Good afternoon, and welcome to the twenty-second Annual CL King Best Ideas Conference. I'm Tom Hayes, Senior Industrial Analyst here at CL King. We're very pleased to have the management team of Tennant here with us today. Representing the company, we have Dave Huml and Fay West. Dave's gonna start off with a brief overview of the company, then we have Q&A. And then for those of you in the audience, if you wish to ask a question, you can type that question into the Ask a Question box at the bottom of the webcast screen. All questions will be sent to me, and I'll try to integrate them into today's discussion. Dave, I very much appreciate you participating in our conference today, along with Fay.
If you'd like to provide a brief overview of Tennant for everyone here, that'd be great.
Thanks, Tom. I'd be happy to, and thank you to everyone for joining the call. Appreciate the opportunity to introduce Tennant Company to you, if you're not familiar with the story, and then Tom and I will have a Q&A session as well to illuminate some of the finer points of the company. If you're not aware of Tennant Company, Tennant Company is a world leader in the mechanized cleaning equipment industry. This is about an $8.6 billion TAM. We occupy a 14% share of that $8.6 billion space on a global basis, and our share position differs by geography from a high point of around 25% in the Americas, 10% across EMEA, including Middle East, and around 5% in Asia Pacific.
So we've got a strong starting position in each of the global geographies we serve, and are a key global multinational player, in this really attractive space. You know, mechanized cleaning equipment is mission critical in many of the geographies and most all the vertical markets that we serve. And so we are very important to the customers that we serve, with our equipment. What is unique about Tennant Company, we are highly regarded for our innovation as well as the quality of our products, meaning how they perform on the ground in the application within a vertical market.
We are differentiated in terms of our aftermarket service support, so we have the industry's largest factory direct service organization, and aftermarket is a key component not only of our business, but also of our value proposition to customers, and a reason why customers choose Tennant. We go to market through a variety of channels. We sell on a direct basis, and we sell to the largest customers in every vertical market we serve. Our core vertical markets around the world are really retail, education, healthcare, and then industrial markets like manufacturing, whether it's food and beverage or other manufacturing, warehousing, logistics, et cetera. So we sell on a direct basis, we sell through distributor partners, and then I mentioned earlier, our aftermarket service component with the industry's largest factory direct service organization.
We are very highly regarded for innovation and we have a very broad product portfolio, so when a customer decides to go with Tennant or a distributor goes with Tennant, we have the products to meet all of their application requirements across all of their needs. And so they can get the one-stop shop benefit from Tennant Company. As a business, we are, you know, we're over a 140 years old, a 150 years old as a business, so we have continued. Being old is notable.
I think what's really interesting about being that age and tenure of business is that Tennant has continually reinvented itself to stay relevant over that 150-year period, and I'm really proud of the fact that we are in the midst of another reinvention as a business. We believe the market leader in robotics and robotic cleaning equipment for professional applications, so we've built a distinctive robotics business since going to market in 2020, and see that as a real bright spot in our offering and a significant growth lever as we go forward. From an investor standpoint, we're very financially disciplined.
We have a very, well-articulated and operationalized capital allocation prioritization, and so we've articulated that in multiple forums. We can spend time on that in Q&A if you'd like, but we, we mean what we say, and we execute against those capital allocation priorities as we move through each of the years. So I'll pause there, Tom, 'cause I wanna leave time for Q&A, but we're really excited to be here at Tennant Company. We think that we've got an opportunity to take this fantastic business, and we've committed to a long-range set of financial targets, 3-5% top-line growth, and this is in a market that's growing at 1-2%, so outpace market growth. Expand our bottom-line profitability by 50-100 basis points per year.
Convert our free cash flow, our net income into free cash flow at or above 100%, in each year that we operate. So you know, we think we've got a bold ambition for the business, and we think we've got the financial firepower to grow both organically and inorganically, as we move forward. I didn't mention it earlier because I got ahead of myself. I was so excited to tell you about the business, but we really think we're really well positioned to capitalize on mega trends within the global markets that we serve. You think about, for example, one of the mega trends we see is this labor challenge that is facing every one of our customers in every one of our vertical markets.
There's a lack of available, predictable labor to serve these industries, and the cost of labor is increasing. So mechanized cleaning equipment increases productivity and reduces the reliance on labor across all of our vertical market applications. So that's a tailwind for the business as we go forward. And then you think about robotics, minimizing, maybe even eliminating the need for labor in many cases. It again plays to that mega trend of labor challenges. So I'll pause there. I'll turn it back to you, Tom.
No, that, that was great, David, and I think certainly a lot to like about this story. I think maybe, you know, touching on your mega trend comment a little bit, maybe turning that sideways a little bit, certainly the focus by a lot of your end users as far as, you know, sustainability, whether it's not using, you know, chemicals or better use of water or, you know, less electricity. Maybe just touch on again, 'cause I think it does get overlooked a little bit. Obviously, you know, the labor issue, you know, people can see and see, but I think those other two, you know, using less resources and stuff like that is as attractive as the labor issue.
Yeah. We have a technology on our equipment called EC-Water, and what EC-Water is, is a technology that allows the customer to turn water into essentially a cleaning agent by applying an electrical current to the water stream. We launched EC-Water. It allows customers to conserve water, use less water, and also allows for chemical-free cleaning in many applications, which is really desirable by all customers, but especially those customers that are interested in driving sustainability targets. You can imagine that a school or a hospital or any shared space would be interested in conserving the cost of chemicals, but also the misuse of chemicals and leaving chemical odor or chemicals themselves on the ground.
EC-Water's a fantastic technology that we have integrated and available as an option on most all of our equipment. But, you know, in addition to the EC-Water technology, we are focused on sustainability as a business. We've established net zero goals, and we are actioning against those goals, Scope 1 and Scope 2, how we operate our own business, but increasingly Scope 3, and for us, that would mean moving the products within our line that are still powered by an internal combustion engine, moving those to electric powered. We have a roadmap to accomplish that over the coming decade, and move away from internal combustion engine engines to support our net zero goals as a business.
Sustainability is interesting and attractive to our customers in many vertical markets, and we think we've got the solutions as a company to help them on their journey while we help ourselves along our journey as well.
No, that was good. I think one of your growth pillars, if you will, it was kind of calls out channel or looking for channel expansion and new go-to-market opportunities. You know, you said you have a 14% share of the global market, and different rates across. You know, how does that kind of tie together, and how do you think about channel expansion?
Yeah, we think about channel. So to us, channel expansion, because we sell on a direct basis, and we sell through distribution, and we have our own aftermarket service, those are all channels to market. In many geographies, we only sell through great distributor partners today, and what we know to be true is that the geographies where we have the highest share, where we grow the fastest, and where we pull the most margin, is ones where we have multi-channels to market. What that allows us to do is we need to have a direct selling organization and partner with distribution channel and have an aftermarket service organization to support the product that we sell into the marketplace. So we, that's the play, is to establish a multi-channel go-to-market in geographies where we don't yet have it.
Okay. I'd like to kind of maybe drill down a little bit on your core vertical markets, but the one that I wanna make sure we talked about was on the industrial side, 'cause I think sometimes it gets overlooked when I talk to investors. You know, and I think people walk around a mall or a hospital or a restaurant and kind of see your products, you know, being used. I think they I know you and I have talked about this, but I think the opportunity also on the industrial side is probably equally as attractive.
Yeah, absolutely, and those are, and to your point, we all see the products that are visible out in the shared spaces that we occupy on a daily basis, whether it's airports or malls or schools or hospitals or retail environments, grocery stores or, or Target, et cetera. What, what you don't see, what we don't see as often, is all of the manufacturing, warehousing, logistics space that has to be cleaned, at least one time, sometimes multiple times per shift, and so those are, those are great environments for, for our equipment, and our customers in those environments rely on our equipment for those applications. Those are large square footages.
So when you think about an Amazon warehouse or a cross-docking facility or a UPS or FedEx facility or an InBev, you know, Anheuser-Busch manufacturing facility, those are large geographies, large square footage to be cleaned. They tend to get very dirty very quickly because these are production environments, and they're, you know, from our business standpoint, they're pretty harsh environments, pretty harsh cleaning. The customer has very distinct cleaning application requirements because this is the space they occupy, and typically, the spaces that we clean are also being occupied by forklifts, so they can't afford to have any debris in the aisle that the forklift could get jammed up on or have an uneven load, et cetera. So it's both a cleanliness issue and a safety issue. We really like the industrial space.
We like all the spaces, but in the industrial space, there tends to be fewer competitors because these are large machines, heavy-duty applications, long sales cycle, and there's a heavy aftermarket service requirement. So we really feel like we're product advantaged in this space and uniquely positioned to grow in the industrial markets. And there are industrial spaces in every geography we're occupied to varying degrees. It can vary by industry, but you'll see industrial spaces in every market we go into.
Okay. I guess just staying on the markets real quick. I think like you said, most people have seen the products in a retail or an educational environment. Maybe just kind of talk about the opportunity in healthcare, 'cause I think that's one that maybe people obviously they want their healthcare area to be clean, but I think you guys have some unique opportunities there.
Yeah, we like the healthcare space. Healthcare delivery and we're talking about healthcare delivery, so we're talking about hospitals and clinics. The requirement for cleaning is higher in these spaces and you know, when you go in somewhere and you're gonna have a procedure done, you and your family, the last thing you wanna see is dirt in the corners. Many of these flooring environments are built and designed to be spotless and routinely cleaned. So these are high. It's not necessarily that robust an application, it's not that hard to clean the floors, but to consistently achieve the specification that's required is a significant challenge and deliver the uptime, because hospitals, healthcare delivery, run 24/7 . So when the equipment's down, they need someone there to service it ASAP.
They can't afford to not have the equipment. So another advantage we have with a factory direct service organization is we can deploy service technicians 24/7 basis, if needed, to satisfy the customer.
Okay. Kind of before we jump with two feet into autonomous, maybe just talk about, you know, broadly speaking, the aftermarket contribution or opportunity in the business. 'Cause I think that's a interesting part of the story as well.
Yeah, we like our aftermarket business. Let's start with aftermarket is a key component of how we're able to sell new equipment, and our customers tell us that they come to Tennant because they understand we have a factory direct service organization. They know that we will get the machine fixed correctly and fast the first time. They also know that with our factory direct parts and consumables, that the machine will perform the same as the day they, you know, kind of as the day they bought it. So, you know, a lot of reasons the customers rely on us for the aftermarket of their equipment. It allows them to get the return on the investment that they expected when they made the investment on our equipment.
They tell us that part of the reason they choose Tennant is that aftermarket service and support. So you think about our aftermarket really provides a really attractive recurring revenue component to the business. You know, on a standard piece of equipment, about 80% of the value of the equipment purchase, the capital purchase, is generated in aftermarket revenue over the life of the machine. So that's our job to go out and harvest it. We capture about 70%. It's an estimate, and varies by geography and by product. We capture about 70% of our own aftermarket, which is actually high versus benchmark, but we still look at that 30%, and we wanna go get more than our fair share, more than our fair share of that as well. So, you know, there's upside potential.
It's good, profitable business. It allows us to continue to deliver a fantastic value proposition to the customer. And another point about aftermarket is our service technicians develop very close relationships with our customers because they see them very often, and they help 'em out of jams. 'Cause when they show up, they've got a problem, by the time they leave, that problem is solved. Our number one source of sales leads is actually our service technicians.
Oh, wow.
Because they see firsthand when the customer is expanding spaces, or he's got a piece of a competitive piece of equipment down. They see the growth opportunity, and they develop a real differentiated level of trust with the customer as well. So our service people are fantastic sales people, too.
That's a great jumping-off point. Maybe talking about one of your more newer product launch, the X4 ROVER. Maybe just kind of talk about, you know, that evolution to get you to where, you know, that product was launched. You know, kind of what end markets are early adopters and, you know, kind of feedback you're getting from the customer base.
Yeah. Listen, I'm really excited about X4 ROVER, so I could talk about the rest of the afternoon about it, but I'm gonna try to stick to the high points. We had developed, in rapid succession, three AMR, three robots. And we wanted to cover as much of our vertical markets that we could, because we weren't really sure how the adoption would pace across commercial markets versus industrial markets. So T7, we landed, you know, we landed Walmart right out of the gate, T380 on its heels. T16, our most recent launch before X4 ROVER, into industrial markets. You know, and we learned a ton about how to get robots to perform reliably in the space and what the gaps to performance were from a or from a we need a customer assist.
We learned a ton about it. Those products are performing well in the marketplace, but we decided that the next generation of robotics needed to be a ground-up, purpose-built machine that was highly maneuverable and capable of cleaning in tighter spaces than any of our other robots.
The reason we felt, that's what our customers told us they wanted. They wanted a machine that could go down the aisle, and if it ran into a pallet that was left in the place, or they couldn't get through, they wanted to be able to turn around and clean its way back out. They wanted to be able to go through the checkout aisles in a grocery store, for example. So it needed to be really compact, and it needed to be, have fantastic maneuverability. And so we worked with Brain, our navigation software provider, and we developed this ground-up robot called the X4 ROVER. We launched it earlier this year, and I think it's a real game changer for us.
Customer returns were fantastic during development. The feedback they gave us, very strong interest. It was strong enough that we evaluated the potential to double our production output from what we had planned. We've completed that evaluation, and we are ready to double the output of X4 ROVER second half of 2024 and 2025. Now that we know we have the capacity, we're out demonstrating the product. We just launched it in Europe, so we're getting the demo units out of the field there with key customers, but you know, the X4 ROVER, because it's a purpose-built, ground-up machine, it also has a Generation 3 BrainOS operating system, so it's got the fanciest sensors, 3D LiDAR, high-def camera.
It's got much better ability to sense obstacles, quickly process what that obstacle is, and route a new path, whether it's gonna wait for it, go around it, come back and clean it later. It's a lot quicker at identifying objects and reacting accordingly. So we launched the product. I think it's gonna be a fantastic product for us over the long haul. We just launched in Q2 in the US, so we're really now just getting it out into customers' hands as we speak.
Are there any markets that this works better for than others, I mean, that your sales team is really kind of focused on?
Yeah, we're focusing, you know, it's called the X4 ROVER, and so it's really designed for, you know, a bit smaller store format than think of smaller than like a Sam's Club.
Okay
More like a standalone retail environment, like maybe your grocery store or something that's a little tighter, something that has tighter aisles, where you're gonna benefit from that maneuverability.
So our sales people will talk to anybody that's interested, but really, we're focused on those retail environments, where we think that the need for clean is high, the labor challenge is acute. They're already investing and interested in investing in robotics, and they know that we're the ones that can help them be successful. So retail is kind of the earliest interest, but we think this product's gonna be really well-suited for other applications in education and healthcare as well, and then a myriad of spaces that will benefit from its maneuverability and its cleaning capabilities.
This is a product that your customers wanna run while they're open and operating, correct?
Yeah, they, they do, and that's, that's one of the interesting things that that stuck with us after the pandemic. If you think back pre-2020, and this was, this was just, how the industry was built, our customers wanted to clean after hours because they didn't want the machine in the way of the shopping public. Since the pandemic, they want the machines out and visible because it sends a visual signal to the customer that the retailer cares about cleanliness
Hmm
and their environment. And so, consumers are getting more and more comfortable seeing robots operating in their space. We still see people have to stop and take a picture with it. You know, it's still fairly novel, but if you spend any time in airports, you know, traveling around the country or large venues, you'll see the robots running. In my one guy's opinion is it's becoming more and more commonplace to see robots operating in the same environment I occupy.
I know I was at a restaurant and saw the robot delivering food to the table, so I think it's becoming more and more commonplace.
Maybe kind of along those lines, you made an investment in Brain Corp, and I think it provides you a bit of a technology moat versus competitors. Maybe kind of discuss that a little bit, 'cause I think that's probably key to the overall strategy.
Yeah, I think it's really key. I'm really, really pleased that we were able to negotiate this. So if you go back, you know, four years ago, five years ago, Brain's strategy was to sell their navigation software through all the floor care equipment manufacturers. So they sold to Tennant, they sold to Kärcher, they sold to Nilfisk, and their strategy was to kind of be the Intel inside and sell to everybody. They also went out and talked to customers directly, and we didn't like that arrangement, but we also, you know, we didn't have the luxury of designing their strategy. So our strategy was to take what we thought was the best navigation software available and go make hay with it, and we believe we've done that.
You know, we've sold over 6,500 units, and so we're really pleased with our progress. And so, as we've thought about standing up this X4 ROVER that I just talked about and bringing in the next generation operating software with 3D LiDAR and all the fancy sensors, we went to Brain and said: "What would it take for us to have exclusivity on this navigation software? 'Cause generation three is a step change improvement. We think we're the horse to ride in the market. What would it take?" And we worked with them, and ultimately what we decided to do was to take an equity position in the company. We put about $32 million into Brain to take that equity stake.
What we got in return was exclusivity on the Gen III navigation software. Gen III navigation software from Brain is no longer available to any of our traditional competitors, so now we have a differentiated solution in the marketplace. We are the single voice to the customer, so we sell the machine, we sell the navigation software subscription, we work with Brain on the back end, but the customer sees us and has a relationship with us. The reason that's important is we wanna sell 'em the equipment, the subscription bundle, the aftermarket service. We wanna own that relationship with the customer. It also afforded us participation in the annual recurring revenue stream of the subscription on the software, so we are participating on that.
We negotiated the share, revenue share on the recurring revenue. And then we've really doubled down and partnered more closely with Brain on the R&D side. When we think about our goal, going forward, our product roadmap, having this equity stake and removing the noise of them participating with all other competitors, now that we're exclusive with each other, we can be very open about our forward-looking product roadmap, and so you can envision where we'll go next with our product line in this tight partnership. It's been great. It's been great from our vantage point. Customers say they appreciate it, and actually, Brain appreciates us as well.
In simple language, what it allows us to do is focus on what we do really well. Brain makes really good navigation software, and that's what they are focused on entirely. We know how to sell equipment and service customers and deploy equipment, and that's what we're focused on doing, and so it's really a partnership of equals focused on what we do best.
No, that was helpful. Maybe shifting gears a little bit, and it's kinda along the lines of your investment in Brain, you know, certainly a well-positioned balance sheet. Maybe kind of talk about, you know, M&A strategy, maybe even use of cash and kind of how you think about that big picture.
Y eah, I'll start with kinda use of cash. We have a very well-defined capital allocation prioritization. Our first priority is always to grow the core, and so reinvesting back into the business. We're not a capital-intensive business, you know, as far as industrials go, but we do want to fund our own growth, and so we invest CapEx back into R&D, we invest back into IT, and then a bit on our facilities to make sure that we can build and sell and service the equipment. So think about that as about a $20-25 million annual use of cash. We have a legacy as being a dividend aristocrat. We wanna continue to pay dividends and grow our dividends on an annual basis.
We wanna be good stewards of our managing our debt ratio. We think about, you know, grow the core, pay the dividends, manage the debt. We wanna be kinda in that one to two, one and a half to two and a half times levered on our debt, and we're well within that. We're well within as we sit here today. We wanna go do strategic acquisitions, and I'll talk a little bit about our acquisition adjacencies, our strategy there. If we can't find acquisitions within meaningful timeframe, then we also wanna be active in the marketplace, buying back shares. And so o ur strategy from a share buyback perspective is to offset dilution, so that we're not diluting our shareholders' position
Okay
in our company. And so, those are our five priorities, and we move through those as we convert the cash, you know. We put it to use in that way to create value for our shareholders. Within that acquisition priority, we have a three-pronged approach. Our first adjacency and our first priority is to defend and grow our core business. We've got an $8.6 billion TAM, and we have a 14% share. Our lowest risk, highest return investment of capital is to go grow to 15% and 16% share of that core space, and we've got specific areas identified and a funnel of potential targets that we're working within that core space. The next adjacency is around connected autonomy and robotics, and deciding where we wanna play in the technology stack from a navigation software perspective.
I would argue that the equity stake in Brain fits into that second adjacency, where we leaned into a partnership in that space, put our capital to work to gain commercial upside with Brain Corp. And also look at robotics-only competitors. If there's somebody in there that's got something that's interesting to us and that we can take to market through our channels or leverage our brand, we wanna be open-minded about that. We have a set of targets within that second adjacency as well. And our third adjacency is to look at other mobile equipment, and this is our further out adjacency, but you have to open the aperture wide ' cause we have big growth aspirations, and acquisitions tend to be a bit episodic.
We can't predict when they'll come. So, the third adjacency around other mobile equipment is looking for other mobile equipment that is in use out in the marketplace that has some synergy to Tennant, whether it's bought by our existing customers in our existing vertical markets, or we could leverage our channels or brand, or we could leverage our supply chain manufacturing capability or aftermarket service capability. There's gotta be some really strong synergy to the core for us to get into a new piece of mechanized equipment, but we wanted to open the aperture pretty wide. That's just what the third adjacency is.
So we, we've populated a funnel of, well over 500 potential targets, and we're in the process of filtering some of those to the top that are really interesting, and the ones that are kinda less interesting, letting those filter to the bottom. And getting out and making the connections with people that we think would be interesting and attractive to acquire.
Maybe just, kind of along those lines, if you kinda look at your market share, you know, Asia Pacific at 5%, you know, is there a benefit or rationality to try to grow that to seven, eight? Or profitability-wise, is it better to pick up, you know, 1% or 2% in Asia and Europe?
There's profitable growth to be had in every one of our geographies.
Okay. Okay.
APAC specifically, when you think about some of the more developed geographies in Southeast Asia, and we serve primarily through distribution, there's opportunity there. I mentioned w e talked earlier about having our multi-channel go-to-market and having a direct sales and service footprint. You know, you can envision growing through distributors, but then also potentially acquiring distributors to establish our own direct footprint in those geographies. So when we sell on a direct basis and we service on a direct basis, it improves our margin profile as well.
Fair enough. Maybe just, you know, one other thing that kinda comes up when I talk to investors is your ERP conversion. Maybe as some of the expected, you know, benefits and kind of just refresh us where you were, you know, last time you reported as far as path to conversion.
Yeah, so maybe just a bit of, of context for those on the call. Through acquisition, we had found ourselves operating across eight different ERPs or instances of ERPs, which was extremely cumbersome. You can imagine what it's like trying to run the business at the enterprise level, working across that many ERPs. We really felt like this was a bit of a burning platform, not only to improve how we operate, but really provide a scalable foundation for growth. As we embarked on this growth journey, we opted not to kick the can on ERPs. ERPs are big, expensive, risky projects, but we didn't see any way around it other than to lean into it.
We started at the beginning of 2023, and the first phase was really planning and definition of our standardized processes on a global basis. Step two, which is we're in now, is around building the system offline, so designing the system to work how we specified in the requirements documents. In 2025, we will go live in a staged launch across our geographies. I mentioned earlier, this is really gonna provide a scalable foundation for growth. That's why we're doing it. This is a growth play. We do expect it to provide us operating efficiencies, and we've committed to a $10-15 million recurring benefit from an efficiency standpoint, but that's not the driver of an ERP consolidation.
It's really to provide that scalable foundation so we can grow organically and inorganically, not being hamstrung by our business, and enable us to deliver a fantastic customer experience. 'Cause you can also imagine when you have a customer trying to buy across multiple product lines, multiple plants, multiple geographies, if you're on different ERPs, you're not facing off to them as one supplier. You're looking, like, very siloed in your approach to them, so we started the journey. It's a three-year journey. We feel really good about where we're at, the progress we've made. We've taken a significant amount of steps and invested a significant amount of resource to avoid business disruption, but also set ourselves up for success, so I'm really proud of the work the team has done and the plan that we've laid out.
We'll keep you posted as we move into 2025 and get closer kinda to the offline testing, and then the user testing, and then the go-lives.
I think that we're just about out of time, but Dave, it's always great to talk to you and get an update on the business, because I think there's a ton of exciting stuff going on right now. So, I don't know if you had any final comments, but otherwise, appreciate the time, as always, with you guys participating in our conference.
No final comments. Thanks, Tom. Really appreciate the chance to participate, and look forward to talking to you again soon.
Thank you all.