research Analyst [10] ——————————————————————————– Okay. I wanted to throw one last one in here. Any update you can 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 coming in there at some point soon? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [11] ——————————————————————————– Well, I’m amongst 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 are — 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 [12] ——————————————————————————– Our next question comes from the line of Chris Moore with CJS Securities. ——————————————————————————– Christopher Paul Moore, CJS Securities, Inc. – Senior Research Analyst [13] ——————————————————————————– I got cut off for a moment when Tom was going through at the end of his remarks on the sequential EBITDA expectations quarterly during ’21. Could you maybe just repeat that? ——————————————————————————– William Prate, Tennant Company – Senior Director of Finance & IR [14] ——————————————————————————– 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 4 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. Does that help? (inaudible) what you missed there from Tom’s session. ——————————————————————————– Christopher Paul Moore, CJS Securities, Inc. – Senior Research Analyst [15] ——————————————————————————– That’s where I missed. Yes. ——————————————————————————– William Prate, Tennant Company – Senior Director of Finance & IR [16] ——————————————————————————– 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, $7 million quarterly impact as well. ——————————————————————————– Christopher Paul Moore, CJS Securities, Inc. – Senior Research Analyst [17] ——————————————————————————– Got it. That’s helpful. How about a bigger picture? Any supply chain or labor availability issues at this stage? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [18] ——————————————————————————– Yes, I’ll take that. We have a — we’re always actively monitoring our supply chain. I would say that — the dynamics in the supply chain environment globally right now, there’s 2 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 airfreight, and obviously, the cost impact of having to airfreight. 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’re a lower volume user and they tend to be more off-the-shelf and less customized. We just don’t have the volume to justify a 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 wholly mitigate that risk. ——————————————————————————– Christopher Paul Moore, CJS Securities, Inc. – Senior Research Analyst [19] ——————————————————————————– Got it. That’s very helpful. 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 too? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [20] ——————————————————————————– Yes, we are seeing and feeling commodity inflation, especially across the core commodities, steel, resin, lead, et cetera. 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 2 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 Paul Moore, CJS Securities, Inc. – Senior Research Analyst [21] ——————————————————————————– Got it. Last one for me. Just longer term the autonomous trajectory, 5 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? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [22] ——————————————————————————– 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, the 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 who 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, that we’re going to be the ones to drive it. ——————————————————————————– Christopher Paul Moore, CJS Securities, Inc. – Senior Research Analyst [23] ——————————————————————————– Got it. That’s helpful. And last one, I’m sorry. With respect to the autonomous margins, I mean, my understanding — I don’t know if it’s correct — is that the margins were relatively similar to the core equipment, but the concept was you generate more consumable revenue. Is that accurate? Or are the margins much different? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [24] ——————————————————————————– 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 increase our profitability on the product and be accretive to the enterprise overall. So the time to get price is when you launch a new disruptive innovation. And so we’ve taken full advantage of that. ——————————————————————————– Operator [25] ——————————————————————————– Our next question comes from the line of Marco Rodriguez with Stonegate. ——————————————————————————– Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division – Director of Research & Senior Research Analyst [26] ——————————————————————————– I was wondering if you could talk a little bit more about the Americas. I’m just trying to get a little bit better of a handle on the Q4 performance. I know that there’s 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 looked like? And then sequentially, the Americas were down, whereas I understand, obviously, seasonality — normally kind of a flattish quarter. So any sort of drivers that you can talk about there as well would be helpful. ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [27] ——————————————————————————– 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 noted, 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 trends 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 on line 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 Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division – Director of Research & Senior Research Analyst [28] ——————————————————————————– 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 for 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? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [29] ——————————————————————————– 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 Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division – Director of Research & Senior Research Analyst [30] ——————————————————————————– 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 and the slide presentation. I was wondering if maybe you can sort of frame where we are on that process? Like maybe what sort of inning we’re in, in terms of reaching that objective? And while I obviously understand that operational efficiency is always going to be an ongoing objective, just kind of like how far long are we with kind of grabbing the low-hanging fruit, if you will, from that objective? ——————————————————————————– David W. Huml, Tennant Company – Senior VP & COO [31] ——————————————————————————– Great question. So our enterprise journey is a 5-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 models. And so let me just give you a little flavor on that and where we’re at on that journey. I think that’s really the substance of your question. We did a robust analysis of our offering. And when we talk about a 35% reduction in Tennant models, that includes product exits. 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. And the third component, we talked about standard offerings. So within a model, we’ve identified and we’re 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 3 components within that simplification from an operations perspective. Where we’re at in the journey? We did a lot of heavy lifting in ’19, ’20 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’ll 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 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’s space to support bringing 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 [32] ——————————————————————————– (Operator Instructions) Our next question comes from the line of Michael Shlisky with Colliers Securities. ——————————————————————————– Michael Shlisky, Colliers Securities LLC, Research Division – Senior Research Analyst [33] ——————————————————————————– 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 at a loss or a below average margin prior to selling it? ——————————————————————————– Thomas Paulson, Tennant Company – Interim CFO [34] ——————————————————————————– Yes, Mike, good question. So to your point, it was EBITDA 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 [35] ——————————————————————————– Since there are no further questions, at this time I would like to turn the call over to management for closing remarks. ——————————————————————————– H. Chris Killingstad, Tennant Company – President, CEO & Director [36] ——————————————————————————– Thank you again for joining us. This concludes our earnings call and you may all now disconnect. We hope you have a great day. Thank you. ——————————————————————————– Operator [37] ——————————————————————————– This concludes today’s conference call. Thank you for your participation. You may now…

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