Good morning, everyone. I'm Steve Ferazani, an analyst at Sidoti. Thanks for joining us for day two of Sidoti's virtual investor conference. I see there's still some folks coming into the room. Before we kick it off, let me take this opportunity to remind everyone we should have some time for questions following, which should be a very informative presentation. If you have press questions, please press that Q&A box at the bottom of your screen, type in the question, and we'll get absolutely as many as we can, time permitting. I don't want to take up any more time from our next presenter. It's Dave Huml, President and CEO of Tennant Company. The ticker is TNC. With that, Dave, let me turn it over to you.
Thanks, Steve, and thank you all for taking the time to join us today. I appreciate the opportunity to tell the Tennant story and, as Steve mentioned, leave some time to field your questions about the business. We have prepared a short slide deck that I will walk through just to land some of the key points for people that may be newer to the stock and maybe as a launching pad for the Q&A session that Steve is going to moderate at the end. Let me just give a brief thumbnail overview of Tennant Company, and I am going to come at it from the standpoint of an investment thesis, the seat you are sitting in, and as you look at Tennant Company, why we think it is a compelling investment opportunity. I would point to these aspects of the business.
I'll cover them quickly here and then provide a little more color in a few more slides. Listen, we're a global leader in this mechanized cleaning equipment space. It's about a $9 billion space. We have about a 14% share of that market on a global basis. We have a differentiated position in that market, and I'll walk through the points of differentiation that provide us an advantage, but also a competitive moat, and we think a compelling growth platform for the future. Talking about growth, our growth strategy is very intentional, and I'll talk through the components of that growth strategy that we're resourcing and investing in and how we will read out over the next coming years. We've made a growth commitment as a company to grow top-line revenues by 3%-5% on a compound basis over the long term.
Our growth opportunities are really underpinned and have tailwinds from global mega trends. I'll articulate what those mega trends are so that you can connect kind of the mega, excuse me, the macro market dynamics to how they will affect Tennant Company and how they'll fuel our growth in the future. We have a world-class service model, and service after markets is a very important part of our business. It's important to our customer base, and it's a growing and profitable segment of our business as well. We also think it's part of our unique competitive advantage and competitive moat as a business. We are known for innovation within this industry and as a business. We're a 154-year-old business, and throughout our history, we have perpetually reinvented ourselves to stay relevant.
A key part of that transformation has been through innovation, both in product and technology, but also in business model and go-to-market, how we serve our customers. At present, we are in the midst of a significant disruption, bringing robotics and automation to bear on the floor cleaning application on a global basis. Really proud of the success we've had in robotics and excited about the upside opportunity in driving continued disruption from autonomous cleaning machines in floor cleaning applications globally. All of this is underpinned by a really strong business structurally. We have a very solid balance sheet. We're very disciplined about execution in the business, maintaining margins, expanding margins, but also a very disciplined capital allocation prioritization.
We think we're in good shape to not only fund our own journey as a business, but also we have the firepower to grow both organically and inorganically over the coming quarters and years. We think we're in a really good position to fund our own journey as a business. We think these are the compelling reasons why Tennant would make sense in a growth portfolio. Deep diving into some of the aspects I just covered about Tennant Company, I mentioned we have about a 14% share of about a $9 billion global TAM. That varies by geography. In the Americas, which is our legacy strength geography, we have about a 25% share, and that's about a $3.5 billion market. In EMEA, we have grown organically and inorganically through a major acquisition in 2017.
We have about a 10% share position in EMEA, and that's a similarly sized market to the Americas. That means we occupy not a number one position, but more of a two, three, or four position in each of the major geographies within Europe, which is a significant and strong starting point, but obviously we've got upside from a growth potential taking share within the EMEA marketplace. Asia-Pacific, about a 5% share of the entire Asia-Pacific region, a lot of emerging markets in these geographies within the APAC segment, and that's about $1.8 billion of TAM. The APAC region is growing at a higher rate and given our significant starting position, but also the upside for share gain and market growth. We're in APAC for the long haul.
If you sum it all together, we've got a solid starting position and a right to win in these geographies with upside from both a market and a share perspective. I talked earlier about our growth agenda, and before I jump into the actions and activities and strategies that we're deploying, let's just talk about the macro trends that provide the tailwind for our industry and for our business. The biggest one is really around automation, the need for automation based on the availability and cost of labor. Since the pandemic, this has been exacerbated. Labor is now one of the top three to five challenges that virtually every customer notes within their business, and especially as it relates to the floor cleaning part of their business.
If you think about a building service contractor, someone like an ABM or an Aramark that provides cleaning services, the turnover in those labor turnover in those businesses approaches 70%. That was a pre-pandemic benchmark. When you think about that kind of turnover, and now with increasingly lower labor availability and high variability in the cost of labor, it provides a significant opportunity for us to provide greater productivity and robotics to reduce and eliminate the reliance on labor. That labor dynamic is a global phenomenon in mature markets like Western Europe and Americas, North America. It is acute and driving a significant interest in our product portfolio, especially AMR. We also see labor challenges in other markets beyond those geographies. We think that this trend is here to stay. We do not see this as a short-term trend that will correct itself.
It is driven by the world's need for better clean spaces, better clean and shared spaces, but also just the lack of availability of cleaning labor and the cost of cleaning labor. Beyond automation, there is also a mega trend of modernization, a shift to mechanized cleaning and away from mop and bucket cleaning in developing and emerging geographies. As the standard of living increases, people have a higher standard for clean in their shared spaces, which drives the need for mechanization in order to provide clean at a high productivity rate. Last but not least, the need for electrified products. We still have products today that utilize internal combustion engines. The advancement in technology of batteries primarily has given us the opportunity to eliminate internal combustion engines and offer products that operate on battery power electric vehicles for their cleaning applications.
Sustainability beyond the power source, obviously EVs in cleaning equipment is a sustainable solution and helps our customers achieve their net zero goals. Beyond that, we also have technologies to help our customers reduce their water usage and their reliance on chemicals, which support their own sustainability aspirations in their operations. We think we're uniquely positioned to help customers not only with their labor challenges and their floor cleaning challenges, but also with their sustainability goals as businesses. We've committed to top-line organic growth of 3%-5%, over the long term. The components of that growth are pricing, new product innovation, and what we call go-to-market or new channels to market so we can reach more customers with our value proposition and service more customers with our aftermarket service capabilities. Those are the components.
We stood up specific initiatives within each of those pillars to be sure that we can deliver on the 3%-5% top-line organic growth commitment over the long term. At the same time, we have activated and demonstrated the ability to expand bottom-line margins. We committed to 50-100 basis points of EBITDA expansion over the long term per year. The components of EBITDA expansion are driven both through the gross margin line. You can think of it as about 30 bip s from a gross margin perspective and about 45 bip s of expansion through S&A leverage.
Within gross margin expansion, we benefit obviously from price and mix and new products, but we also have a cost-out muscle that we've built so that we have an evergreen discipline around identifying and executing cost-out, cost-reduction, COGS, cost-reduction actions in the business to more than offset inflation and offer us the opportunity to expand margin. From an S&A efficiency perspective, we're investing in systems, harmonizing our ERPs, standardizing our processes so that we can get the leverage and scale profitably as we grow this business. In addition to our organic growth, we've committed to a robust M&A effort. We're actively working a funnel as we speak. We've articulated an M&A strategy. I'll touch on that a bit later in the presentation. We've targeted about $150 million of revenue, top-line revenue added from M&A over three years, 2024, 2025, 2026, and we've already begun that journey.
We're actively working a funnel of targets. Everything from kind of bolt-on and tuck-in smaller strategic acquisitions, think about product lines and channel acquisitions, all the way up to a handful of transformational acquisitions that would put us in a differentiated position as a business within our marketplace. It is difficult to predict M&A, but we're actively working the funnel and confident that we can find attractive targets and execute here in the coming quarters and years. All of this is enabled by our financial position, a very strong balance sheet, very disciplined in our operation of the business, strong cash flow conversion. We've committed to 100% of net income to free cash flow conversion. We're really in a good position to fund our own journey organically. Inorganically, we've worked our balance sheet down. We have low debt leverage, lots of borrowing debt capacity.
We think we've got the firepower to not only fund our own journey organically, but go out and do the acquisitions that we want to over the midterm here. I mentioned a little bit about innovation. Let me deep dive our new product roadmap and portfolio, where we're investing for growth. There are really three pillars. We're investing in robotics, expanding our robotics offering, and improving our robotics capability. We view this as an opportunity to disrupt our own core market. The AMR product offering we have today is five robots. We have coverage across all the core vertical markets we serve and can engage any customer that's interested in moving into robotics with a product that will meet their application requirements. I'm most excited in robotics about our most recent introductions, the X4 ROVR and the X6 ROVR.
X4 was launched last year about this time, and X6 is just launching now as we speak. The reason I'm most excited about these two robots, the older robots are great and customers prefer those and have ordered and reordered those robots. Our latest X4 product, the X platform AMR, are built as purpose-built robots. They're not manual machines that we turned into robots. They don't have seats and steering wheels on them. They're built to a very compact form factor, so they're highly maneuverable in the application, which provides the customer the opportunity to clean more and more quickly without having to assist the robot. They're built with the functionality of our Generation 3 navigation software, which we have exclusivity on in the floor cleaning space. This Gen 3 navigation software is through our partnership with Brain Corp.
We announced this partnership and the exclusivity to this navigation software in January, first quarter of last year. This not only gives us the best navigation software package, we believe, available in the industry. It utilizes 3D LiDAR, high-def cameras, NVIDIA chips. This is very high-performing, high-computing power onboard the robot, which allows the robot to be very responsive in the application, make decisions very quickly, and it gives the customer even greater productivity with better cleaning outcomes on the floor. This exclusivity with Brain Corp also has afforded us the opportunity to participate in the annual recurring revenue from navigation software subscriptions. It represents an incremental revenue stream. Because we are exclusive now with Brain Corp, it has reduced a lot of the commercial friction and operational friction in our partnership.
We think we can accelerate more, better new products to market and sell more efficiently now that we're not having to share Brain's attention with any of our competitors. Really excited about the X4 and X6 platforms, more new products to come in AMR, but we think AMR, it solves one of our customers' leading issues, which is around the cost and availability of labor. We do it in a really financially attractive way. It provides a great cleaning outcome, but they can get less than a three-year payback on the investment by reducing and eliminating the need for labor in floor cleaning. It's also financially attractive to us at Tennant Company because an AMR sells for about three times the sell price of its non-robotic equivalent at similar margin profile.
You can imagine what the margin drop-through is on an AMR, even if we just cannibalize ourselves and sell an AMR in the place of a non-robotic piece of equipment. We're really excited about the AMR opportunity, and we've leaned heavily into R&D to bring more new products, more robotics to market faster. We're also investing in small space cleaning. This is not a space we've historically participated. This offers an opportunity to penetrate new vertical market segments, but also give our customers solutions for cleaning smaller spaces within their existing environment. Think about a large manufacturing space probably has bathrooms that need to be cleaned, an entryway, maybe a break room that the large equipment can't fit into, and now we can sell a suite of solutions to existing customers through existing channels, existing brands. We're also leveraging product line extensions.
We are bringing products from acquisitions that are designed to a different performance spec and a lower cost point. We are bringing them into the market to participate both at mid-tier prices and at premium prices. What that allows us to do is capture share from some of our price point competitors without having to discount our premium offering. We are picking up incremental unit market share at good margin and not sacrificing margin on the premium side of the house as we continue to grow there as well. A two-tiered offering strategy through our product line extensions. Matt mentioned that we participate. We fund our own internal development. We are increasingly relying on partnerships as well. Sorry, that was on a previous call. You mentioned that. I am mixing calls, Matt.
We rely on partnerships as well to accelerate our new product development and new products to market as a business. I mentioned M&A earlier. We have a three-pronged, three-pillar strategy in M&A. I'll focus on the first two pillars because that's where we're focusing the majority of our efforts. Our first priority is to defend and grow our cleaning core. That's our core $9 billion TAM with our 14% share. We are primarily focused on adding products, so product OEMs to our existing portfolio where we think our brand equity, our channel reach, and our aftermarket service can accelerate growth for us and in those segments. We're also looking at adding channel, so where we can buy out distribution partners to establish a direct presence in a given geography. That can be an attractive value creation and growth lever for us.
We announced our TCS acquisition in the first quarter of 2024. That's going very well for us. That was an acquisition of a master distributor in Eastern Europe that now gives us a direct sales and service footprint in places like Romania and Czech Republic and Hungary and Austria, where they're smaller geographies growing at a more rapid rate and quickly modernizing their cleaning applications. Acquiring that space also gives us the opportunity to service pan-regional accounts that have locations across those geographies in Eastern Europe. Our second pillar is around driving value through connected autonomy. I mentioned how important and interesting our disruption through robotics is to the business.
We are opening our aperture to make sure that if there's an opportunity to acquire technology in the space of autonomy, connected autonomy, or robotics that will enable us to accelerate the adoption of robotics, we want to thoughtfully consider those. I mentioned earlier that we negotiated exclusivity with Brain Corp. We announced that in the first quarter of last year. The underpinning of that, we took an equity stake in Brain Corp, a minority equity stake that unlocked all of this commercial advantage for us from an exclusivity standpoint, from a go-to-market standpoint, from participating in the ARR. While it's not academically, it wasn't an acquisition, but I would say taking an equity stake in a strategic partner to gain commercial advantage, I would view that as putting our capital to work to create value for the enterprise. We count that within our M&A actions.
Last but not least, we are monitoring some adjacent equipment categories, mobile equipment categories to see if there's something interesting for us to action. It's a lower priority for us, but we are monitoring those spaces to see if something's interesting over the long term. With that, Steve, I think I'll turn it back to you. I'll see if the group has any questions.
Great. Dave, thanks so much for that informative presentation. We do have several questions in the queue already. We do have 10 minutes remaining, so I'll remind everyone. If you do have a question, press that Q&A button at the bottom of your screen, and we'll get to as many as we can. First question is regarding AMRs. You had a—I don't think you said it in the presentation, but you did have a nice press release hitting a milestone a couple of weeks ago regarding the 10,000th robotic scrubber you've sold. Can you talk about general demand for the AMRs right now? Let me ask on top of that, I believe U.S. deliveries for the X6 just started this quarter. Can you talk about what your early signs are on the X6?
Yeah. Thanks, Steve, for the question. We did reach an important milestone in having shipped our 10,000th unit since we started in robotics about five years ago. It is a milestone along the mile marker along the way. I think the other compelling points about our AMR business, this business cumulatively is over $250 million in revenue, profitable revenue, growing nicely. We sold $75 million worth of AMR in prior year, full year 2024. We think we have demonstrated not only growth, but good momentum. We have committed to growing this business to $100 million plus by 2027 from a run rate perspective. I think that is well within our grasp. 10,000 units is an impressive number. To give you a sense of the makeup of that 10,000 units, it is to over 900 individual customers across 25 countries.
This was not just—we did go public with the fact that we landed Walmart. Walmart continues to reorder from us. They're an important big customer. There's only one Walmart in the world. We are glad to have them, but we are selling to a vast array of customers beyond kind of the big flagship customers with some significant wins. I think we referenced this even first quarter, we deployed AMR to T.J. Maxx. There's a sort of a mass retailer that's moving into robotics. Gives you an example of kind of the sort of customers. We're also selling robotics successfully into industrial customers, people that run manufacturing operations or warehousing logistics operations. Yeah, listen, we're really pleased about the progress. I'm proud of what we've accomplished. I yearn to grow this business because the value proposition to customers is just so compelling.
Virtually everyone we talk to has labor challenges in the space of cleaning. We think there is nothing but upside for us as we go forward with AMR. One more comment I will make on AMR. We commented on this on the call. In addition to the product, and we are really excited about our product, especially the X4 and X6. Steve, you asked about the X6. We have shipped customer units. We have sold customer units. We have booked orders under what we call our Clean 360 program. What a Clean 360 program is, is you can think about it as robots as a service. We offer the customer the opportunity to pay one monthly price. Embedded in that price is the robot, the navigation software subscription, and a service maintenance contract, one price per month for the customer with a 90% uptime guarantee.
One of the questions I get is, "Hey, what are you doing to try to drive adoption of robotics with your customers?" We've got great products. They perform safely, reliably, really deliver a great outcome. We're getting better and better with that performance with the X platform. Now we've got a business model that says, "If the CapEx was a hurdle, if coming up with the cash to put into robotics or you're hesitant to make the CapEx, you can move into a Clean 360 type program where now you have a known monthly operating expense with an uptime commitment from Tennant Company to keep the machine available for use, which gives you a better guarantee you're going to get the return on your investment." I think the Clean 360 bundle is an interesting and really important part of accelerating adoption.
Is that essentially a lease-to-buy type situation, or how does that work?
You can think about it as a fair market value lease as far as the mechanics of it underneath it. What we've heard from customers is it's appealing to them. They like the idea of having a known cost to operate the robot on a monthly basis. They can bake that into their operation, and it just flows as an operating expense. They won't get any surprises.
Got it. Got it. Okay. And X6 adoption so far, can you give any sense how it compares to other past launches at this point, or is it too early?
Yeah. It's good. We're not public with any of the early wins, but I will tell you that what we've learned around robotics is it's great to have some co-development partners as you're developing the product. In this case, we're working with some really large co-development partners, and we expect them to—we expect that we'll win some larger deployments here and be able to announce those shortly with those partners. Beyond that, the excitement's really high because the X6 can kind of fit large-scale retail formats because it can clean 75,000 sq ft on a charge, on one battery charge. That's a big operation. It's appealing to sort of large-scale retail as well as manufacturing, warehousing, logistics, where the X4 Rover was a bit undersized for industrial. Our industrial selling organization is really excited about it. They're on out beating the bushes. The pipeline of opportunity looks really solid.
Excellent. Excellent. I do have a question. I know this has come up quite a bit over the last couple of quarters. If you could just explain it to everybody. The question is, you had stated a revenue growth target of 3-5%. Obviously, Q1 was soft, which you had clearly indicated multiple quarters ago. This also ties into how you're reporting backlog. If you can just walk through it quickly, the issues there so people who might be new to this can understand why this year is a little bit different.
Yeah. Thanks, Steve. It really is a headline about overcoming a backlog reduction hurdle from prior year. We shipped coming through the supply chain challenges. We amassed about $327 million worth of backlog, and we're a billion-free business. So that was a big backlog to work down. We worked that backlog down, $150 million of it in 2023, $125 million worth of it in 2024. Exiting 2024, we're back to normal lead times. And no more backlog to work down. Great position to be in from a company because now we can take orders, ship reliably within a stated lead time, competitive lead times. The downside is from an enterprise perspective, we're up against that $125 million backlog reduction benefit we got in 2024. That benefit, well, $50 million of that benefit was in Q1 of 2024. So we had to overcome that $50 million in Q1.
That becomes less of a hurdle as we go through Q2, 3, and 4, but it still means we're up against that backlog reduction benefit in prior year quarter and on a full year basis. I know just at a surface level, we show negative year-over-year sales growth. It's entirely because of overcoming the backlog reduction challenge in 2024. Underneath our guidance, what it will take to deliver, and we're confident we can deliver on guidance, we need to drive order rates between 5-6%. When you think about, when you do the math and look at, well, what do they need to do to deliver on guidance? We've got to grow this business at the high end of our long-term commitment of 3-5% to deliver on guidance. Early returns are good.
We came through Q1 with about a 13% quarter-over-quarter order increase. The comp was a bit easier on 2024, but we're still high single digits if you account for the comp. The pipeline looks strong. I will tell you, based on all the negativity in the headlines and all the reasons to be concerned about demand, we're monitoring our demand signals very closely. We're talking to all of our customers, and we don't yet see storm clouds on the horizon. We don't see any signals of softening demand. We're full steam ahead from an order growth perspective.
Excellent. Excellent. That's good news. Quite a few questions around the balance sheet and use of it in terms of you obviously have that very large revolver and a nice cash position. Can you talk about capital allocation? In more detail, I want to mention the February 25 announcement around the authorization of the 2 million share buyback program, which is, what, 10% plus of your float. You haven't traditionally been a big repurchaser of shares, but your balance sheet is in such great shape. Can you talk about how you're balancing those now?
Yeah. Let me just give you a thumbnail on our capital allocation strategy and then specifically around the share authorization. We have a really disciplined capital allocation prioritization. Job number one is to fund the business. We think that offers the highest reward, lowest risk. We're not a capital-intensive business, and we need about $20 million-$25 million back into the business. That's pretty evenly spread between R&D and back into the manufacturing plant to drive productivity and efficiency and R&D to fund our new product innovation. The next priorities around for capital allocation are dividend payment. We're a strong dividend payer, and we've grown dividends over 50-plus years. We think that's value expected from our shareholder base and just good hygiene. We want to maintain our ability to pay dividends and grow our dividends. We want to be good stewards of the capital and manage our debt.
We target leverage kind of between 1%-2%, 1%, 1.5%. We're at 0.6 debt leverage now, which we think is appropriate given not only sort of the market, but also our aspirations. We want to maintain borrowing power to go out and do what we want to do, be in control of our own destiny. The final facets of our capital allocation priorities are M&A. I talked a little bit about our M&A priorities. We think M&A is a higher priority than share buybacks, but if we can't find a deal within a reasonable timeframe and our outlook over the next quarter or two would indicate we're not going to have a deal to invest in and our stock price is a value, then we're going to buy back shares. At a minimum, we want to offset dilution from shares issued to management.
In recent times, our stock has been a bit depressed, and we think unfairly so. We think it's a good value creation lever. We bought back $20 million in shares through the first quarter and will remain active and disciplined around share buybacks. Again, if M&A isn't readily available to put the capital to work, share buyback is a great secondary alternative. It's a great value for our shareholders. The share authorization was really just to put us in a position to be in control of our own destiny. We had remaining shares on our authorization. We talked to our board, and we aligned that we want to have—we don't want to have to wait in order to execute against our organic and inorganic value creation levers. We've got our debt in line, low debt, high borrowing power, high leverage.
We've got the share authorization in place. If we have to go share buyback, we don't have to go to the board for approval. We're a strong cash generator. We're going to grow organically. That creates the cash to fund the whole thing. The stars have aligned, and it's important to me that we have all of the arrows in the quiver. We don't have to scramble if we want to go do something. We've got a disciplined capital allocation priority. We've got the firepower to do it, and the balance sheet's in really good shape as well. I think we're well positioned to execute.
Fantastic. I know we're just about out of time, Dave. Any closing thoughts before we wrap this up?
My closing thought is, listen, I'm really optimistic for the future. I think that we've got fantastic opportunities. I'm really proud of the team. I think we've got the right talent on the field as well as kind of coaches on the sidelines. Our board is maybe the owners in the skybox, but I think we're in a really good position to go out and deliver on the commitments we've made as a company. I think the future is really bright for Tennant Company.
I know that I didn't get to—there are a lot of really good questions, Dave. I'm sorry I wasn't able to get to all of them in the time allowed. Certainly, you can forward the questions to us at Sidoti. I'm happy to send it to the team at Tennant or contact them directly. I'm sure they'll respond because there are quite a few good questions and a lot of interest, Dave. Good luck on Q1.
Thank you. Just a plug, Steve. You do a great job covering the company and have a depth of knowledge that would really be informative and helpful to anyone interested in learning more. I would refer them back to many of your reports.
Great. Thanks so much. Dave Huml, President CEO of Tennant Company. Thanks so much for being here, and enjoy the remainder of the conference. Thanks, Dave.
Thank you all.