Good afternoon, everyone. I'm Steve Ferrazzani, an Analyst at Sidoti. I'm just giving it a few seconds to wait for the room to fill in, so please be patient. Bear with us. Sometimes technology's a little slow. Okay, looks like we're filled in. Welcome back to Sidoti September Virtual Investor Conference. Before I turn it over to the next presenter, I'd like to remind everyone we should have some time at the end of the presentation for questions. If you do have any questions, press that Q&A button at the bottom of the box at the bottom of your screen, type in the questions, and we'll get to as many as we can, time permitting. With that, so happy to be joined by Tennant Company. The ticker is TNC, and we're joined by Dave Huml.
It's the provider of mechanized floor scrubbers. I'm sure most of you have seen them if you're in the grocery store, larger retail stores, or many other places. A lot to catch up on here on the next half hour, so I don't want to take up any more time. So with that, let me turn it over to CEO Dave Huml. Dave?
Thank you, Steve. Appreciate the introduction and the chance to give this group presentation. Thank you all for joining me. As Steve mentioned, I've got us some prepared remarks, or a walk-through, just to kind of level set us and anchor us in the Tennant story, and then we'll leave some time for Q&A at the end. As always, if you have questions beyond today's presentation, we're happy to make time for you. Just reach out to us, and we'll schedule a time to sit down and talk through the business. So let's start with the punchline. From a 30,00 ft level, this is the Tennant Company value proposition, the investment thesis. When you move into Tennant Company, you're really partnering with a global leader in an expanding market.
We have a 14% share of an $8.6 billion TAM. We have a differentiated product portfolio and a unique service offering as well. So we occupy a significant footprint, but there's significant upside for growth within that TAM. We have a world-class service model. In our business, what that means is we have the industry's only factory direct service organization. This provides a fantastic value proposition to our customers, a profitable revenue stream for the company, and is a strong competitive moat against our competitors in the space. So our service model is part of the secret sauce of the Tennant Company and of the business, and we've got upside in service, as well as service as a growth lever outside of our other outside any other product categories that we offer.
We have a number of compelling growth opportunities. We've embarked on an ambitious growth plan here. Beginning in 2024, we've committed to 3%-5% top-line growth over the long- term. We've got identified initiatives we've resourced and funded in pricing, new product innovation, and go-to-market channel excellence. Our growth opportunities are underpinned by tailwinds from global mega trends that we think are creating opportunity for us and play in our favor. Think about things like the global challenge for labor and the cost of labor, and the fact that our equipment provides a productivity improvement and reduces the. Think about our robotics, reduces the opportunity, or excuse me, the reliance on labor to perform cleaning actions.
When we look at the global mega trends, we really think that they are present tailwinds to us as a business. We are recognized as the innovation leader in our space, and our customers tell us that they rely on us for new innovative solutions to their cleaning challenges. We are on the cusp of a disruption with robotics in our core space, our mechanized cleaning space. We believe we're the leader in the robotic cleaning equipment space today. We've got 7,000 units deployed, have generated over $200 million in sales over the last, you know, four, call it four and a half years. We have a large deployed fleet, and we've really just started to scratch the surface of that opportunity.
Our general posture is that disrupting our core business should be our core activity. This is our space. We have the brand reputation, we have the channel reach, we have the non-robotic equipment as the alternative. Really, this business, this industry is ripe for disruption, and we are very well positioned to drive that disruption. Then, as an enterprise, and those of you that have followed Tennant will know this, we pride ourselves on a very strong financial position, strong fiscal discipline. We have a very healthy balance sheet. We have a well-articulated capital allocation prioritization, which I'll walk through a bit later in the presentation.
But, you know, the punchline on our financial position is that we manage the business to be able to control our own destiny and to be able to fund our own growth. So a bit more detail on the business. I mentioned our TAM at fourteen-- excuse me, at $8.6 billion. Our TAM grows at about GDP-type rates around the world, so you think about that in the 1%-2% range. When we grow at 3%-5%, we are outpacing market growth and taking share from competition. We have a 14% share of that TAM on a global basis, but our starting position differs by geography. About a 25% share of the Americas, 10% across EMEA, and 5% across APAC.
So growth potential across all the geographies, I would say a significant total and starting position in the geographies where we compete, especially where we compete on a direct basis, but significant upside for growth across all of the geographies. This industry and this business is won locally. We compete locally, and it's important that we have the components of growth within each of the regions for the reasons. And so we're well positioned in each of our key geographies to capitalize on our footprint position we have and use it to drive growth, as we go forward ... a bit more grounding in the business itself.
We're about 60-40 in terms of revenue between the equipment, meaning the machines, and then what we would call aftermarket, in terms of the service, because we have service labor as well as the parts and consumables that we sell. So, a healthy mix of equipment going out and then a very healthy aftermarket opportunity. We estimate that we get about 70% of our own aftermarket, in both parts and service. So we think there's, while we like that aftermarket business, upside growth potential there as well. We go to market through a multi-channel approach. We sell on a direct basis, direct from Tennant to end customers. We sell through distribution partners. We sell through rental houses and in some cases, rent ourselves to customers.
I mentioned service earlier, and e-commerce is also another channel for us. Not only e-commerce direct from Tennant, but also partnering with e-commerce partners that have e-commerce reach and reaching the customer that way. We have multiple channels to market, and the reason that's important is that we can match the channel to the customer, so we can deliver the right value proposition at the right cost to serve, to maximize profitability. So in some cases, it makes the most sense to service a customer through a distributor, and in those cases, we partner with distribution. In other cases, it makes more sense to take the business direct and sell it on a direct basis.
We spend a lot of time and energy and have a playbook for how the channels not just peacefully coexist, but how they support each other to drive growth, surrounding the customer with a Tennant ecosystem for success. For example, our service technicians, we have over 900 service techs, excuse me, over 500 service technicians in the U.S., 900 globally. Our service technicians see our customers on a more regular basis than our salespeople do. They develop fantastic relationships with our customers. They are our number one source of sales leads for new equipment, and that makes intuitive sense because they see when customers are expanding their site, when they're buying new companies, or when they're growing, or the old equipment is requiring more service.
So our channels work together, and we incentivize them to focus on growing with the customer, not sort of competing across channel. We serve a broad set of vertical market customers, and the reason that's important and compelling is it helps us weather any downturns in a specific vertical market or even more broad, market downturns. Because of our, our mix of vertical market, sales, we have exposure across a broad range. We ranked our top five. We get this question often, what are the kind of the top five vertical markets that we sell into? You can see them listed on the slide. Contract cleaners are building service contractors, so these are people that, perform cleaning activities for other people as their, as their business. Think of ABM and Aramark here in the U.S.
Retail encompasses both store-facing retail and the distribution arms that support retail. Everything from small-scale convenience stores up to grocery stores, Targets, shopping malls, and then even the clubs, Sam's Club, Costco, warehouse-type settings as well. Manufacturing is a broad set of end-use customers, but think about durable goods manufacturing, think about process industries, think about food and beverage, think about petrochemical, think about heavy industry as well. These are environments that need to stay clean. Even though the public isn't frequenting these spaces, they need to keep the floors clean from dirt and debris to operate in a safe environment. Warehousing and logistics as well. Think about Amazon warehouses, FedEx, UPS, cross-docking facilities, et cetera, and healthcare is an important vertical market for us.
This is healthcare delivery, so think about hospitals and clinics and the importance of keeping those environments clean for the public as they visit with their health challenges, so yeah, I think what you see is we've got a broad mix by product category in both the equipment sale and capturing aftermarket, both with upside from a share perspective. We go to market through omni-channel approach, and we're not fully matured yet in our multi-channel approach across all our geographies, so there's a growth opportunity in geographies, for example, where we solely sell through distribution to add other channels to reach more customers in those markets, and a broad vertical market coverage with varying positions across vertical markets, but we tend to sell and we sell with the largest customers in each of the vertical markets we serve, and these vertical markets are global.
This is a description of these vertical markets really holds true in every geography that we participate in. This is our growth strategy. It has three pillars: growth, performance, and people. Within growth, we talk about pricing excellence, and pricing excellence to us means not only list price realization, but it also means discounting control, and putting compensation programs in place that incentivize volume growth as well as margin expansion. We do a great job with pricing, and we price to the value we deliver to the customer. Product innovation, we invest in R&D at the, you know, 2%-3% of sales range, provides a fantastic return on the investment and is a significant growth lever for us.
And we think that new product pipeline is one of the lifebloods of the company and one of the lifebloods of our growth engine. So we'll continue to invest in new product innovation. In current year and kind of the next calendar year, you can think about innovation coming in small space cleaning. You can think about innovation in AMR robotics, notably our recent X4 ROVR launch this year, and in product line extensions, where we take some of our acquired platforms that are manufactured at a lower cost point, rebrand them to take them into different geographies, different channels as a mid-tier offering, supporting a two-tier product offering in the marketplace. We're investing in new channels to reach new markets. We're hiring salespeople, we're hiring service technicians. We are aligning and adding distribution partners to reach more of the market.
We're successful with new business models, and we're evaluating scaling those models. The most notable example would be something we call equipment as a service. What this is, we offer the customer one bundled price on a monthly basis, and for that one monthly price, they get a piece of equipment, they get a service contract, which includes preventative maintenance as well as break and fix repair. And so we really take all of the headaches of trying to manage an equipment fleet off of the customer's hands. We manage it for them. They pay us. It's a recurring revenue stream for us, where we have the capability to provide that service profitably.
We offer it to targeted customers that we think we need and want to, and it's really a compelling business model for us because it makes us very sticky with the customer, and the switching costs go up exponentially, so scaling business models like that are another area of growth lever. We are actively pursuing acquisitive growth. We announced a deal here earlier in 2024, where we bought our distributor in Eastern Europe to establish a direct sales and service footprint in that important geography. We also took an equity stake in our navigation software provider for robotics, which afforded us commercial benefits in terms of exclusivity and participation in ARR from the navigation subscription software licenses, so we are actively pursuing acquisitive growth across three adjacencies.
We have identified our targets, and we're working the funnel to put our capital to work from an acquisition standpoint. We expect and have targeted to add 150 million in top-line revenue over the next three years from acquisitions. The other pillars are performance and people. In the performance category, we are in the midst of an ERP consolidation. The company had existed on eight different ERPs or instances of ERPs, primarily through acquisition. We were not in a position to scale and grow with leverage based on the complexity of our systems, so we started a three-year journey back in 2023 to consolidate ERPs. We are building the system as we speak. We will go live in 2025. We expect to gain significant amount of operational efficiency and have a scalable foundation.
It should yield between $10 million and $15 million in gross efficiency savings beginning 2026. We're committed to sustainability. We've committed to net zero targets in our greenhouse gas emissions, and we are integrating those aspirations across how we think, plan, act as a business. And the biggest potential impact area we have is to take the remaining part of our product line that is still driven by internal combustion engines and introduce electric alternatives to those products. It's a small percentage of the product line, but it produces a large percentage of our greenhouse gas emissions. The great part about our sustainability ambition is that it's completely aligned with our customers. They are looking to us to help solve their sustainability challenges.
We're the provider of choice, and so we get the win-win of helping customers achieve their goals, profitably selling new products and equipment, and performing against our sustainability goals as well. Last but not least, is our people pillar. None of this happens without the talented Tennant team around the world, motivated, aligned, and driving our success. And so we're working on something called the employee value proposition, where we get crystal clear on what is it like to work at Tennant, why is it great, and what are we doing to continually reinforce that fact, to make it tangible and real to our employee base, so that we can attract, retain, and motivate the talent we need to achieve our aspirations.
I alluded a bit to our capital allocation priorities earlier in the conversation, so let me put a little more meat on the bone, meat on the bone there. We have. In priority order, our priority will always be to defend, fund, and grow the core business. We've got a great business. It is the engine underneath it all. To make sure that we are. We're not a capital-intensive business. We need about $20 million-$25 million per year, primarily in R&D, a bit in IT and infrastructure and investments back on the plant, but, you know, primarily around kind of R&D and plant productivity investments. We generate a lot more cash than that, and so our next priorities are to pay dividend. We've been a strong dividend payer.
We want to grow, pay it consistently and then grow our dividend, in a predictable fashion over a year. That's a very efficient and logical way to return capital to shareholders. We want to manage our debt. We have a stated ratio of 1.5x-2.5x . We're well below one now. We think that's just being good stewards of the business to maintain a low debt leverage and give ourselves that additional firepower to fund the business or go after acquisitions as we would like. And then I mentioned acquisitions earlier. We've re-negotiated our revolver to gain more favorable terms and increased the revolver size here in 2024.
We've got a low, low debt ratio, low debt leverage, so we've got plenty of financial firepower to go fund our own growth, control our own destiny, and do acquisitions of a size. So we've got a strategy defined, and we will pursue acquisitions. As you know, acquisitions can be episodic, and so if an acquisition is not readily apparent or likely to close in an equal timeframe, we are also active buying back our own shares, calibrating to the share price in the market, and with the goal of offsetting dilution. We think that's just being a good steward for our shareholders. So offset dilution in the period, and I'm proud to report, if you look back to when I took over this role, we have offset dilution over the last three years. So, we've delivered against the commitment.
I mentioned our M&A priorities. I'll just touch on the three adjacencies we have identified. First adjacency, defend and grow our cleaning core. We've got a 14% share in an $8.6 billion space. We know this market. We have channels, we have manufacturing capability, we have brands, we have customer relationships. Investing in growing our position primarily through products and channel, so bringing new products, additional products into our channels and brands, or buying, acquiring more channels to market or service components to the market, are probably amongst our highest risk, or excuse me, highest return, lowest risk M&A opportunities available to us. So that's our first priority, is to grow the core. Our second priority is to win through connected autonomy.
We think that driving this robotics disruption into the industry is a really compelling opportunity for our customers and for Tennant Company and for our investors. So we want to keep an open aperture around the technology stack that is required to drive robotics, both the navigation software as well as the sensing technology. We also want to look at the software component and say, "You know, are there pieces of that, that we would be a more rightful owner, that we should own? Or are there standalone robotics-only competitors that have a mousetrap, and from a robot perspective, that would be interesting to add into our portfolio?" So, you know, kind of driving value through connected autonomy and robotics.
I would argue that our equity stake we took at Brain fits into this adjacency from a strategy perspective, and, and, well, it wasn't an outright acquisition. It certainly gives us tremendous commercial benefits by virtue of the fact the equity stake we took in Brain. And our third adjacency, which is further out but worth noting, we wanted to look at other mobile equipment spaces. And the reason we're looking here, you know, if you boil Tennant down, we're really good at making purpose-built mobile equipment that survives and performs fantastic in a myriad of vertical market application requirements. And so we want to look at other opportunities in mobile equipment that would leverage our manufacturing expertise, our supply chain, our brand, our channels to market, including our aftermarket service. And hopefully, there's some leverageable asset we have.
We wouldn't acquire a business unless it had a link into our leverageable assets and some crossover with our channels and customer base. So it'd be a logical extension of Tennant Company, not a standalone silo investment. So it's our third adjacency. You know, the nature of the beast with acquisitions are unpredictable, so we need to open the aperture very wide and consider a wide array of options for the business. We're off to an early start with the TCS acquisition we announced in Q1, and we also took the equity stake in Brain, and more to come. I'm really excited about our posture and our opportunities from an acquisition standpoint.
The full commitment from a long-range plan perspective is to grow this business 3%-5% top line, expand our bottom line EBITDA margins by 50-100 basis points per year, and convert our free cash flow, our net income, 100% to free cash flow. So again, we can fund our capital allocation priorities. I mentioned the $150 million that we hope to add from acquisitions over the next three years. But we think this package of financial commitments, and when we deliver these results, through rigorous capital allocation and rigorous execution of our strategies, we think there is a significant value creation opportunity here at Tennant Company, and we're excited to drive it. Steve I'll turn it back to you.
Great. Thanks so much, Dave. As a reminder to everyone, we have looks to be about seven minutes remaining. If you have any questions, press the Q&A button and type in your question. Looks like we have a pretty large queue built up already. I do want to start, and then I'll get into one of the first questions, but the ROVR was released in 2Q, as I recall. Can you talk about the early response and where the robotic strategy is going?
Yeah. So we introduced in North America in Q2. We're introducing in EMEA and the rest of the market here in Q3 and into Q4, so it's a staged geographic rollout. Response has been fantastic, both from customer interest, requests for demos, and in North America, where we're actually launched with the product, customers giving us POs. It was strong enough that we made the decision to double our production capacity, and that meant securing the components to be able to meet double the demand we had originally planned. And now we're out beating the bushes to make sure we have the orders to consume all of that production capacity. X4 is a really important evolution in our robotics disruption of this industry. It is a purpose-built, ground-up robot.
And what that allows us to do is really minimize the footprint, increase the maneuverability, so it can clean closer to obstacles. It can navigate smaller spaces, it can turn around in tighter aisles, for example, in retail. It's got higher computing power. We gained exclusivity on the Generation 3 navigation software from Brain, so we no longer compete with anyone on the Gen3 software. Brain is exclusive with us. The product performs really well in the application. We can deliver a less than a three-year payback to the end customer when they make this investment in robotics. We are the single selling point to customers, and we participate in the ARR from the navigation software subscriptions that we write on the X4 ROVR.
I think it's a game changer for us, and-
Okay
... the next logical step in our disruption of this industry with AMR.
So we have a question asking: How can your disruption strategy be disrupted? What would... With the new Brain agreement, those are the risks much lower now?
... There's always risk in a disruptive technology because it's very disruptive. So within that context of that greater risk profile, I believe that with solidifying our exclusivity with Brain and allowing us to focus each on what we do best, that has reduced the risk with our navigation supplier. Now, so and Brain is a fantastic partner. We've strengthened our partnership through this equity stake, and we're more closely aligned around our future-looking roadmap. It has removed a lot of the internal friction and the external commercial friction from them working with our competitors, for example. And so, feel really, you know, feel really good about the Brain relationship, the state of the relationship. You know, how could the disruption be disrupted? I think this is inevitable.
I think what's unknown is that this application is going to move to robotics because it just makes so much sense. Cleaning is hard work, it's dirty work, it's not desirable work. The cost of labor and the availability of labor is not going to improve in any reasonable timeframe. And so all of the facts point to this being a ripe industry for disruption. I think what is unknown is the pace of adoption.
Right.
So then I think about, as we get more comfortable with robotics in our environment, in our normal lives, as the cost of components comes down the cost curve, because these components are used elsewhere in self-driving cars and other applications, the cost comes down, which allows us to offer a more competitive price point, making the hurdle rate for automated investment less. I think it just has a flywheel effect, and so we're trying to predict what that adoption curve looks like so that we can continue to stay ahead of it with our new products and our offering.
Excellent. A question about geographic growth prospects. Obviously, the larger economies of Europe have been challenged the last few quarters. U.S. is certainly, from what I hear from certainly the industrial companies we cover, there's customer uncertainty right now that seems to be affecting things. But are there other growth areas that people aren't paying attention to globally, that maybe can partially offset some of the macro weakness in the more developed countries?
Yeah, I've heard some of the rhetoric on some softening in the North America industrial space. We haven't seen signals of that in our business, and it doesn't mean it's not real. We just haven't seen it in our business yet. So the last thing we want to do is create our own downturn. We're harvesting all the industrial business we can in North America. You know, our commercial business in North America has rebounded a bit from the way we started the year. What remains to be seen there is what happens in the commercial spaces when the federal funding kind of really dries up. Think about the education space, for example. What happens when all that post-pandemic federal funding goes away? We think there's still opportunity for growth.
We see strength in industrial North America, and we see a significant opportunity with robotics. You know, a robot sells for 3x the sell price of its non-robotic equivalent. So even if you're just cannibalizing yourself-
Yes
There's a pickup from a growth perspective. You mentioned EMEA. EMEA has been sluggish for us for the last, I'm going to say, six to eight quarters. Spotty but sluggish. The major geographies have been challenged. We've seen. I think we've turned the corner in EMEA. We saw a pickup in growth of orders coming through the second half both sequentially and versus prior year. We see some rebound in the U.K. Our acquisition in Eastern Europe, Romania, Hungary, Czech Republic, Austria, we're seeing. We're performing at or slightly above business case for that acquisition in those geographies. And Italy has been a bright spot for us.
I think we're still challenged in kind of the Benelux region and France, so it's still a bit of a mixed bag, but we are forecasting full year growth in EMEA year- over- year. And so, it may be modest growth, but in my mind, it will show we've turned the corner in EMEA, and that can drive growth in that region. Asia Pacific has got the China. We're feeling it in China. We had a significant decrease in Q2. That China has a halo impact across the region. That is not good. We're not forecasting growth in APAC as we come through the year, and we'll see what opportunities it affords us in 2025.
In Latin America, we continue to click along despite all the challenges of doing business in Brazil and Mexico, you know, as our primary geographies in that region. Still clicking along well. We feel like we've got growth opportunity there as well.
Let me combine a couple of questions. One's on industrial, one's on retail in the U.S. On the industrial side, are you seeing any benefits, and do you expect more benefits from industrial reshoring? And on the retail side, the change in retail formats to some in some cases, smaller format or more open air, does that create challenges?
Yes, on industrial. The challenge with industrial is, as you think about this reshoring phenomenon, depending on what industry it is, it's a long lead time between making a decision to add square footage to your plant, get it permitted, get it built, and then get it up and running. And really, you don't invest in our machines until-
Right
... the contractor turns the keys over to us-
Yeah
as the owner, and that's when you buy the machine. So we're a late cycle-
Hopefully, it's clean for the first six months, so.
It better, yeah, it better be clean. So, we're a late cycle purchase-
Yeah
... but, you know, we believe that the onshoring, reshoring will drive. We've heard people talk about their plans to expand or add manufacturing square footage. You know, the other piece that continues to drive demand doesn't get as much press, is the conversion to e-commerce. As our e-commerce grows as a country, it requires more square footage to move the product to us, so you can buy it and have it delivered to your house. So, we're benefiting from warehousing logistics expansion as well, which is, you know, that's not manufacturing reshoring, that's just growth in the space. So industrial, I think we've got some significant growth drivers. Your other question was more around retail.
Was on changing to retail form, the formats.
Yeah. We have seen some migration, but it's interesting, the clubs are still doing well.
Yeah.
You look at the Costcos and the Sam's Clubs of the world. Some of the more traditional, like the Target stores, you know, take Target as a general merchandise retailer, have introduced smaller footprint formats. The reality is they still have the same. It may be a smaller overall footprint, but they have the same aisle widths, and they have the same aisles. So from a floor cleaning perspective, it's a perfect application. Maybe they would have bought a T7 in the past, now we can sell them an X4 ROVR because they only need a couple of hours of runtime to clean the whole store. So it may require a, you know, a different piece of equipment, but it's the floor still has to be cleaned.
Any of these shared spaces where the public is coming and going, there's a strong desire to keep those spaces clean for a whole host of reasons.
Fair enough. I know we've gone a little bit over. We couldn't get to everything. If you, if we didn't get to your question, please reach out to me at Sidoti or reach out directly to Dave and the team at Tennant. But with that, any closing thoughts before we wrap up this half hour, Dave?
No, I just listen. I appreciate the time. Obviously, we're very bullish on our long-term outlook, and I'm really proud and pleased with the way the team has operationalized against our targets, our growth targets, our profitability targets, our strategic plans, our acquisitions, and our capital allocation. I think we've got the roadmap, and now it's down to rigorous execution. So I appreciate the chance to talk to you. And as Steve said, if you have any questions you'd like to ask us directly, just reach out to us. We're happy to make time.
Right. Dave Huml, CEO of Tennant. Thanks so much, Dave. Appreciate it. Hope everyone found this to be an informative half hour. Have a great day, everyone.
Thanks.