Tennant Company

Good morning. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tenant Company's fourth quarter and full year earnings conference call. This call is being recorded. There will be time for Q&A at the end of the call. Please press star and then one if you would like to ask a question. After the Q&A, please stay on the line for any closing remarks from management. If you joined our call today via telephone and logged into the conference call presentation on your computer, Please mute the audio on your computer to avoid potential quality issues during the call. Thank you for participating in Tenant Company's 2019 Fourth Quarter Earnings Conference Call. Beginning today's meeting is Mr. William Prates, Director of Global Financial Planning and Analysis and Investor Relations for Tenant Company. Mr. Prates, you may begin.

Thank you, Chris. Good morning, everyone, and welcome to Tenant Company's Fourth Quarter and Full Year 2019 Earnings Conference Call. I'm William Prate, Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Chris Killingstad, Tenet's President and CEO, Andy Cibula, our Interim CFO, Tom Stueve, Vice President and Treasurer, and Mary Talbot, Senior Vice President and General Counsel. Today we will update you regarding our progress against our core strategies, our fourth quarter and full year performance, and our guidance for 2020. Chris will brief you on our strategies and operations, and Andy will cover the financials. After our remarks, we will open the call up for questions. Please note our slide presentation accompanies this conference call and is available on our investor relations website at investors.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 risk 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 our conference call, we will discuss non-GAAP measures that include or exclude certain items. Our 2019 fourth quarter earnings release include 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.tenantco.com. Now I'll turn the call over to Chris.

Thank you, William, and thanks to all of you for joining us today. In 2019, we made meaningful progress in improving our operating model and achieved record revenue and EBITDA for the full year, on top of a strong 2018. General strength in our America's business, which has recorded 10 consecutive years of organic growth, offset the effect of continued broad-based macroeconomic challenges in Europe and China. Our fourth quarter was characterized by continued organic revenue growth with pricing and cost-saving initiatives that helped to offset tariffs and material inflation. Our overall Q4 and full-year results demonstrate our ability to manage reasonable growth with improved profitability. While we are on the early stages of our operating model improvement plan, We believe the momentum we've established will help drive shareholder value through this year and beyond. Today, I'd like to provide a deeper dive into the key elements of that plan. As we discussed, our enterprise strategy, which we call our Global Positioning Strategy, or GPS, is based on three pillars in support of our value creation objectives. Winning where we have competitive advantage. Reducing complexity and building scalable processes. Innovating for profitable growth. The first pillar, winning where we have a competitive advantage, is based on 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. Our key initiatives in this regard are to simplify our product portfolio, strengthen our local advantage, and optimize our customer portfolio and go to market capabilities. In simplifying our product portfolio, we will streamline, rationalize, and invest where needed with a goal of enhancing value for our customers, and for Tenant. In doing so, we will discontinue certain categories and products that do not fit within our profit-oriented growth model, as was the case last year with our Orbeo on-site generation technology and our Green Machine, Sentinel and ATLD lines. We will also decrease the number of models and options across our portfolio. By reducing complexity across our product lines, we can unlock significant value. We are targeting a 25% reduction in our portfolio breadth by the end of 2021. Introducing more pre-configured product offerings with standard option packages will yield a number of benefits. These include an improved and more consistent customer experience with shorter lead times on top of greater manufacturing predictability and supply chain leverage. This represents a shift in philosophy from making what we sell to selling what we make. Our acquisitions of IPC and Gaume give us a truly global reach. In order to optimize our capabilities across our international markets, We must strengthen our local advantage. Our approach in this regard has been to assess our market position versus the competition, primarily in the over 100 countries in which we serve. Based on that analysis, we've identified 12 major markets for new differentiated strategies and are currently implementing market specific strategies to drive EBITDA in four of those markets. To improve our go-to-market strategy, we will apply 80-20 principles to our pricing, channel optimization, and customer segmentation. Last year in our initial review of our strategic accounts, which are those accounts we prioritize in terms of preferred pricing and high-touch service, we identified those customers that did not meet our formal criteria and resegmented appropriately. We also used 2019 as an opportunity to assess all of our approximately 350 distributor partners in North America. This review allowed us to adjust or terminate over 50% of these partnerships in order to ensure that we have the best distributor partnerships in place to address the ultra-competitive North American market. By adjusting our customer segmentation appropriately, we can better serve our best customers while adjusting lead times, pricing, and sales support across our customer base. The goal is to align the customer experience with our enterprise probability goals. Our first strategic pillar and its related initiatives are so important because Tenant is now much bigger, and more diversified than it was three years ago. Size gives us a number of strengths and advantages, but optimizing our capabilities will be the key to our continued profitable growth. Our second pillar is reducing complexity and building scale across our products, operations and business processes. That means questioning how we do things today. and making sure we have the right tools in place to support us in the future. Our key focus areas in this regard will be to leverage our platform product design, advance our end-to-end supply chain and capture operating model efficiencies. In leveraging our platform product design, our first initiative is greater use of value engineering. IPC excels in this area, and our acquisition of that business has helped us explore ways we can use value engineering throughout our product portfolio. One example of this is the changes that we've made to the T300, a walk-behind floor scrubber that cleans virtually any hard surface. Last year, our U.S.-based R&D team worked with the value engineering experts from our IPC business to optimize the design of the T300. In doing so, they identified two key categories of machine components. One, parts specifically built for tenant that do not drive competitive advantage. And two, parts that add measurable value to our machines. Armed with this information, we have been able to resource parts that are more cost effective while still delivering on our value proposition. For the T-100 machine specifically, we were able to improve gross margin by more than 500 basis points. We see opportunities for similar value engineering in other product lines. We've also begun to optimize our subsystems architecture. One example is our IRIS asset manager technology. where we've been able to decrease the number of circuit boards needed across the various machine platforms. In one case, we were able to reduce the number of boards from 11 boards to four. To put that another way, that represents a 63% reduction in electronic hardware and an 85% reduction in software code. Improving our subsystem architecture in this way allows us not only to simplify our manufacturing, but also to optimize inventory, lower costs, and enhance customer service. Looking ahead, we will make similar improvements in the areas of commodity components and product architecture to simplify our product designs and to reduce costs. For example, by using more common parts across more product platforms We can establish greater supplier leverage. At the same time, we have multiple platforms within a single product category. We will harmonize down to a smaller number. Furthermore, we can scale many of our designs as we leverage new innovations across multiple platforms. By extending our design concepts in this way, we can avoid having to reinvent from the ground up each time. Turning to our supply chains, our North America operations represent best-in-class service, and they serve as a model for what we can do around the world. Specifically, we can win locally by sourcing and manufacturing locally. These changes allow us greater flexibility and can reduce costs, while also enabling us to be more responsive to customer demands. Furthermore, this effort yielded benefits in 2019 by helping to partially offset the impact of tariffs. Our recent shift from a big, small company to a small, big, and growing company has reached a tipping point where our legacy business processes have gone from being simply inefficient to potentially growth inhibiting. If we did not begin to dramatically change our operating model, we would be stuck running in place and we would struggle to reach our true potential. We will rid ourselves of a number of aging and obsolete systems that require manual workarounds and lots of extra work. We will reduce parts and suppliers, streamline our end-to-end supply chain, and become a more agile manufacturer. so we can have more predictable lead times and improve quality. We need to simplify and standardize our IT infrastructure and upgrade our automation capabilities so that they align with and support our new enterprise strategy. Becoming a more efficient and agile business will help us solve our customer problems more successfully and drive enhanced value creation for tenants. The high priority fixes we've identified include planning for demand and supply and improving parts management and flow. Parts management and flow improvement is about managing our end-to-end supply chain better. We want to be more efficient in how we get parts from point A to point B, from suppliers through our factories. Getting the right parts to the right places at the right time will enable us to build more machines and more. We will also introduce new measurement tools and KPIs to ensure that everyone knows how to prioritize their own work in relation to the company's goals, and so that we can hold ourselves accountable and clearly communicate our progress. The third pillar is innovating for profitable growth, and that requires thinking differently to maximize value for our customers and for tenants. As you may know, 2020 marks the 150th anniversary of the founding of Tenant Company. As we honor our company's history, we recognize that innovation has always been a part of the company's heritage and the key to its longevity. Today, we are combining customer-driven insights with a new innovation approach to unlock value for both our customers and for tenants. We will build on our position as an innovation leader with new and compelling solutions for our customers that address such challenges as labor pressures, rising health and cleanliness standards, and sustainability demands. The new insights we source from the real world and cultivate internally yield new approaches to innovation that ultimately unlock greater value for our customers and for tenants. Innovating for profitable growth means using innovation to unlock for our customers and tenant companies. In addition to the machine and hardware innovation we are known for, we believe value for customers can extend beyond machines. For example, by expanding our cloud infrastructure, we can provide customers improved access to more data through more access points. One such offering we are working toward is a mobile enabled experience that will fully integrate the customer's experience with Tenant Company from delivery updates to machine location and performance data. to instant on-demand communication with a service technician. We're using technology to reduce friction in the customer's experience and providing them with insights to their business and operating expenses. Our disciplined approach to innovation is customer-centric in focusing on their critical needs. At the same time, the results we want to achieve through any innovation must meet our strict and many more. We have what we call an MVP approach to innovation whereby the more ideas we vet, the faster we learn and the sooner we get products to customers for real-world learning and validation. This should improve both our innovation velocity and our capacity. Our AMR project is a good example of how we put all of this together in introducing a revolutionary product that delivers real customer value. And more than that, it is an example of the organizational agility that we can bring to bear. The AMR team went from announcement of our partnership with Brain to having production in place in only seven months and had their first large customer win just five months later. Moreover, they did so with an unwavering focus on the end result to create the most value for our customers and for tenants. In short, we are off to a good start. but this is just the beginning of the journey. GPS sets the course for unlocking the potential of this great company. Our organizational capacity for change has never been better and we have a strong team dedicated to the success of our strategy. We are operating from a position of market strength and are excited by the opportunity to drive enhanced shareholder value. With successful execution of this strategy between now and 2024, we are targeting annual organic growth of 2% to 3%, annual EBITDA growth of 6% to 10%, and annual EBITDA leverage of 50% to 100 basis points. Our goal is to continue to build credibility to our performance by delivering shareholder value. And we look forward to updating you on our progress. With that, I'll turn the call over to Andy, who, as you know, is serving as our interim CFO during Keith Woodward's medical leave. We wish Keith a BD Recovery, and we look forward to his return. But we're lucky to have a highly talented and dedicated senior management team in place. Andy joined Tenant more than two years ago and has been our Vice President of Finance and Corporate Controller, leading the accounting and finance functions. He has more than 25 years of experience and leads a strong and the seasoned finance team here at Tenant.