Tennant Company

to Tenant Company's third quarter 2024 earnings call. This call is being recorded. There will be time for Q&A at the end of the call. Please press star one 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 the audio on your computer to avoid potential quality issues during the call. Thank you for participating in Tenant Company's Third Quarter 2024 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 Third Quarter 2024 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 provide an update on our 2024 third quarter performance. Dave will discuss our results and enterprise strategy, and Fay will cover our financials. After our prepared remarks, we will open the call to questions. Our earnings press release and slide presentation that accompany 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 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 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 2024 third quarter earnings release includes the comparable GAAP measures and a reconciliation of 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 third quarter 2024, our outlook for the remainder of the year, and the progress on our enterprise strategy. I am pleased to report on our strong third quarter results. Laughing a record high third quarter in the prior year, we delivered both organic net sales growth and increased adjusted EBITDA. As we anticipated, this quarter's performance was driven more by incoming order demand and less from backlog reduction. With this growth momentum, we are well positioned to achieve our 2024 guidance and continue to execute our enterprise growth strategy effectively. For the third quarter of 2024, net sales increased 3.6% to $315.8 million. Adjusted EBITDA rose to $47.9 million, yielding an adjusted EBITDA margin of 15.2%. Order rates were very strong in the third quarter, increasing high single digits compared to the same period in 2023. On a year-to-date basis, order rates have increased mid-single digits and are above our long-term revenue growth target of 3% to 5%. This quarter also marks the second consecutive quarter with strong order growth across all our geographies, a trend we believe will continue in the fourth quarter. Unpacking the third quarter, our business results varied by geography. In the Americas, order rates during the quarter were up compared to the prior year period, significantly outperforming the average growth rates we have seen in the region over the past few years. This was the result of both pricing and volume growth driven by our enterprise strategy initiatives. We reduced our backlog in the quarter at a faster pace than expected due to order softness within our North America industrial products. Overcoming currency-related headwinds in Brazil, our strategic investments in the Americas continue to deliver order rates, outpacing market growth, reinforcing our confidence that our strong leadership position is growing. In EMEA, continued market demand softness this year was compounded in the third quarter by lapping a previous quarter with higher backlog reduction benefit. Despite the overall sluggishness, we continue to see some positive signs in the region. Third quarter order rates increased double digits, and year-to-date orders are up mid-single digits. Go-to-market initiatives helped drive double-digit growth in the UK compared to the prior year period, and Italy saw strong organic growth as we expanded our distribution network. Lastly, TCS, our previously announced acquisition in Eastern Europe, continues to perform ahead of expectations. This business drove nearly 6% growth for the region in the quarter. Integration is on track and we are executing aggressive growth plans for this business in this attractive region. Turning now to APAC. Our APAC region accounts for 7% of our enterprise level sales, with China and Australia combined accounting for over 60% of this region's revenue annually. Business performance in this region was primarily impacted by stark declines in China, where overall market demand has slowed considerably. Australia is also showing signals of slower demand reflecting customers' growing economic uncertainty. As has been widely reported, excess manufacturing capacity and government-induced overproduction in China are pressuring market prices in our mid-tier product offerings and impacting our results. We do not see this dynamic changing for the remainder of the year. To counter this, we have strategically shifted our focus to vertical markets and product categories that are more insulated from this broader market dynamic, particularly through our tenant-branded legacy product offerings, which delivered strong growth in the third quarter. Turning now to strategic initiatives, last year we introduced the three pillars of our new enterprise strategy, growth, performance, and people. We continue to resource, invest, and execute targeted initiatives across each of these pillars, and I'd like to take the opportunity to provide you with several key updates from the quarter. Within the growth pillar pricing is a critical piece to driving growth during the third quarter, we continue to see price growth across each of our geographies. At an enterprise level, we are targeting approximately 50 to 100 basis points of annual price growth as part of our long term goals. We are well positioned to achieve that in 2024 and expect our pricing realization to more than offset inflationary pressure for the full year 2024. New product development is another important focus area in our growth pillar. By launching innovative new products, we help our customers solve their most pressing challenges, capitalize on emerging technology and market trends, and differentiate our offerings from our competitors. At an enterprise level, we are targeting new product development to add approximately 150 to 200 basis points of growth as part of our long-term goals. Bolstered by the release of the X4 Rover earlier this year, We are on pace to achieve that in 2024. As part of our new product development efforts, we are placing a strong emphasis on small space and product line extensions. Earlier this year, we introduced our IMOP family of products into new geographic markets, including Brazil, France, Portugal, and Spain. This international expansion has driven incremental growth of IMOP products during the current year, and we anticipate continued growth through increased country, channel, and brand access as we look ahead to 2025 and beyond. In September, we launched our new T291 small walk-behind scrubber into the North American market. Designed for use in both hard-to-reach spaces and open areas, the T291 is a walk-behind scrubber built to simplify and improve facility management by combining cleaning power and maneuverability. The T291's versatility and small size make it an excellent fit for midsize retail, healthcare, and education environments. Our product line extensions have proven to be an effective strategy, positioning our mid and premium tier products to grow, share, and generate incremental revenue and margin. The third area of focus for our new product development efforts is AMR. The strong market reception for the X4 Rover combined with continued high demand for our existing AMR products has been encouraging. Customers are choosing tenant AMR machines, supporting our belief that we have a winning product portfolio, differentiated service capability, and strong value proposition in the market. Customers are actively upgrading and expanding their AMR fleets with new X4 Rover and our other AMR models. In the third quarter of 2024, we saw significant repurchases from existing key retail customers and are reaching new AMR customers with the X4 Rover, which officially launched in EMEA during the quarter. In the first nine months of 2024, we have deployed over 2,200 units, bringing our cumulative AMR total to over 8,700 units deployed since introduction. We continue to be pleased with our progress on driving disruption in robotics and growing our AMR portfolio, which now accounts for approximately 5% of net sales at the enterprise level for the first nine months of 2024. The launch of the X4 Rover alongside our strong AMR performance fuels our optimism as it relates to our long-term growth strategy. We designed the X4 Rover as a scalable platform allowing us to bring new products to market more quickly and cost effectively. This includes accelerating the development of new products based on the X4 Rover platform, with additional launches now planned for 2025. Shifting to the performance pillar of our enterprise strategy, our ERP modernization journey is one of the key components within our performance pillar. The project is on track and we have hit our current year milestones related to the design and build phase of the implementation with staggered go-live launches planned for 2025. Our significant investment in this ERP project will provide a strong and secure digital infrastructure to enable globally standardized processes and systems for scalable growth by better serving more customers and unlocking operational efficiencies. Looking ahead, we anticipate a strong finish to 2024 driven by increasing order growth across all geographies. This momentum, supported by our strategic initiatives, is expected to continue promoting higher order growth in 2025. While this order growth bodes well for our long-term outlook, other dynamics will shape our 2025 performance. As previously discussed, our 2024 backlog was primarily concentrated in North America industrial equipment. Initially, we anticipated reducing our backlog by 80 to $100 million within the year. However, we are now on track to reduce our backlog by $130 million by the end of 2024. This accelerated reduction is attributable to lower than expected incoming orders for industrial equipment. In 2024, we experienced lower than anticipated demand for industrial equipment across various vertical markets, including the rental channel, where we are experiencing extended replacement cycles. This market dynamic has contributed to a larger than expected backlog reduction in 2024, presenting a headwind for 2025. Despite anticipated strong order growth in 2025, this significant backlog reduction, coupled with continued softness in certain regions, is likely to result in muted top-line performance in 2025. We continue to see success in the first year of our enterprise growth strategy. The investments we are making are reading out in the current year, illustrated by our strong double-digit order growth. We believe we will see continued order growth from these initiatives as we navigate the short-term backlog challenges in 2025. Our key enterprise growth drivers, pricing, new product development, and go-to-market investments will continue to fuel our growth and help drive our long-term revenue growth targets of 3% to 5%. Additionally, we will continue to prioritize investments aligned with our long-term growth pillars while maintaining strict spending discipline. With that, I will turn the call over to Faye for a discussion of our financials.

Thank you, Dave, and good morning, everyone. In the third quarter of 2024, Tenant delivered gap net income of $20.8 million compared to $22.9 million in the prior year period. Net income for the quarter benefited from increased net sales, primarily driven by effective price realization and volume growth in the Americas. However, this positive performance was partially offset by volume declines in EMEA and APAC. Additionally, operating expenses rose this year due to the ERP implementation costs, as well as integration costs related to our acquisition of TCS, which totaled $4 million in the quarter. Beyond operating income, interest expense in the third quarter was $0.6 million lower than the prior year period. This reduction was primarily due to a decrease in debt balances coupled with lower interest rates. Our average interest rate net of hedging for the third quarter of 2024 was 4.63% compared to 4.92% in the prior year quarter. Income tax expense in the third quarter was slightly higher than the prior year period. Our effective tax rate was 24.4% in the third quarter of 2024 compared to 23.4% in the prior year period. The increase in the effective tax rate was primarily due to an increase in non-deductible executive compensation and an unfavorable change in the mix of forecasted earnings by country. We anticipate that our full-year effective tax rate will be within our guided range of 22 to 27%. Excluding ERP implementation costs and other non-GAAP costs, adjusted net income in the third quarter of 2024 was $26.6 million compared to $25.4 million in the prior year period, a 4.7% year-over-year increase. Adjusted EPS for the third quarter of 2024 increased 3.7% compared to the prior year period to $1.39 per diluted share. Looking a little more closely at our quarterly results, For the third quarter of 2024, consolidated net sales totaled $315.8 million, reflecting a 3.6% increase from the $304.7 million reported in the third quarter of 2023. Acquisitions contributed 1.3% of this growth, while changes in foreign currency exchange rates had a negative impact of 0.4%, primarily affecting our operations in Brazil. On a constant currency basis, organic sales increased 2.7%, with 1.8% attributable to price increases and 0.9% due to volume growth. On a consolidated basis, order activity grew mid-single digits, driving higher equipment sales, particularly in the Americas. However, volume in the current period was adversely affected by sluggish economic conditions in EMEA and a challenging business environment in APAC. As a reminder, we group our net sales into the following categories, equipment, parts and consumables, and service and other. In the third quarter, we experienced growth in both equipment and service product categories as compared to the prior year period. Equipment sales grew 3.7% and service increased 9.2%, while sales for parts and consumables remained unchanged. Tenet also groups its sales into three regions. The America includes all of North America and Latin America. EMEA covers Europe, the Middle East, and Africa. And Asia Pacific includes Australia, China, Japan, and other Asian markets. Organic sales in the Americas increased 4.6% compared to the prior year period. The increase in net sales was driven by a 60-40 split between volume and price. Volume growth across the region was generated primarily from our commercial equipment sales, while volume growth in our industrial equipment was flat. Organic sales declined 0.8% in EMEA due to volume declines in both equipment sales and parts and consumables, partially offset by price realization in all product categories. EMEA volumes were impacted by weaker than expected market conditions, and a smaller contribution from backlog reduction in the current period. Organic sales decreased 4.3% in APAP, primarily due to volume declines in China and Australia, partly offset by price growth in Australia. As Dave mentioned earlier, challenging business conditions persist in the region, and we expect this dynamic to continue for the remainder of the year. quarter of 2024 was $47.9 million, up 4.4% compared to the third quarter of 2023. Adjusted EBITDA margin for the third quarter of 2024 was 15.2% of net sales, up slightly compared to the third quarter of 2023. Gross margin was 42.4% in the third quarter, a 90 basis point decrease compared to the prior year quarter. The margin rate decrease is attributed to inflationary pressure on materials, as well as elevated freight costs. Unfavorable geographic and customer mix also contributed to the decline, but to a lesser degree. This was partially upset by price realization. Our overall margin profile can be impacted by shifts in our geographic, product, and customer mix. During the first half of 2024, As we reduced our industrial equipment backlog, our overall margin rate benefited from this higher margin profile shift. In the third quarter, as orders for our commercial products increased, our product mix became more balanced. We expect this balanced mix to continue in the fourth quarter of 2024. Our pricing and cost initiative efforts during the year have positioned us to achieve our EBITDA margin expansion targets for the full year of 2024. Adjusted selling and administrative expense in the quarter totaled $88.7 million, a $0.5 million increase compared to the third quarter of 2023. Adjusted S&A expense as a percent of net sales was 28.1%. This is an 80 basis point improvement compared to the third quarter of 2023. Turning now to capital deployment. Net cash provided by operating activities was $30.7 million during the third quarter compared to $54.4 million in the year-ago period. Operating cash flow during the quarter was impacted by investments in the ERP project as well as working capital investments related to inventory. We generated free cash flow of $26.4 million for the quarter which included investments in the ERP of $9.4 million. When excluding these non-operational cash flows, we converted 154% of net income to free cash flow during the quarter. The company continues to deploy cash flow toward operational capital needs and to return capital to shareholders in line with its capital allocation priorities. During the third quarter, the company invested $4.3 million in capital expenditures and returned $13.3 million to shareholders for dividends and share repurchases. Yesterday, we announced a 5.4% increase to our annual dividend, raising it to 29.5 cents per share. This marks the 53rd consecutive year Tenet has increased the dividend payout. Tenant's liquidity remains strong with a balance of $91.3 million in cash and cash equivalents at the end of the third quarter and approximately $439.3 million of unused borrowing capacity on the company's revolving credit facility. As previously announced in August, the company refinanced its existing debt agreement, increasing its revolving credit facility limit to $650 million. This provides the company with increased flexibility and capability to fund growth through M&A and create value for our stakeholders. The company continues to effectively manage debt and maintain a strong balance sheet. Our net leverage was 0.56 times adjusted EBITDA, below our targeted range of 1 to 2 times adjusted EBITDA. Moving to 2024 guidance. Overall, based on the strong order growth rates and demand for our products and services, we are reaffirming our 2024 guidance. We will remain disciplined and prudent in our spending, focusing on investments in areas that position us for growth and increased operating efficiency. For 2024, tenant reaffirms the following guidance. Net sales in the range of $1,280,000,000 to $1,305,000,000, reflecting organic growth between 2.5% to 4.5%. Adjusted EPS of $6.15 to $6.55 per diluted share, which excludes certain non-operational items and amortization expenses. Adjusted EBITDA in the range of $205 million to $215 million. Adjusted EBITDA margin in the range of 16% to 16.5%. And capital expenditures of approximately $20 million. With that, I will turn the call back to Dave.

Thank you, Fay. In summary, I am very proud of the global team and our ability to continue our growth trajectory. As we carry this momentum through the end of the year, we are well positioned to achieve our 2024 guidance. I am optimistic by the positive returns we are seeing from the investments we are making in the first year of our enterprise growth strategy. The work the team is doing is helping create the framework to reach our long-term financial targets of 3% to 5% sales growth and annual EBITDA margin expansion between 50 and 100 basis points. Our strategy is centered on creating value for our shareholders through returning capital via dividends and share repurchases, as well as a renewed focus on value creation through acquisitions. Growth through acquisitions presents an exciting opportunity to capitalize on megatrends, expand our total addressable market, and drive growth. We're excited about the opportunities here at Tenet as we continue to make investments fueling our growth we're prepared to tackle the 2025 backlog headwinds and drive forward with the transformational ERP modernization project. This ERP journey will empower us with real-time insights, enabling smarter, faster decision-making across the business. The foundation our team is building now is paving the way for our future success. If you wish to learn more about our company and the direction we're heading, we are participating in the Baird Global Industrial Conference on November 13th in Chicago. With that, we will open the call to questions. Operator, please go ahead.

At this time, if you would like to ask a question, simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Steve Ferronzi with Sedoti. Please go ahead.

Morning, everyone. Appreciate all the detail on the call. You covered a lot of ground, so a lot of numbers. So I want to see if I can work through at least a couple of big topics, if that's okay. I want to start with the AMR. It sounds like if it's 5% year-to-date, counting for 5% of your year-to-date net sales, it sounds like that's really, if anything, understating the performance, right? Because as I recall, you only began shipping the new Rover in 2Q, and now you've just moved to EMEA in 3Q. Is that accurate? that really, if we're looking at it from the period when you started launching the product, that would be a much higher number.

Good morning, Steve, and thanks for the question. Just to clarify, the 5% number is on total revenue for all of our AMR products.

You're right. But I'm assuming the Rover is the biggest driver this year, or is that not accurate?

Rover is part of the driver, but it's a really, so it's a great question. Underneath it, we are growing differentially in our legacy AMR products, as well as benefiting from the X4 Rover. And when you think about the X4 Rover, we're really excited about it. We believe it's a game changer for us. We really started shipping the X4 Rover in Q2 in the North American marketplace, and later in Q3 in the European marketplace. So it's performance is not a dramatic driver of that 5% data point.

Okay. When I think about when you initially launched AMR, it was driven primarily by two or three big orders. Is the performance of Rover's demand different?

Yeah, so if you open the aperture and think about the AMR journey we've been on, we had a large strategic account order that we were public about right out of the gates in 2020 and took into 2021 as well. Since then, we've launched additional models in the T380 AMR and the T16 AMR, and now the X4 Rover. We are very fast out of the gates with the X4 Rover, but as I mentioned, we really only got a quarter and a half X4 Rover impact in the year-to-date numbers, and less than a quarter's impact in EMEA impacts results in the year-to-date numbers. So my point being, will we expect X4 to continue to ramp as a percentage of our total AMR sales? And it's important to note the pipeline for X4 and actually the pipeline for all of our AMRs is really strong here as we look out into Q4 and beyond. Excellent.

Appreciate that, Dave.

Help me out with the backlog. There are a lot of numbers there. So it now sounds like, let me make sure I got these right and I can ask You've converted 80 to 100 million this year. You're expecting 130 million full year. As I recall, that compares to, I think you converted 140 million last year. And where are you? Will you be at a normalized rate by year end?

Yes. So Steve, your numbers are good. We have guided to an 80, or excuse me, an 80 to $100 million backlog reduction. As we started the year, we're actually going to deliver now but we believe about 130 million in backlog reduction. That compares to 140 million in prior year, and we expect to exit the year with normalized backlog, which means we're back to market competitive lead times and selling our entire product portfolio at the lead times that our customers expect. Okay.

And then it sounded like you also commented the reason you were able to convert so much of the industrial backlog this year was industrial orders have been a little bit slower. I mean, does that set you up for not only challenging sales comps next year, but also your mix is going to be dramatically shifted, right, particularly if industrial is slower?

Yeah, I think it's important to dimensionalize that comment about industrial softness because really it's a very narrow set of products. And we mentioned earlier that our backlog had become increasingly consolidated in North America and on fewer and fewer product lines. Those were the lines where we saw the softness in incoming orders, which allowed us then to drain the backlog more quickly than we expected. And when you dig deep into what drove the softness in those particular industrial products, it's really a story of a few customers and the rental channel, which we referenced in the script. I can put more color around the rental industry dynamic if you'd like, but we believe it's a correction kind of in that industry for coming off of the supply chain crisis. We don't expect it's going to rectify itself, that specific situation, you know, anytime soon in 2025. But beyond that, we see opportunity in the other industrial vertical markets and industrial products. So we'll solve for that acute problem in that specific vertical market and industry. It's not a broad-based industrial downturn. Does that make sense, Steve?

Because, I mean, I remember at the beginning of the year, the view was the industrials could be strong because of, the labor saving opportunity where there was obviously labor shortages. So what you're saying is that was still playing out. It was specific to the rentals market only where you've seen the softness. Correct. Okay. Okay. That's helpful. Last one for me, because I don't want to take up too much time here. I want to let other people have a chance, but can you update us on where you are with the ERP modernization time and costs that remain and you could walk through what that can mean on the financial side once that's completed.

Yeah, let me walk through the project, sort of where we're at on scope, timeline, and fail fill in the details on the financials behind it. I'm really pleased with progress on this major transformational project for Tenant Company. We'll be ending year two of the program. We're in the design and build phase. We're actually building out the system to meet our requirements and configure it to match our business. Team has done a fantastic job, and this has required a significant lift from many resources across the company. We are benefiting greatly from our partners, a significant lift by our team around the world, and also guidance by our board that has experience with multiple ERP deployments in other industries, other companies. So we feel like we're really well positioned. We're on pace as far as scope and functionality deliverables as we move through Q3. and are optimistic on our outlook. 2025 is a big year for the program. We have staggered go-lives planned geographically around the world beginning in Q2. And so it'll be all hands on deck to make sure that we can deploy the system effectively, help our team members as they change toward the new way of working with the new standardized global processes. avoid business disruption, and realize the benefits, both tangible and intangible, of having a common ERP around the world.

And Steve, just to put some numbers around it, year to date, we've spent approximately $25 million. Of that $25 million, $9 million is running through the P&L, and $16 million has been capitalized. On a full year basis, we anticipate spending right around $37 million, which was in line with our original expectations um and in it in the breakout there would be similar as far as what gets capitalized and what what you know and what's remaining for for costs and timing yeah so so as dave mentioned we've got a year of deployment in 2025 um staggered throughout the year and i and i suspect likely some of that given the timing of deployment will run into early part of 2026. We're in line with our anticipated cost projections for the project that we outlined early on. So we are tracking timeline-wise and tracking dollar-wise.

OK. And what do you think the impact can be in terms of, do you view this as potentially beyond just the speed and convenience

can't is this a margin enhancing project for the business yeah so we're we're planning on efficiency savings between 10 and 15 million and we continue to refine and enhance those estimates as we build the system and understand the true functionality we can deliver in that time frame to realize the efficiency savings And that's really only part of the story. The rest of the benefits are going to be less tangible and quantifiable in the P&L, but we're looking for enhanced decision-making by putting better data in people's hands to make faster decisions, capitalize on opportunity, and candidly, just serve more customers better with less manual effort required. So there's a $10 million to $15 million kind of efficiency planning target we have out there. We'll update you as we move through 2024 and into 2025. how that number is shaping up as we finalize the estimates.

Great. Thanks, Dave. Thanks, Faye. Thank you.

Thank you.

Our next question comes from the line of Tom Hayes with CL King. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions. Morning, Tom. Morning. Hey, Dave, maybe a couple of geographic-based questions. I think you mentioned APAC. Obviously, I think everyone knows or kind of understands that China has been a pressure point for you and everyone in the industrial world for a while. I was just wondering, you had kind of highlighted in your prepared remarks some initiatives or actions you're taking in that market. Could you just maybe go over those a little bit more?

Yeah, I'd be happy to. The headline story around APAC's performance is really that market-driven softness in China. China, and this has been widely reported in the mass media, China's trying to overcome some significant macroeconomic headwinds, and we are not immune to those pressures. And the way that's manifested itself and shown itself in the markets we serve is that there is overcapacity from a production standpoint on decreasing demand in the markets. As well as government incentivized overproduction. So we've seen price pressure primarily in the lower end of our product line. You would say commercial products and down as kind of the very competitive price point products that we have in our portfolio. And so what's happened is there's this price war going on amongst competitors. And what we're not doing is chasing the price down the sewer. We're being very intentional about where we're choosing to participate in this market environment where there's this much pricing pressure to make sure that where we are taking orders, we're going to do it profitably and it's an incremental volume for us. So we're being very intentional reacting to this market dynamic within China. And there's a halo effect of this dynamic outside of China because as the overproduction is unable to find a home in the local China market, they're exporting their production at really reduced market rates. So you're seeing some impact throughout Southeast Asia and elsewhere of these exported low-price units. So what we are doing in response is flexing our resources to focus more on the higher end of our line. And for us, that's our industrial product. In that space, there are just fewer competitors. We are product advantaged in that space. We have a legacy of product leadership. So we're well known as a preferred partner in that space. And from a selling perspective, these are more single site sales up and down the street where our direct selling capability gives us an edge and our direct service capability gives us an edge over distribution, for example, selling into distribution because we have that direct relationship with end use customers. So what we're doing is flexing our selling organization to focus more on the industrial vertical markets to try to drive volume where we can get growth at a decent margin, a creative margin, rather than kind of just chasing this commercial product as it moves ratchets down in price points. In the short term, we weren't able to offset the decline in the commercial space with the industrial sales, but we did drive incremental business for us in industrial on a standalone basis. So we think it's an appropriate step to take Just acknowledging the challenging environment we're in in China.

No, I appreciate the call and maybe shifting over to Amiya. It sounds like the acquisition that you guys did, I think it was earlier this year or late last year on the distribution platform is performing well. Just your thoughts on that progress.

Yeah, it's going really well. I appreciate you mentioning and asking the question. It's going really well. Really pleased with the performance of the business. know we we bought a business that's made up of a group of really talented long tenured people who have long-standing customer relationships in these markets and they just had not been um appropriately equipped to address all the opportunity in their markets whether that be from a training perspective from a go-to-market strategy perspective from a product assortment perspective so you know i'm really proud of the tenant team for coming in embracing the acquisitions moving intentionally with aggressive growth plans so that we can get the products into the hands of the sellers and the sellers train so they can take those products in front of the end-use customers and the yearly returns are really positive I continue to be very bullish on this on this acquisition I think it's a an excellent example of where we can put our put our capital work to create value for shareholders within our core space our core cleaning market and this is This is a channel play. We've acquired new channels to market and new geographies on a direct basis, direct sales and service basis that can drive incremental value, not only growth for the company, but incremental value for shareholders as well.

Okay. I appreciate that. Maybe just one on the AMR business. And I know you cover a lot of that with the previous caller, but I was just wondering on production capacity. I know you added some not too long ago, but what are your thinking on that? that outlook, especially with your commentary that demand remains pretty robust?

Yeah, we did. We referenced an earlier call on the X4 Rover specifically when we launched in North America. We looked at the pipeline of opportunity and orders likely to come, and we decided to make the investment to roughly double our production capacity versus the original launch plan on X4 Rover. I'm pleased to report we're making great progress securing orders for that increased production. So I think that's proven to be a smart move by the team to double down on the product in that space. Listen, I think it's a lot of upside for AMR for us in 2024 and out into 2025. And I would remind you, we're solving for one of our customers' most pressing problems, which is the availability, the cost, and the reliability of labor. And all of our equipment enhances productivity, but AMR specifically reduces the reliance on cleaning labor that is increasingly hard to find and expensive. We are demonstrating success with our legacy AMR products. We've gained some significant refleet orders in addition to fleet orders on our T-7 AMR, for example. Our T-16 AMR was the last. Before the X-4 Rover, that was the most recent introduction that's focused on industrial applications and the uptake on that product has been really, really great and excited about the upside on T16 AMR. And X4 Rover, listen, I've spent a lot of airtime on it. As our first ground-up purpose-built AMR product, I think it's a real game changer for us. And our customers are telling us that it solves a real need they have in a differential way. And so I think we've got a lot of upside on X4 Rover. You know, if you narrow your view and just think about 2025, We had a mid-year launch of X4 Rover in North America and a late Q3 launch of X4 Rover in EMEA. So even just straight lining for full year availability in 2025 provides mathematical upside. The pipeline looks very robust, and now we've got to get out and convert the pipeline of interest into a pipeline of POs.

Okay, maybe one more, if I could. Just on your new product launch on the T291, are there any specific markets that's addressing?

This is really a product that's born out of our product line extension strategy, where we look at the the platforms the hardware platforms we have from our acquired businesses in ipc and gaume and consider rebranding them into in this case tenant tenant brands so that we can take it through our existing channels that's a great it's a great representation of that strategy what we're targeting is smaller store formats with this product line it's really compact and highly maneuverable it's capable of cleaning wide open spaces but it really shines when you get into tighter spaces So think about smaller format retail environments that have checkout aisles or even tight aisles that need to be navigated. Think about grocery stores. Think about smaller store format retail, general merchandise retail, clothing stores, et cetera, which is really kind of bread and butter applications for us because we sell the large format stores, but when we get into the smaller format stores, some of the equipment is historically to navigate the space. And so we think this gives us an opportunity to penetrate smaller store formats in real and retail vertical market, but also vertical markets like education and healthcare as well.

Appreciate the color.

Thank you very much. Thank you.

Our next question comes from the line of Aaron Reed with North Coast Research. Please go ahead.

Good morning, gentlemen. So, based on where Tenant is in the full year guidance range right now, what needs to happen in the fourth quarter to really achieve that? Is it really coming back to order growth? Are you thinking more backlog reduction? Or is it a combination of the two? Can you provide a little more color on that?

Yeah, it's just the math. At midpoint of our guidance, we need to deliver 334 in revenue in the Q4. Some of that will be driven by backlog reduction. We exited Q3 having taken backlog down by 109 million. And this, you know, so we got another, to hit the 130 estimate we have for full year, there's another 20, 21 million of backlog reduction. And when we'll do that, that will likely happen earlier in the quarter rather than later. But really, the activity, as important as backlog reduction is, the activity to deliver Q4 is around our strong pipeline of opportunity. And we've got line of sight to a strong pipeline of orders in AMR, as well as some key strategic accounts that are already planned. It gives us confidence that the orders will materialize in those product and customer segments. We continue to execute really well against our elevate strategy and inclusive of AMR. And we talked during Tom's questions about kind of the export rover and the momentum we have in that space as well. We've come through the last two quarters with really strong order growth, and really that's a direct result of the investments and actions we're taking in our Elevate strategy. We expect strong order growth in the Q4 as well, kind of hovering around that double-digit order growth rate year over year, which not only helps us deliver Q4, but sets us up really well, having three-quarters of elevated growth rate as we head into 2025.

That makes sense. I appreciate it. And then just kind of building off of this, and I know you've already touched on it a little bit, but can you tell me about how AMR is performing this year compared to your expectations? And in addition to that, when we look further into 2025 and beyond, how do you see AMR impacting your overall growth trend?

Thanks for the question. So AMR continues to perform well. And Aaron, I know you're a bit newer to the conversation. I'll fill you in on something we've been talking about over the past several years with AMR. We're really bullish on AMR over the long term. We are disrupting an industry, and so the adoption curve of AMR for our customers in this industry is anything but a traditional adoption curve. We've seen really spotty adoption marked by significant orders, for example, in strategic accounts, large fleet orders that can really skew the impact of AMR in a given quarter, month or quarter, and even a year because some of these deployments have been significant. But when you take a step back and think about the cumulative impact that we've driven for the business on AMR, you know, we're at over $250 million in sales cumulatively since we launched AMR. over 8,700 units to 850 unique customers in 25 different countries. And so the reason I bring that up is that we are very pleased that we are getting the product out and in front of as many customers in as many geographies, channels, and vertical markets as possible so that we can begin to model and gauge where will the adoption be the most quick across those vertical markets that we serve. This X4 rover is a game changer for us. I believe it's our first purpose-built robot. It gives us a truly differentiated offering in the marketplace based on its maneuverability and its performance. It's enhanced by our agreement with Brain, where we have exclusivity on the Generation 3 navigation software. We have exclusivity on almost any competitors in the marketplace, and it's just a superior navigation system. And we're also participating, as a result of that agreement, we're participating in the ARR of the subscription revenue, which provides us another profitable revenue stream as we go forward. We expect AMR to be a significant contributor, not only to the enterprise, but to our growth year over year as we move into 2025, 26, 27. We're continuing to iterate. The X4 is a purpose-built ground-up machine. It's a platform product. So we indicated in the script that we expect to launch more new products off of that platform beginning in 2025. That will give us an opportunity to take kind of the benefits of the X4 platform into even more vertical markets, get into more vertical customers. And we think driving inflection point is an option. And so we're really bullish on the AMR opportunity and think it's going to be a significant opportunity contributor to the business, but also a disruption to this industry on a global basis in the coming years. Okay.

That makes sense. And then drilling down just a little bit further, one other question I had was, it sounds like right now you're experiencing some longer lead times on replacement of some of these fleets and some of that equipment. My question is, will you expect to possibly see any sort of offset in terms of More sales coming through the parts and consumables segment as these vehicles are just getting towards the end of their lives and you start to see higher failure rates on parts. Is that a possible offset?

Yeah, that comment about the extended replacement cycles was really limited to the rental industry and our partners in the rental channel. I'll just give you a quick snippet about the dynamic there. Coming through supply chain challenges, when customers couldn't get their equipment from the OEMs, like Tenet and many others, the rental industry in general saw that this was going to be a short-term opportunity to capture a demand spike as customers still need equipment, whether it's a backhoe or a floor scrubber or a boom lift. They need the product. They can't get it from the OEM, so they turn to the rental channel. And so the rental industry as a whole brought in inventory to capitalize on that short-term opportunity. Now that they have the inventory in place, And the demand, you know, OEMs have taken their backlog down, both tenants and the broader base of OEMs. Now the demand is returning to a more normalized pace in that rental channel. They've got to rent down the inventory they have in place. So it's really kind of a short-term, shorter-term structural challenge to overcome. But it's really specific to that rental industry. Beyond that, yeah, we have multiple levers for growth across the vertical markets we serve. And I think I've highlighted many of them on the call. But I think about The fact that we're still seeing growth in our core marketplace. We're focused on the highest growth segments within that marketplace, whether it be small space or product line extensions or AMR. They are growing at rates faster than the core business. I already talked about our X4 Rover and how excited we are about the early returns on that product, as well as the platform products to come off of following on the X4's heels. We're driving double-digit order growth rate as we exit year Q3 and Q4 heading into next year. You just think about the trending of order rates, the direct results of execution of our Elevate Growth Strategy. And so really excited and confident that we can continue to execute that really well. And our acquisitions are paying back. The CCS acquisition in Eastern Europe is contributing really, really nicely to that region and to the enterprise. And our investment in in brain is yielding commercial benefits as we take amr to the uh out to the marketplace so you know really bullish on on our growth prospects outside of some of the softness we articulated in a specific vertical market or a channel in north america or some of the geographic softness like china really bullish on our upside growth opportunities as a business i really appreciate the clarification thank you thank you

Before we take our next question, I'd like to remind everyone that in order to ask a question, simply press star one on your telephone keypad. Our next question will come from the line of Eva Priscilla with North Coast Research. Please go ahead. Hey, good morning, guys.

Good morning.

So good morning. The press release referenced elevated freight costs and inflationary pressures. So I was wondering, how are these freight costs and inflationary pressures trending through October? And do you see this as a temporary headwind? or something that could last well into 2025?

We really see it as a temporary headwind. If you think about what's happened in the global freight industry, you've got a few factors at play. Think about the unrest in certain parts of the world that are influencing carriers' willingness to pursue certain trade routes. And so they're alternating to other trade routes that are longer a lot more time on the water and more expensive. I think that's one dynamic we've seen and reacted to from a freight perspective. There's also been some saber rattling, as you recall, about port closures and port strikes that have impacted people's outlook. I will tell you that we took some intentional actions in preparing for a potential port strike to reroute some products coming from overseas for domestic markets. just to get out ahead of it and avoid the potential business disruption, that came at an expense. I still think that was a prudent move for us as a business, but we don't expect that dynamic to continue into future quarters.

And just a few more data points. We anticipate that pricing will offset inflation on a full year basis. And while we don't specifically guide to gross margin, when we look at Full year, over full year, we still expect that we will see gross margin expansion on a full year basis.

Okay, yeah, thank you. That was super helpful.

And since there are no further questions at this time, I would like to turn the call over to management for closing remarks.

I want to thank you all for your participation today and your interest in tenant companies. This concludes our earnings call. I hope you have a great day.

Thank you all for joining today's presentation. You may now disconnect.