Tennant Company

by a 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 fourth quarter and full year 2023 earnings conference call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tenant Company. Mr. Bassi, you may begin.

Good morning, everyone, and welcome to Tenant Company's fourth quarter and full year 2023 earnings conference call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Hummel, Tenant's President and CEO, and Fay West, Senior Vice President and CFO. Today, we will review our fourth quarter and full year performance, as well as our initial guidance for 2024. Dave will provide you an update on our operations and enterprise strategy, and Faye will cover our financials. After our prepared remarks, we will open the call to questions. An earnings press release and slide presentation that accompanies this conference call are available on our investor relations website. 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 expectation 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 fourth quarter and full year earnings relief and presentation include the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results. 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 fourth quarter and full year 2023. our outlook for 2024, and our new enterprise strategy and long-term growth targets. I am pleased to report our fourth quarter performance underpinned by strong revenue growth and margin expansion. Our team's dedication in navigating supply chain challenges and executing on our enterprise strategy drove the momentum we carried through the year, which resulted in record highs in net sales, adjusted EBITDA, and EBITDA margin. For the full year, net sales reached $1.243 billion, while our adjusted EBITDA rose to $192.9 million, resulting in an EBITDA margin of 15.5%. We saw year-over-year organic growth across all geographic business units and product categories, led by equipment sales in North America. Our full-year organic growth rate of nearly 14% was fueled by a combination of approximately 9% price growth and a 5% increase in volume. Order rates remained resilient, and we meaningfully reduced backlog throughout 2023. Additionally, we converted 150% of net income to free cash flow during the year as we continued to make improvements in working capital. This enabled us to focus on making strategic investments for future growth and return capital to shareholders through dividends and share repurchases. Turning to slide four. As we close a strong year, I'd like to point out several key accomplishments the team made in 2023. First, our teams across the company made incredible efforts and collaborated to stabilize our supply chain, maintain backlogged orders, and translate strategic investments made during the recovery into profitable net sales. This dedication has not only generated sales, but also improved customer satisfaction and kept new orders flowing in. Second, we introduced our new sustainability framework, Thriving People, Healthy Planet, featuring ambitious goals validated by the science-based targets initiative. This framework is now integral to our business operations as we commit to both near-term and long-term targets. Third, our autonomous mobile robots, or AMR, have surpassed $200 million in cumulative sales since the launch in 2019. That equates to over 6,500 units delivered to more than 200 individual customers. In 2023, 30% of our AMR revenue came from customers who previously purchased AMR machines and made larger investments to expand their fleet, illustrating the growth opportunity this program continues to present. Fourth, we have been disciplined in how we allocate capital consistent with our priorities. We've invested in our core business, managed our debt leverage, returned capital to shareholders, and activated our M&A strategy. Lastly, We exceeded our targeted financial results, achieving a 15% EBITDA margin and closing out our prior enterprise strategy one year ahead of schedule. This success came from executing selected initiatives that drove permanent structural improvements into our business. This remarkable achievement has set the stage for us to launch a new enterprise strategy, building on the momentum of a record-setting year and positioning us for continued growth. These accomplishments are a testament to the dedication and hard work of every member of our global team. We are proud of our 2023 results, and we are carrying significant momentum into 2024. Looking at slide five, I am pleased to unveil more details on our next enterprise strategy for the years 2024 through 2026. Our new enterprise strategy is centered on three pillars, growth, performance, and people. We've already resourced and activated initiatives across these pillars, and I'd like to provide you with a couple of key updates. In our growth pillar, we are innovating through new product launches. In our most recent product launch, we introduced the T1581 Ride-On Scrubber, a medium-sized floor cleaning machine designed specifically for applications in light industrial cleaning in the logistics, retail, and manufacturing industries. The T1581 offers enhanced productivity to customers with expansive environments, and it is commercially available to order now. In the second quarter of 2024, Tenant will launch the new X4 Rover, the company's first purpose-built autonomous mobile robot, or AMR. Building on the momentum of our earlier robots, we are committed to iterating and refining our AMR solutions, aiming to enhance adoption rates. The X4 Rover offers greater maneuverability specifically designed for operation in smaller spaces. Its compact size, improved obstacle detection, and enhanced mobility will result in fewer assists and deliver a step change improvement in customer ROI. The X4 Rover is driven by BrainCorp's next generation navigation software and hardware suite. Also within our growth pillar is our M&A framework, which prioritizes opportunities that provide tenant with the right strategic value, operational fit, and financial return. Our focus will be on growing the core, driving value through connected autonomy, and expanding it to select adjacencies. Thanks to our strong cash flow generation and disciplined capital allocation strategy, we have reduced our debt leverage and strengthened our balance sheet. paving the way for strategic acquisitions to be a growth opportunity moving forward. We are excited to announce our exclusive technology agreement with BrainCorp. Tenant has made a $32 million investment in BrainCorp to accelerate the development and adoption of the next generation of robots in the floor cleaning industry. This collaboration grants Tenant access to BrainCorp's next-gen technology that will be exclusively available on tenant equipment, including the upcoming X4 Rover launch. Our expanded relationship with BrainCorp creates a differentiated customer support ecosystem led by tenant sales and service and supported by BrainCorp analytics and insights. As part of tenant's investment, Fay West will join BrainCorp's board of directors and bring a wealth of expertise and experience in strategic financial management. Together, Tenant and BrainCorp will seek to dramatically accelerate the transition to robotic cleaning. Aligned with our M&A framework, our investment in BrainCorp enhances our ability to grow our core business, drive value through connected autonomy, and build on our leadership position. The minority share in BrainCorp supports shared objectives, expanding our pipeline of new products and technology developments. This collaboration empowers us to further deploy dedicated sales, marketing, and customer support resources to aid customers in the transition to robotic cleaning. With this agreement and starting with the X4 Rover, Tenant will begin offering an all-in-one AMR solution with the equipment and autonomy services bundled as a single solution sold by Tenant. This new approach will simplify the buying experience for customers and result in tenant benefiting from recurring revenue or autonomy services moving forward. This alignment between BrainCorp and tenant underscores our commitment to driving customer ROI and accelerating the transition to robotic cleaning. In the performance pillar of our enterprise strategy, we are focusing on enhancing processes to drive efficiencies in our business. We will build on the foundation we have established through our disciplined strategic pricing and cost-out actions that have expanded our gross margins. The investments we make will enable us to maintain gross margins and allow for incremental improvement going forward. Within our performance pillar, we are also focused on unlocking long-term S&A efficiency by investing to modernize and consolidate our eight existing ERP systems to a best-in-class SAP cloud-based solution. This large transformative investment will encompass the entire enterprise and is estimated to cost approximately $75 million inclusive of CapEx and OpEx through 2025. The $75 million all-in estimate will be excluded from our adjusted non-GAAP results. with approximately 37 million of that investment expected in 2024. When completed, we anticipate that this ERP modernization project will allow us to more easily access data that will enable us to quickly access information for reporting, insight, and decision making, and to standardize processes in order to increase efficiencies. Our new ERP system will include improvements that allow us to better anticipate and react to market dynamics, deliver a better customer experience, and be easier to do business with. It will provide a scalable foundation to grow and increase our operating leverage. Beginning in 2026, we are targeting approximately $10 to $15 million in annualized savings as a result of this investment. Our ERP modernization timeline is centered on three phases. The planning phase that occurred in 2023 focused on data gathering, assessment, scope definition, and resourcing. We allocated a significant amount of time and resources to complete a thorough benchmarking of risks to prepare us for this journey. Partnering with a top-tier implementation consulting firm that brings a wealth of experience in helping companies with change management and SAP integrations. 2024 will include the design phase, focused on the development and design of the ERP system across the entire company. The implementation phase will occur in 2025, where we will define our future state with a standard first approach, utilizing preconfigured industry best practices. Our growth and performance goals can only be met if our organization attracts and retains talented people who can drive change and help deliver our exceptional products and services to our customers. In 2024, the work on our people pillar will center on our employee value proposition. We will invest in aligning and articulating our employee value proposition so that we can deliver a clear, consistent, and compelling promise to employees and prospects about why they should choose Tenant Company as the place to grow their careers. In summary, I am very excited about the future and the opportunity it represents. The last four years have showcased our capabilities, reaffirming we have the right strategy and people in place to drive future growth. As we drive growth and continue to meaningfully reduce backlog in 2024, we will continue to reinvest in the business, and are setting the stage for our long-term targets to include, one, achieving revenue growth of 3% to 5%, two, expanding EBITDA margins by 50 to 100 basis points, and three, continuing to generate a 100% free cash flow conversion rate. With that, I will turn the call over to Faye for a discussion of our financials.