Tennant Company

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to Tenant Company's 2023 Second 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'd like to ask a question. After the Q&A, please stay on the line for closing remarks from management. If you've 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 2023 Second 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, everyone, and welcome to Tenant Company's Second Quarter 2023 Earnings Conference Call. I'm Lorenzo Bazzi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Hummel, Tenants President and CEO, and Fay West, Senior Vice President and CFO. Today, we will provide you with an update on our second quarter performance. Dave will provide you an update on our operations and enterprise strategy, and Fay will cover our financials. After our prepared remarks, we will open the call to questions. Please note, The slide presentation accompanies this conference call and is available on our investor relations website at investors.tenanto.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 2023 second quarter earnings release and presentation include the comparable gap measures and a reconciliation of these non-gap measures to our gap results. Our earnings release was issued this morning by a Business Wire and is also posted on our investor relations website at investors.tenanco.com.

I'll now turn the call over to Dave. Thank you, Lorenzo, and hello, everyone. On the call today, I will be discussing highlights from the second quarter, new product innovations, our new sustainability framework, Thriving People, Healthy Planet, and our outlook for the remainder of 2023. Before analyzing the details of this quarter, it is important to frame our performance in relation to the prior quarters. In 2021, as the economy started to recover and reopen, we experienced a spike in demand for our products and services, and we have continued to benefit from strong and resilient demand since that time. Also beginning in early 2021, we started to experience supply chain issues, labor shortages, and high inflation, conditions which have persisted for seven straight quarters, which impacted our ability to increase production to fully meet demand. This led to a substantial increase in our order backlog, which reached unprecedented levels. To address these circumstances, our team took significant actions and made incremental investments to mitigate the short-term disruptions and enable us to increase production. Leveraging our enterprise strategy, we also implemented structural changes, such as optimizing plant capacity and securing labor to support increased parts availability that helped address the immediate production and supply chain issues, as well as position us for long-term future success. These actions and investments have started to yield results, as evidenced by our performance in the last two consecutive quarters. The availability of critical parts has increased and the impact of supply chain challenges and inflation has abated. Lead times are reverting to normal in almost all of our locations, and we have been able to reduce our backlog substantially. Our elevated backlog is testament to the strength of our brands, quality of our products and service, and commitment to supporting our customers, and we appreciate our customers' loyalty and patience during this extended period. We will continue to work diligently to reduce lead times and satisfy customers with our exceptional products and services. We anticipate that we will be able to reduce backlog further in the back half of the year. However, backlog will remain elevated, specifically in North America industrial products. Now, moving on to some specifics about the quarter. In the second quarter, we achieved record net sales of $321.7 million, which was underpinned by organic growth of 15%. We expanded gross margins to 43.4% and delivered adjusted EBITDA of $57.6 million, or 17.9% of net sales. Additionally, we converted over 100% of net income to free cash flow. Key drivers of our second quarter performance were a noticeable improvement in parts availability and, in general, a more stable and predictable supply chain environment, which resulted in an increase in volume and a reduction in backlog. Continued price realization and moderating inflation, which drove an improvement in gross margin, and a cautious approach to S&A spending, which benefited adjusted EBITDA. Regarding supply chain, we have seen a significant improvement in parts availability and have experienced fewer line disruptions. This allowed us to operate our plants more efficiently, increase volumes, and as I just mentioned, meaningfully reduce backlog. We are pleased with the improving supply chain landscape and are cautiously optimistic that we will continue to see stability and predictability, but we do not think that we are fully recovered. Therefore, this remains an area of significant focus continued action, and necessary agility. Strong price realization, moderating inflation, and careful cost control have benefited both gross margin and adjusted EBITDA in the quarter. Based on our first half performance, resilient demand, and continued backlog reduction, we are pleased to increase our full year 2023 guidance. We are cautiously optimistic that inflation will remain at moderate levels and that the global economy will continue to recover. Turning now to recent product launches and our innovative technology. We continue to see success in utilizing our global network of manufacturing, design, and engineering facilities. This quarter, we broadened our portfolio of innovative products and solutions by leveraging the Italy-based IPC product platforms and launched the tenant branded S680 and S880. These ride-on sweepers in our mid-tier range are the right fit for light to medium duty tasks requiring high maneuverability in both indoor and outdoor environments. These products improve existing offerings of similar sized legacy equipment, but are presented at different price points. This allows us to reach a broader set of customers across the broad array of vertical markets we serve through our multi-channel distribution approach. Our acquired product platforms allow us to bring a diverse range of equipment to market at different price points for our customers with minimal financial investment and resources from tenants. Turning now to our innovative technology products. The most disruptive and innovative technology with the highest potential in our industry is the autonomous mobile robot, or AMR. This equipment operates in complex environments without the need for direct operator control. Not only does this ensure consistent cleaning operations, but also reduces the cost of ownership by helping to minimize the impact of labor expenses for cleaning in today's tight labor markets. These products work alongside cleaning staff and allow them to focus on the difficult and variable cleaning tasks, while the more repetitive and expensive floor cleaning can be handled by our equipment. Tenant currently offers three autonomous mobile robots, including our most recent product, the T16 AMR4 scrubber. This was the first autonomous scrubber designed for industrial applications like warehousing and manufacturing markets. Tenant has been traditionally strong in these industrial vertical markets, and our customers value our high-performance equipment, reputation for quality and durability, as well as our ecosystem of support, including our factory direct field service organization. The T16 AMR is a natural progression for us. Since 2022, about 30% of our T16 sales have been the AMR version of the equipment. We believe autonomous equipment in large space industrial markets has significant growth potential, and the adoption rate will continue to expand. The industrial market has already adopted automation and robotics in the areas outside of cleaning, and employees in these settings are accustomed to working alongside robotics. We also believe that it is easier to manage and measure the ROI of automation in the industrial space, allowing our customers to fully realize the value of our AMR products. We are excited about the T16 AMR potential and believe we are uniquely positioned to enable customer success and drive AMR adoption in these verticals. Now, turning to sustainability. In April, we announced the launch of our new sustainability framework, Thriving People, Healthy Planet. Along with our first set of goals and our commitment to reduce greenhouse gas emission and achieve net zero by the year 2040, in the coming weeks, we will plan to release our 2023 sustainability report, which will detail tenants' progress on our goals and ESG metrics. We also plan to announce our second set of goals under the Thriving People Healthy Planet framework. Specifically, we aim to increase the percentage of women in leadership by 50% by the end of 2030. Ultimately, we believe that there are opportunities to deepen the diversity of our organization and expand the perspectives on our teams. We believe that combining this objective with providing an inclusive work environment will positively support our business success. With that, I'll turn the call over to Faye for a discussion of our financials.