Tennant Company

Ladies and gentlemen, good morning, my name is abby and I will be your conference operator today at this time, I would like to welcome everyone to tenant companies 2025 fourth quarter and full year results earning conference call. This call is being recorded, there will be time for Q amp a at the end of the call please press star one if you would like to ask a question after the Q amp a please stay on the line for closing remarks for 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 2025 fourth quarter and full year results earning 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 2025 earnings conference call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Hummel, President and CEO, and Faye West, Senior Vice President and CFO. Today, we will review our fourth quarter and full year performance for 2025. Dave will discuss our results and enterprise strategy, and Faye 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 statement. 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 2025 fourth quarter and full year earnings release and presentation include the comparable gap measures and reconciliations of these non-gap measures to our gap results. I'll now turn the call over to Dave.

Thank you, Lorenzo, and good morning, everyone, and thank you for joining our Q4 and full year 2025 earnings call. As we reported today, our Q4 and full year 2025 results were materially impacted by the North America go-live of our new ERP system during the first week of November of 2025. I will be devoting a significant portion of my overall remarks to the North America ERP go-live. I want to address upfront the impacts, including operationally, financially, and for our customers, where we stand today and the path forward. Let's talk about what happened. Despite a successful go-live in the APAC region in September, and extensive preparation in North America, the cutover of the ERP system in the first week of November introduced severe system functionality issues that limited our ability to enter orders, ship products, and service our customers. Core functionality required for processing orders, particularly for our highly configurable machines, did not perform as intended. As these issues emerged, our teams, together with our implementation partners, mobilized extensive stopgap procedures to offset system limitations that prevented normal order entry, production sequencing, and shipping. These actions allowed us to process limited activity, but they were highly labor intensive, inefficient, and not an adequate substitute for fully functioning workflows. Despite these sustained efforts to diagnose, remediate, and recover, The underlying problems proved far more complex and persistent than we anticipated based on our stress tests. We expected a short-lived productivity dip similar to APEC, where operations normalized within a week. Instead, in North America, we lost three full weeks of machine order entry and parts shipping capability. In essence, the system could not be stabilized as quickly as anticipated. prolonging the disruption and amplifying the operational impact, irrespective of the significant investment we made in recovery actions. So what do we have planned and why did it not operate as expected? We moved into the go-live based on the results of our testing and the confidence we had in the readiness of the environment, including sign-off from both the business readiness team and our implementation partners. We also had clear mitigation plans that included safety stock and manual contingencies. These were designed to offset anticipated potential inefficiencies, not an unexpected fundamental inability to transact for a prolonged period. We also relied heavily on our APAC implementation experience as a proxy for North America. While we believed that experience would guide our North America transition, The complexity and scale of the North American business created unique challenges. Let's talk about the operational and customer impacts. Our operations were significantly disrupted, particularly from the cutover date through November across all three U.S. production and distribution facilities. To keep plants running, we incurred additional overtime, freight, and other direct operating costs from the cutover date and into december as we worked to maintain production and distribution the customer impact was equally severe during november starting on the cutover date we were unable to fulfill many orders and could not provide reliable visibility into shipment timing our parts and consumables and service businesses were especially affected as we were unable to ship parts for most of the month Our inability to operate at scale drove an extended backlog and limited our ability to provide reliable shipment dates. We take great pride in our customer relationships and recognize how much trust our partners place in us. Our teams communicated frequently throughout the disruption and many of our customers showed patience in the early days. We are appreciative of that and we sincerely apologize for the strain this has caused. Let's shift to the financial impact. The operational constraints had clear implications for both fourth quarter and full year performance. Orders were reduced by approximately $15 million as the challenges we experienced in parts and consumables and in equipment directly affected demand. These dynamics combined with our limited ability to operate plants at normal capacity resulted in an estimated $30 million impact on net sales. Roughly half of this shortfall reflects the lower order intake, and the other half represents activity that moved into backlog. Gross margin was also pressured. Roughly $13.5 million of the impact came from the sales shortfall, and another $8.5 million was tied to operational inefficiencies and higher labor and freight costs, along with deleverage. As a result of this gross margin impact, adjusted EBITDA was negatively affected. The ERP implementation challenges reduced fourth quarter adjusted EBITDA by an estimated $22 million. In addition to the operational effect, I would like to update you on how our ERP project costs are tracking relative to expectations. To date, since 2023, we have invested approximately $98 million in the program. For 2025, our spending remained broadly in line with plan. However, the fourth quarter challenges required incremental stabilization and support resources that were not originally contemplated. As a result, we now expect ERP-related spending in 2026 to exceed the roughly $5 million initially planned and likely reach more than $20 million as we complete remediation, maintain hypercare support, and advance the next stages of our ERP modernization program. We believe these investments are appropriate to achieve the long-term benefits of our ERP modernization. So where are we now? The short answer is that we have solved the critical issues we faced starting on the cutover date in the first week of November. We remain in hypercare in North America, and while teams are identifying and fixing issues daily, the system is becoming more reliable and improving each week. In fact, core workflows, including order management, production scheduling, and fulfillment have improved. We are working toward achieving system stability by the end of Q1, 2026. with efficiency improvements continuing into Q2. How are we planning for the last regional go-live in EMEA? The experience in North America is reshaping our approach to the remaining ERP phases in EMEA, which initially was supposed to begin and complete in Q1, 2026. We have paused the EMEA timeline, not to set a new date, but to focus the entire organization on North America recovery as our 100% priority. Despite the disruption, our strategic direction remains intact. At the end of the day, everything we are working through now reinforces the long-term value of our ERP transformation, including better data, greater scalability, and ultimately a more efficient and capable enterprise, all with the goal of serving our customers that much more efficiently and effectively. Despite these challenges in the second half of the fourth quarter, the fundamentals of the business remain strong. Our international teams delivered solid execution throughout the year, and the momentum we saw outside North America in the fourth quarter highlights the breadth and durability of our global footprint. EMEA grew 5.1% year over year, supported by price realization, foreign exchange, and steady commercial execution across multiple markets. APAC returned to improve performance late in the year as growth in Australia and India offset softer demands in parts of East Asia. These results reinforce the strength of our global portfolio and our team's ability to perform in dynamic market conditions. From an innovation and growth standpoint, 2025 marked important progress on several of our strategic fronts. We launched four major new products during the year and continue to see increased customer adoption of our robotics portfolio, which delivered roughly 85 million in AMR sales, inclusive of recurring autonomy fees. We also maintained disciplined capital allocation throughout the year. In 2025, we repurchased approximately 1.1 million shares for $88 million, reducing outstanding shares by about 6%. This was an intentional and meaningful deployment of capital consistent with our longstanding strategy. We were able to do this while continuing our commitment to returning capital through dividends, including the company's 54th consecutive annual dividend increase. Our balance sheet remains strong, and with low leverage and solid liquidity, we have the capacity to invest in innovation, operations, and strategic priorities while still returning capital to shareholders. The actions we took in 2025 reflect our stated capital allocation priorities, and that is how we will continue to approach capital allocation in 2026. We remain committed to growing our business, investing organically, and pursuing strategic acquisition opportunities. We will also continue to use our share repurchase authorization when it represents the best use of capital. That discipline combined with the strength of our balance sheet positions us well as we move into next year. Let me shift and talk about the launch of our dedicated T&C robotics group. A major milestone in the quarter was the launch of a dedicated organization focused on accelerating the adoption and scaling of our autonomous robotic cleaning solutions. This new structure brings together expertise spanning product design and engineering, production, commercial strategy, marketing, business development, and customer support. The intent is to create a unified and focused team responsible for advancing our autonomous product roadmap, expanding production capacity, and supporting customers throughout the deployment and operational lifecycle of these solutions. The formation of this group directly aligns with our enterprise growth pillars. The team will accelerate our product roadmap, strengthen our commercial focus, and enhance customer engagement throughout the adoption journey. By unifying these capabilities, we are better positioned to drive awareness, increase demand, build the right channels, and deliver a consistent customer experience as autonomous solutions scale globally. The AMR market continues to expand, driven by persistent labor shortages, rapidly advancing technologies, and declining costs. At the same time, the landscape is becoming more competitive as new entrants move into the space. Establishing a dedicated AMR organization positions us to move faster, innovate more efficiently, and provide the support needed for consistent infield performance. This is a meaningful step forward in advancing our enterprise strategy and capturing the significant opportunity emerging in autonomous cleaning. With this renewed focus and increased investment, we are elevating our long-term ambition. We expect our AMR revenue to reach approximately $250 million by 2028, reflecting our confidence in the technology, the strength of our portfolio, and our ability to lead the ongoing transformation of this industry. Looking ahead to 2026, our primary focus is on restoring full operating capability in North America and driving steady improvement in efficiency as our system performance strengthens. We expect the challenges associated with the ERP transition to ease through the first half of the year as we expect reliability improvements, phase out of manual workarounds, and teams to transition from stabilization to a focus on productivity. At the same time, we are encouraged by the momentum in our autonomous and robotic solutions. The dedicated cross-functional organization we established is positioned to accelerate both development and commercialization. and we expect to build on the strong demand we generated in 2025. We will continue to scale our autonomous portfolio through new product introductions to serve a broader array of vertical market and customer applications. Our efforts also include strategies designed to help customers adopt autonomous solutions more quickly and with greater confidence, which we believe will support higher value mix and improved margin contribution as adoption grows. We expect resilient demand across our markets to support performance. Our backlog remains healthy, and commercial activity across global regions continues to show stability. With this foundation, we believe we are well positioned to capture demand and drive growth through new product innovations, strategic pricing, and go-to-market sales and service actions. Based on these drivers, we expect to deliver our 2026 full-year guidance with results weighted toward the back half of the year as we expect efficiency and throughput to steadily recover. Faye will provide detailed guidance and the full financial outlook in her remarks. So with that, I'll turn the call over to Faye.