Tennant Company

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 Tenant Company's 2022 Third Quarter Earnings Conference Call. This call is being recorded. There will be time for Q&A at the end of the call. Please press star 1 if you would like to ask a question. After the Q&A, please stay on the line for closing remarks from management. If you have joined our call today via telephone and logged into the conference call presentation on your computer, Please mute your audio on the computer to avoid potential quality issues during the call. Thank you for participating in Tenant Company's 2022 Third Quarter Earnings Conference Call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance for Tenant Company. Mr. Bassi, you may begin.

Good morning and welcome to Tenant Company's Third Quarter 2022 Earnings Conference Call. I'm Lorenzo Bassi, Vice President of Finance. Joining me today are Dave Hummel, Tenants President and CEO, and Fay West, our Senior Vice President and CFO. On today's call, we will update you regarding our third quarter performance and revised guidance for 2022. Dave will brief you on our operations and enterprise strategy, and Fay 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.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 uncertainty, and our actual results may differ materially from those contained in the statement. 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. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items. Our 2022 third 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 by a business wire and is also posted on our investor relations website at investors.tenantco.com. I'll now turn the call over to Dave.

Thank you, Lorenzo, and thank you all for joining the call today. Our third quarter results reflect continued customer preference for Tenant's portfolio of cleaning products and solutions and demonstrate our commitment to maintaining profitability in the current operating environment. Incremental price realization, growth in aftermarket services, parts and consumables, and strong cost discipline contributed to sequential improvement in adjusted EBITDA and adjusted EBITDA margin in the third quarter. Additionally, pricing and cost-out actions covered the impact of inflation on a dollar-for-dollar basis in the quarter. While adjusted EBITDA for the quarter was in line with our expectations, we achieved those results differently than planned, and this has informed our full-year expectations. On our previous calls, we outlined several strategic initiatives as well as targeted investments in inventory in order to stabilize our supply chain, unlock production, and reduce product lead times in the second half. We continue to action against these initiatives, which have provided incremental benefits. but supply challenges persist, most notably for electronic components and subcomponents. As a result, production has not ramped as quickly as we had expected and did not increase sequentially in the third quarter, which adversely impacted sales volumes across all regions. We do believe, however, that because of our continuing efforts, we are better positioned for success going forward. This is critically important as we work to address our global backlog. which has grown steadily since 2021 and is now over $280 million, roughly five times normal levels. Our near-term priority is to reduce our backlog and satisfy the customer orders that we have already secured. We are actively working to reduce lead times and appreciate our customers' patience and flexibility during this period of extended lead times. Based on the minimal number of order cancellations to date, we have confidence that we can convert our backlog to revenue. This backlog represents our customers' strong preference for tenant products and services. It also provides us with a level of insulation from future demand fluctuations. Demand patterns and order timing have been atypical since the beginning of 2021, due in part to the pace of recovery in various end markets and geographies. In the third quarter, we experienced lower order volumes as compared to second quarter for all reasons except Latin America. But when we look at year to date orders in North America, they are up single digit versus the prior year, suggesting the timing could be a driver of the third quarter decrease. We are monitoring demand patterns closely, talking with customers and evaluating the macro factors that can influence demand. These include COVID lockdowns in China, the impact of the Russia-Ukraine conflict, and higher energy prices in MAF. Our people have demonstrated terrific agility and creativity in managing through the current operating conditions. While we certainly are not satisfied with the pace of recovery we're realizing in our business, we believe we are on the right path forward and are pulling the right levers to effect change over time. Taking all of this into account, we are revising our full year guidance. We now anticipate that net sales will be between $1.08 billion and $1.11 billion, and adjusted EBITDA will be between $130 and $140 million. Fay will detail those changes shortly, but first let me highlight the specific actions and proof points that underpin our recovery trajectory. Driving short-term improvement has been top of mind for our entire organization, as we look to increase production as well as offset the impact of macro factors. On a full year basis, the combined impact of foreign currency and the effect of the Russia-Ukraine conflict on sales and energy costs is significant. We estimate that it has impacted adjusted EBITDA by approximately $15 million in 2022. But we are mobilizing resources accordingly and remain focused on what we can control, including, first, stabilizing our supply chain to unlock production, reduce product lead times, and address backlog to improve our customer experience. And second, executing our pricing strategies to offset inflation while maintaining strict cost discipline to preserve profitability. With respect to our first area of focus, our teams are taking every opportunity to find creative solutions to mitigate supply chain disruptions and increase production in the fourth quarter. These actions include working closely with our suppliers to accurately predict the availability of critical parts, increasing supplier purchase commitments and safety stock inventory, supplementing Tier 1 supplier efforts, and directly procuring difficult-to-source Tier 2 subcomponent parts, expanding dual-sourcing supply options and continuing spot-buy activity, evaluating product design alternatives that reduce the reliance on constrained parts, And lastly, optimizing our global manufacturing capacity and product platforms to increase production in EMEA and APAC for sale in the Americas. Regarding our second area of focus, pricing strategies and cost discipline, we have executed significant pricing actions across all geographies for both equipment and services, including parts and consumables. We will continue to monitor market conditions and are targeting published increases to ensure that our pricing actions sufficiently cover realized inflation. At the same time, we are continuing our cost-out efforts and are tightly managing discretionary spending. Importantly, these actions align with our long-term enterprise strategy of winning where we have a competitive advantage, reducing complexity and building scalable processes, and innovating for profitable growth. For example, We are accelerating the leverage of IPC and Gaume mid-tier product platforms by introducing tenant branded versions to grow, share, and compete more effectively in targeted geographies. It's a prime example of winning where we have competitive advantage. The actions we've taken to reduce product skews and eliminate options are examples of reducing complexity, which is helping us gain efficiency by allowing us to focus our recovery efforts on fewer parts and suppliers. Additionally, driving adoption of our market disruptive robotics offering is helping our customers solve for their critical labor shortages and delivers an attractive payback on their investment while allowing us to expand into potentially attractive adjacencies like inventory scanning. As a team, we remain relentlessly focused on providing our customers with the high quality products exceptional service, and superior experience they expect from tenant as we work toward increasing production, continued strict cost management, and executing on our enterprise strategy. With that, I will turn the call over to Faye for a discussion of our financials.