Tennant Company (NYSE:TNC) Q3 2022 Earnings Conference Call October 27, 2022 11:00 AM ET Company Participants Lorenzo Bassi - VP, Finance David Huml - President and CEO Fay West - SVP and CFO Conference Call Participants Chris Moore - CJS Securities Steve Ferazani - Sidoti & Company Tim Moore - EF Hutton Operator Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's 2022 Third Quarter Earnings Conference Call. This c ...

Reinventing how the world cleans TENNANTCO.COM INVESTOR COMPANY PRESENTATION 2 SAFE HARBOR STATEMENT Certain statements contained in this document are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. These statements do not relate to strictly historical or current facts and provide current expectations or forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. These include factors that af ...

| --- | --- | --- | |-------|-------|-------| | | | | | | | | | | | | | | | | 2 Forward-Looking Statements & Non-GAAP Measures Certain statements contained in this document are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. These statements do not relate to strictly historical or current facts and provide current expectations or forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. The ...

Financial Data and Key Metrics Changes - Second quarter net income was $16.6 million compared to $9.8 million in the prior year period, impacted by nonrecurring items [25] - Adjusted EPS for the second quarter was $0.92 per diluted share compared to $1.18 per diluted share in the prior year, primarily due to lower gross profit and higher income tax expense [26] - Net sales for the second quarter were $280.2 million, a 0.4% increase year-over-year, driven by a 4.4% organic sales increase on a constant currency basis [28] Business Line Data and Key Metrics Changes - The increase in consolidated net sales was driven by higher selling prices and growth in services, parts, and consumables [29] - Adjusted EBITDA for Q2 was $30.3 million or 10.8% of sales, down from $35.1 million or 12.6% of sales in 2021, due to lower production volumes and inflationary pressures [32] Market Data and Key Metrics Changes - Organic sales in the Americas and EMEA increased by 6.5% and 3% respectively, while APAC organic sales declined by 4.5% due to volume declines in China [29][30] - Overall demand remains strong except for China, with limited availability of certain parts constraining the ability to meet volume demands [31] Company Strategy and Development Direction - The company is focused on stabilizing its supply chain to unlock production and reduce product lead times, while also executing pricing strategies and maintaining cost discipline [15][20] - Strategic investments are being made to drive short-term improvements and long-term growth, particularly in the AMR (Autonomous Mobile Robots) program [13][22] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to deliver results within the guided range despite supply chain constraints and foreign currency headwinds [37] - The company anticipates that supply chain constraints will continue to impact production but expects improvements in the third and fourth quarters [38] Other Important Information - The company reported a cash balance of $73.8 million and $279.1 million of unused borrowing capacity on its revolving credit facility, indicating strong liquidity [36] - The company is investing in solar panels to mitigate increasing energy costs and support sustainability goals [21][22] Q&A Session Summary Question: Backlog status and pricing impact - Management confirmed that backlog increased sequentially in Q2, driven by robust demand and inability to ramp production at the desired pace [45][46] - Approximately 80% of the backlog was booked in the first half of 2022, with strong price realization expected as backlog works through [50][51] Question: Supply chain visibility - Management noted a moderate change in supply chain visibility, with suppliers increasingly meeting extended lead times, but overall challenges remain [53][54] Question: Confidence in guidance amid FX headwinds - Management acknowledged the uncertainty and moving parts affecting guidance but emphasized control over certain elements and actions taken to mitigate risks [63][68] Question: Inventory and cash flow expectations - Management expects to consume inventory as plant output increases, leading to positive cash flow in the second half of the year [72][73] Question: AMR product performance and market penetration - Management expressed bullishness on AMR technology, noting significant sales and customer interest, with a focus on expanding the product portfolio [75][78]

PART I - FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited statements show slightly lower YTD sales and net income, with negative operating cash flow due to inventory increases [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) YTD net sales slightly decreased while net income fell due to lower gross profit, though Q2 net income rose year-over-year Consolidated Statements of Income Highlights (in millions, except EPS) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $280.2 | $279.1 | $538.3 | $542.4 | | Gross Profit | $106.1 | $114.9 | $205.0 | $228.2 | | Operating Income | $22.8 | $20.4 | $37.4 | $56.7 | | Net Income | $16.6 | $9.8 | $26.9 | $35.5 | | Diluted EPS | $0.89 | $0.51 | $1.44 | $1.88 | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Total assets decreased slightly as cash declined significantly while inventories rose, with total debt remaining stable Key Balance Sheet Items (in millions) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash, cash equivalents, and restricted cash | $73.8 | $123.6 | | Inventories | $188.6 | $160.6 | | Total Assets | $1,025.2 | $1,061.7 | | Total Debt (Current + Long-term) | $265.8 | $267.6 | | Total Equity | $434.0 | $435.1 | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Operating activities generated a significant cash outflow, reversing a prior-year inflow, driven by a large inventory increase Six Months Ended June 30 Cash Flow Summary (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(23.6) | $37.8 | | Net cash (used in) provided by investing activities | $(10.1) | $16.7 | | Net cash used in financing activities | $(12.2) | $(58.6) | | Net (decrease) in cash | $(49.8) | $(5.9) | - The primary reason for the **negative operating cash flow** was a significant increase in inventories ($44.7 million) and unfavorable changes in other operating assets and liabilities[16](index=16&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail geographic sales performance, significant inflationary impacts on inventory, and the company's debt structure Net Sales by Geographic Area (Six Months Ended June 30, in millions) | Region | 2022 | 2021 | | :--- | :--- | :--- | | Americas | $338.7 | $325.0 | | Europe, Middle East and Africa | $156.0 | $166.1 | | Asia Pacific | $43.6 | $51.3 | | **Total** | **$538.3** | **$542.4** | - The LIFO charge for the first six months of 2022 was **$6.0 million**, a substantial increase from $2.2 million in the same period of 2021, attributed to the broad effects of inflation on materials[46](index=46&type=chunk) - As of June 30, 2022, the company had **$265.8 million in total debt** outstanding and approximately **$279.1 million of unused borrowing capacity** on its revolving credit facility[55](index=55&type=chunk)[57](index=57&type=chunk) - In Q2 2022, the company sold a building in Minnesota, resulting in a **pre-tax gain of $3.7 million**, compared to a $9.8 million gain from the sale of its Coatings business in Q1 2021[41](index=41&type=chunk)[42](index=42&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Macroeconomic pressures, including inflation and supply chain issues, impacted results despite a slight sales increase [Macroeconomic Events and Outlook](index=26&type=section&id=Macroeconomic%20Events%20and%20Outlook) The company navigates ongoing supply chain disruptions, inflation, and geopolitical conflicts impacting operations - The company is experiencing disruptions in raw material and component supply, price inflation, and inefficiencies due to **supply chain issues**[83](index=83&type=chunk) - Sales to Russia and Belarus, which have been suspended, represented **less than 1% of 2021 consolidated net sales**[84](index=84&type=chunk) - Management anticipates that **supply chain challenges and inflationary trends will continue** in the second half of 2022[86](index=86&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Q2 organic sales growth from pricing was offset by currency headwinds, while gross margin fell due to inflation Q2 2022 vs Q2 2021 Net Sales Change Drivers | Driver | Impact on Net Sales | | :--- | :--- | | Organic Sales Growth | +4.4% | | Foreign Currency Exchange | -4.0% | | **Total Net Sales Change** | **+0.4%** | Q2 2022 Net Sales Growth by Region | Region | % Change vs Q2 2021 | | :--- | :--- | | Americas | +6.7% | | EMEA | -9.3% | | APAC | -8.2% | - **Gross profit margin decreased by 330 basis points** in Q2 2022 compared to Q2 2021, primarily due to inflation on materials, labor, and freight costs[96](index=96&type=chunk) - The order backlog at June 30, 2022, was **approximately three times larger than the prior year**, indicating strong demand but also persistent supply chain challenges[106](index=106&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=Liquidity%20and%20Capital%20Resources) Cash decreased due to negative operating cash flow from working capital investments, but liquidity remains sufficient - Net cash used in operating activities was **$23.6 million for H1 2022**, compared to net cash provided of $37.8 million in H1 2021, driven by investments in working capital[110](index=110&type=chunk) - The company's **debt-to-capital ratio was stable at 38.0%** as of June 30, 2022[108](index=108&type=chunk) - On August 3, 2022, the Board of Directors authorized a **quarterly cash dividend of $0.25 per share**[109](index=109&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=33&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes in market risk were reported since the previous fiscal year-end - There have been **no material changes** in the company's market risk since December 31, 2021[117](index=117&type=chunk) [Controls and Procedures](index=33&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were deemed effective with no material changes to internal controls during the quarter - Management concluded that **disclosure controls and procedures are effective** as of June 30, 2022[118](index=118&type=chunk) - **No changes in internal controls** over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[119](index=119&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) No material pending legal proceedings are reported outside of ordinary business litigation - There are **no material pending legal proceedings** other than ordinary routine litigation incidental to the business[120](index=120&type=chunk) [Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors have occurred since the last annual report - **No material changes** have occurred in the company's risk factors since the last annual report filing[121](index=121&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=34&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No shares were repurchased under the public program, though some were acquired to satisfy employee tax obligations Share Repurchase Activity (Q2 2022) | Month | Total Shares Purchased | Average Price Paid | Purchased as Part of Plan | | :--- | :--- | :--- | :--- | | April 2022 | 18 | $78.80 | — | | May 2022 | 2,018 | $60.54 | — | | June 2022 | 35 | $56.31 | — | | **Total** | **2,071** | **$60.63** | **—** | - The 2,071 shares purchased were delivered to **satisfy tax withholding obligations** by employees, not open market repurchases under the formal plan[123](index=123&type=chunk) - There are **1,192,089 shares that may yet be purchased** under the company's authorized share repurchase programs[122](index=122&type=chunk)[123](index=123&type=chunk) [Exhibits](index=34&type=section&id=Item%206.%20Exhibits) Filed exhibits include required CEO and CFO certifications under the Sarbanes-Oxley Act - Key exhibits filed include **CEO and CFO certifications** under Rule 13a-14(a)/15d-14(a) and Section 1350[124](index=124&type=chunk)

Financial Data and Key Metrics Changes - First quarter net income was $10.3 million, down from $25.7 million in the prior year, primarily due to gross margin compression from inflationary pressures [16] - Adjusted EPS for Q1 was $0.73 per diluted share, compared to $1.17 per diluted share in the prior year [17] - Net sales for Q1 were $258.1 million, a 2% decline year-over-year, impacted by unfavorable foreign exchange and the divestiture of the Coatings business [17][18] - Adjusted EBITDA for Q1 was $27.9 million, or 10.8% of sales, down from $40.7 million, or 15.5% of sales in 2021 [23] Business Line Data and Key Metrics Changes - The Americas net sales were $160.3 million, an increase of 1.6% from the prior year, driven by higher selling prices and strong sales in commercial and parts categories [19] - EMEA net sales were $78.7 million, a decrease of 2.7%, negatively impacted by foreign currency exchange [20] - APAC net sales were $19.1 million, a decrease of 22.4%, primarily due to government-mandated shutdowns in China [21][22] Market Data and Key Metrics Changes - Organic sales growth in the Americas was approximately 2.3%, while EMEA saw a favorable organic sales growth of approximately 4.2% [19][20] - APAC experienced an organic sales decline of approximately 20.2% due to COVID-19 related shutdowns [22] Company Strategy and Development Direction - The company is committed to maximizing output and safeguarding customer experience through dual sourcing and local sourcing strategies [11] - The enterprise strategy includes a focus on profitable innovation, with the introduction of lithium-ion technology in autonomous mobile robots [13][14] - The company is adjusting its full-year guidance for adjusted EBITDA to a range of $140 million to $155 million due to evolving market conditions [10][28] Management's Comments on Operating Environment and Future Outlook - Management noted that macro environment risks have not moderated as quickly as expected, impacting parts availability and inflation [9] - The company expects gross margins to improve throughout the year, driven by price realization and effective cost management [27] - Management remains optimistic about demand and is encouraged by the strong customer response despite challenges [55] Other Important Information - Cash flow used in operations was approximately $10.1 million, reflecting investments in working capital [24] - The company ended Q1 with a cash balance of approximately $110.4 million and strong liquidity of approximately $374.5 million [25] - Updated guidance for 2022 includes net sales of $1.125 billion to $1.17 billion and adjusted EPS of $4.15 to $4.75 per diluted share [28] Q&A Session Summary Question: Can you provide more detail on the pricing strategy for 2022? - Management indicated that a price increase was enacted in October 2021 and another in April 2022, expecting these to offset inflation, though backlog may mute their impact [34][35] Question: How has the China slowdown impacted revenue? - Management stated that top-line performance is largely influenced by production volume, which has been affected by supply chain shortages and the China impact [40][41] Question: What is the current status of backlog? - Backlog is currently at approximately five times the normal rate, reflecting strong customer demand despite extended lead times [43][44] Question: Is there a shift in CapEx priorities? - Management confirmed that CapEx composition remains unchanged, with some acceleration in strategic investments to mitigate short-term constraints [45][47] Question: Are there any shifts in acceptance of AMRs due to COVID restrictions easing? - Management noted that markets have opened up, allowing for more demonstrations of AMRs, which is expected to enhance customer acceptance [48][50]

| --- | --- | --- | |-------|-------|-------| | | | | | | | | 2 Forward-Looking Statements & Non-GAAP Measures Certain statements contained in this document are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. These statements do not relate to strictly historical or current facts and provide current expectations or forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. These include facto ...

Financial Performance - Consolidated net sales for Q1 2022 totaled $258.1 million, a 2.0% decrease from $263.3 million in Q1 2021[82] - Net income attributable to Tennant Company was $10.3 million, or $0.55 per diluted share, compared to $25.7 million, or $1.37 per diluted share in Q1 2021[81] - Gross profit margin decreased to 38.3%, down 470 basis points compared to Q1 2021, primarily due to material inflation and higher freight costs[87] Expenses - Research and Development expense was $7.7 million, representing 3.0% of net sales, reflecting continued investment in new product development[89] - Selling and administrative expenses were $76.6 million, a decrease of $2.8 million compared to Q1 2021, with S&A expense as a percentage of net sales decreasing to 29.7%[88] - Interest expense, net was $0.3 million in Q1 2022, significantly lower than $3.9 million in the same period of 2021 due to debt restructuring[91] Cash and Liquidity - Cash, cash equivalents, and restricted cash totaled $110.4 million as of March 31, 2022, down from $123.6 million at the end of 2021[97] Taxation - The effective tax rate for Q1 2022 was 30.1%, an increase from 22.1% in Q1 2021, due to changes in forecasted taxable earnings by country[93] Order Backlog and Supply Chain - The order backlog at March 31, 2022, was approximately five times larger compared to March 31, 2021, driven by higher order rates and supply chain challenges[95] - The company anticipates ongoing supply chain challenges and inflationary trends throughout 2022, while maintaining confidence in long-term growth trends[79] Risks and Uncertainties - The company has identified various risks and uncertainties, including geopolitical and economic uncertainty, competition, and the impacts of the COVID-19 pandemic[103] - There have been no material changes in the company's market risk since December 31, 2021[106] Forward-Looking Statements - The company emphasizes the importance of considering forward-looking statements carefully due to potential material differences in actual results[104] - The company has no obligation to update or revise any forward-looking statements unless required by law[105]

| --- | --- | --- | |-------|-------|-------| | | | | | | | | 2 Forward-Looking Statements & Non-GAAP Measures Certain statements contained in this document are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. These statements do not relate to strictly historical or current facts and provide current expectations or forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. These include facto ...

Financial Data and Key Metrics Changes - Fourth quarter net income was $7.9 million, up $5.2 million from the prior year [19] - Full year 2021 net income reached $64.9 million compared to $33.7 million in 2020 [19] - Adjusted earnings per diluted share for Q4 2021 was $0.71 compared to $0.48 in the prior year [20] - Full year 2021 adjusted earnings per diluted share was $4.39 compared to $2.91 in 2020, an increase of $1.48 [20] - Adjusted EBITDA for the full year 2021 was $140.2 million, or 12.9% of sales, compared to $119.4 million, or 11.9% of sales in 2020 [24] Business Line Data and Key Metrics Changes - Sales in the Americas grew 4.3% year-over-year or 7.4% organically, driven by service, parts, and consumables [22] - EMEA sales grew 19.3% year-over-year or 14.2% organically, with growth across all countries and product categories [23] - Asia Pacific sales increased 9.6% year-over-year or 5.6% organically, with strong demand in Australia and Korea [23] - Fourth quarter sales in the Americas grew 1.3% year-over-year or 4.9% organically [26] - EMEA sales in Q4 were up 3.9% year-over-year or 7.4% organically [27] Market Data and Key Metrics Changes - The company ended 2021 with a backlog of 3x to 5x normal ranges, indicating strong demand for 2022 [51] - The company anticipates continued supply chain constraints impacting production and delivery throughout 2022 [32] Company Strategy and Development Direction - The company focuses on three strategic pillars: winning where there is competitive advantage, reducing complexity, and innovating for profitable growth [11] - The company is prioritizing local-for-local manufacturing to mitigate supply chain disruptions [10] - The launch of the Inventory Scan product represents a move into an attractive adjacency, enhancing customer value [14][62] Management Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to deliver on 2022 targets despite macroeconomic headwinds [6] - The company expects organic net sales growth between 4.5% and 8.5% for 2022, with adjusted EBITDA between $145 million and $160 million [9][34] - Management noted that pricing is being driven by inflation, with robust demand and a significant backlog available for monetization [41] Other Important Information - The company generated cash flow from operations of approximately $70 million in 2021 and returned over 60% of net cash flows to shareholders [9] - The company refinanced its debt, resulting in annual interest savings exceeding $12 million [30] Q&A Session Summary Question: Revenue guidance breakdown between volume and price - Management indicated that the guidance for 2022 is weighted more towards price than volume, but both factors contribute [39][40] Question: Impact of the Russia-Ukraine situation - Management noted no direct assets in affected regions but acknowledged potential ripple effects on the macro economy [44][45] Question: M&A opportunities - Management is always exploring M&A opportunities but prioritizes protecting the core business and addressing short-term challenges [46][47] Question: Top line guidance support - Management highlighted strong organic growth and significant backlog as key factors supporting the guidance [51] Question: Autonomous market development - Management reported high interest levels in the Autonomous market, with expectations for significant sales growth in 2022 [56][68]