Few minutes, you know, I'll provide a brief overview of the company, and then open it up for moderated Q&A. Please be gathering your questions. I'll be happy to take those in the time following the presentation. Here's the topics I'd like to cover just to introduce you to Tennant Company from a high level. We are a global leader in a growing market, and I'll talk a little bit about that market, our share of that market, as well as our differentiated position in that market and why we feel really good about our prospects for the future. Our growth plans are underpinned by global mega trends that provide tailwinds to our growth, and I'll spend a little time talking about those key drivers of our business as well.
We are differentiated and offer our customers a really differentiated world-class service model, which feeds our aftermarket business, which is a fantastic piece of the portfolio and also a very important part of our customer experience. I'll talk a little bit about our aftermarket business and our service capabilities at a high level. We are driving a disruption of the industry with robotics. We've been very public about this. We've had great success to date, and we have even bigger aspirations going forward. I wanna talk a little bit about the drivers of robotics, where we are at on that journey, and some decisive steps we've taken to not only solidify our leadership position, but to accelerate our growth going into the future. This is all underpinned by a really strong balance sheet and financial discipline.
We'll talk about our capital allocation priorities, as well as how we're performing against those and what opportunities we have to not only fund our own organic growth, but also from M&A perspective, and how we're returning capital to shareholders to create value. From a market perspective, it's about a $9 billion TAM. It grows at around GDP type rates, historically. We have about a 14% share of that global market. Strongest in the Americas, we're a 25% share. Ten percent share across EMEA, and about a 4% share of Asia-Pacific. If you just take a step back and just to put a competitive lens on this market, sort of consolidation of competition, there are three global multi major competitors. There's us and Nilfisk and Kärcher.
Nilfisk and Kärcher are based out of Europe, excuse me, and strongest in that geography. Obviously we're based out of the Americas and strongest in that geography. Between the three major competitors, we control less than 50% of the global market. There's plenty of opportunity for growth from smaller players to take share. If you think from an M&A perspective, there are consolidation acquisition opportunities within the space, as well. It's an attractive space. We've got a significant toehold, but plenty of upside for growth from a market perspective. Driving that growth, we see the underpinning of growth coming from five major mega trends. Automation, modernization, electrification, and sustainability. Automation is a significant driver of our business.
If you think about our equipment in general is productivity enhancing equipment, the automation, you know, the mechanization of manual tasks. Increasingly there's an opportunity for robotics in the space being driven by the shortage of labor, the cost of labor, and the variability of labor. We see that labor dynamic across virtually every vertical market we serve on a global basis. We see that as an enduring tailwind, driving our business well into the future and helping us drive this disruption with automation. Modernization is about people requiring cleaner shared spaces, especially in developing countries, but in mature markets as well. That continues to be an underpinning of the drive for better cleaning solutions.
Electrification is about the elimination of internal combustion engines, in and of themselves from an operating expense perspective and also a safety perspective, but also in pursuit of sustainability goals. Our customers are trying to eliminate internal combustion engines in their operation. They also want to achieve their net zero goals, and so they're looking to us to provide them solutions that deliver the same performance in a more sustainable fashion without requiring gasoline on premises. We think we got some significant global mega trends that provide tailwinds for our business. I will tell you that these are all very real and are part of customer conversations every day as we're interfacing with customers and trying to understand how we can help them solve their problems, most pressing problems, and achieve their objectives.
We think these provide a robust environment for growth and a tailwind to our growth agenda. We've committed to our long-term growth targets, and what that looks like for us is top line organic net sales growth in the 3%-5% range. Margin expansion at the EBITDA line between 50 and 100 basis points per year. We wanna convert net income free cash flow conversion at about 100% or more. We have a target to add about $150 million in revenue from M&A. This is over the long term, but we use these to guide our annual aspirations from an AOP or a plan within the year. We think that the business is capable of delivering this, as we overcome significant kind of macro- external challenges.
We think that the structural business will allow us to deliver this kind of performance. We communicated these at our Investor Day in 2024, and we continue to remain committed to delivering both these top- and bottom-line targets and cash flow targets over the long term. I'll talk a little bit about innovation, and we talked earlier about the mega trends that are driving the customer challenges and how we're uniquely positioned to solve them. When we think about innovation, we think about innovation from the standpoint of solving the customer's most pressing problem in a very real way that's tangible to the customer, that they're willing to pay for, and that we can make money and are the most rightful person in the market to do it.
When we look at our innovation agenda, there are three spaces, categories we've been focused on. One is around AMR, which is our robotics offering. We think that's a fantastic opportunity to support our customers' need for overcoming their labor challenges, and delivering a fantastic outcome, as well as a great ROI on their robotics investment. We're invested in small space cleaning. You know, traditionally, Tennant has gone down to a certain level in terms of the square footage of facility we can clean or the space that we're capable of cleaning, and we've been moving into offering more innovative products and small space cleaning that allow customers to take advantage of mechanization and the productivity improvement and providing a cleaner, better cleaning outcome, you know, without having to pull out a mop and bucket.
Lastly is something called product line extensions. Over the past several years, we've made acquisitions of competitors in the space, one in Europe, it was based in Europe, and one that was in Italy, and the other one that was based in China. As a result, we inherited manufacturing capability, supply chain, and product designs that allow us to compete profitably at more mid-tier price points. We have been taking those product portfolios, launching them into new brands and channels, and going to market with a two-tiered offering. We're extending the acquired products into new brands and new channels as a way to grow our overall share and support premium pricing on our legacy product in the Tennant brand.
It's a two-tiered product offering that allows us to reach more customers with more products priced where they're willing to pay, and penetrate new channels to market as well. We've had success in each one of these categories, and we expect to continue to iterate our offering with new innovations as we go forward across the spectrum. We've added additional categories as well from an innovation perspective. One example would be our recent push into outdoor sweeping, moving up the line into very large equipment for outdoor applications. We launched our first product last year. It's been very well-received, and we anticipate moving into that outdoor space with incremental products here in the future as well. Very excited to announce the launch of our TNC Robotics Group.
You know, we built a great business in robotics, and I could argue that we were the first to market in the mechanized cleaning equipment space, you know, back pre-pandemic, kind of that 2019 timeframe, when we secured a very large deal with Walmart to deploy robotics into part of their ecosystem at the store level. We've built a great business. You know, in 2025, our robotics business reached $85 million in revenue. That's inclusive of the annual recurring revenue from the software subscriptions and connected autonomy on our robotics. Great business. It's growing. It's profitable. What we recognize is that we want to drive the disruption faster, first and foremost, and that there are new entrants coming into the market space, robotics-only competitors coming primarily from Asia.
When we look at kind of the product set that they have, the feature set they have, and how nimble and agile entrepreneurial startups can be, we wanna make sure that we can match the speed and responsiveness and agility, coupled with our fantastic product portfolio and our ecosystem of support, our brands, our sales coverage, our sales relationships, and importantly, our aftermarket service capability. We wanna have the best of both worlds. In order to accomplish that, we launched a dedicated TNC Robotics Group. This is a 100% focused group of people on growing our robotics business. That's inclusive of the new product roadmap and how many products we bring to market, so expect to see more new products faster coming to market in our robotics range.
We're working on growing our brand awareness and demand generation, turning people from interested and curious over to a demonstration pilot and ultimately a sale. We are scaling our deployment capability to make sure that we can deliver a great experience first time with a new robotics customer. We are looking at tapping our full channel reach in our go-to-market. We can sell direct, we can sell through distribution, we sell strategic accounts, and we have aftermarket service. We wanna make sure we're maximizing the impact of each of our channels to market and to grow in the robotic space.
We're improving our overall customer experience and interface, not only during the sales process and the touch points as they move through the sales journey, but then also how they interact with the machine and our aftermarket support of our customer from a deployment perspective, but also a service parts and consumables perspective. We dedicated this group. We moved, lifted, and shifted some people into roles to support this 100% dedicated, focused team. We also are adding roles incrementally. We accomplished that largely by flowing resources from other opportunities to support our doubling down in the robotic space. We're committing to $250 million in robotic sales inclusive of ARR by 2028. We finished 2025 at $85 million. We're going to $250 million by 2028.
Really exciting space for our business. Really exciting opportunity in the marketplace. We think we had a commanding lead. We think that by doubling down, we can extend that lead, not only against our traditional floor care competitors, but against new entrants, robotics-only entrants, as they come into the marketplace. A recent occurrence in the business was our ERP transformation. We've been very public over the last several years about this program and project and the underpinnings of why we had to do it and how we were approaching it, how we were funding the journey, et cetera. We went live in Asia- Pacific in September of 2025, and while it wasn't without challenges, it performed. Our go-live performed largely as expected. We quickly rebounded from a business perspective and got back to working efficiently.
In North America, we had a very different experience, and I'll just touch on kind of what happened. We can take more questions from the group after the fact if you'd like. We went live in November. We had a couple of showstopper challenges in North America when we went live in November. The most notable is which we lost about three weeks of being able to enter orders and build and ship product machines. With that kind of an outage in the period, we had a significant financial impact. We estimate about a $30 million revenue impact in the period. About $15 million of that we think was lost in the period, and about $15 million went into backlog in terms of orders we just couldn't fulfill.
When you think about what happened with the ERP, there's a whole host of analysis we've done around our root cause countermeasure. You know, we really placed a heavy reliance on our successful go-live in APAC. We relied heavily on the guidance of our integration partner as well as our software provider in guiding us through this journey. In the end, we underestimated the complexity of our North America business. That bit us in that challenge I pointed to earlier. We also underestimated. We knew the scale was much larger given the size of our North America business.
As we had challenges reiterating solutions, as we had challenges in North America, the backlog built quickly and the customer frustration built quickly because of the volume we do in that particular piece of our geographic business. A significant impact in November, obviously significant impact in the quarter, significant impact to our customers. We just didn't have enough time in the year to recover from it. When this happened in November, December, we actually bounced back rather well from an output perspective. Our orders were off about 1.5% in the quarter, which you would think would be off more given the disruption that we experienced. December, we rallied back and actually delivered a December in terms of sales that was above our plan, and above prior year.
We rebounded pretty well from an operational perspective in December but there wasn't enough time left in the year to go recover kind of the lost revenue. It impacted the quarter, impacted the year. Should comment on Q1. As we moved into Q1, we lost two weeks in January due to taking a physical inventory. Based on the disruptions we had in our North America business, we were compelled to take a physical inventory in order to close the books. We lost two weeks of output and production in January. Really tough way to start the quarter and the year. Following that, demand has been resilient. Our operational capability has been resilient.
We're moving through Q1 to establish system stability and work as much of the backlog down as possible, and we'll focus Q2 on driving the efficiency into our operation to make sure we can get back to operating productively and efficiently and gain back our output. The output will be our margin rates back in line. As a result of the challenges we had in North America, when we wanted North America recovery to be our number one focus, we pushed our EMEA rollout of the ERP out of 2026. We're working to plan what we wanna do, how we wanna handle the EMEA rollout in 2027.
More updates to come on that, but obviously we'll incorporate all of the learnings from Asia- Pacific and North America in our approach to our ERP transformation in EMEA. All of the strategic reasons for pursuing the ERP are intact. We still need to do this. We wanna do this. This is gonna deliver benefits to the business and to the customer. We've committed to efficiency savings as a result of our ERP transformation, and as soon as we're live across the entire enterprise, we'll be able to realize those savings in the $10 million-$15 million range annually. In addition to that, I'll just highlight the underlying structure of the business is intact. While we've had this ERP transformation challenge, the system we use to run the business, demand has been resilient.
Our products are still preferred in the marketplace. We still have our large installed base. We have the industry's largest service infrastructure. All of the basics underlying structure of the business are intact. It gives me confidence that as we emerge from these challenges in last year, November and you know, a bit in January as we started the year, we can get back on track quickly. We have a really strong balance sheet, and really that allows us to fund our own growth. We have a disciplined capital allocation strategy. The first priority for us is to invest in the core business and grow our business organically. We're not a capital-intensive business historically.
We need about $20 million-$25 million a year to invest primarily into operations, manufacturing, productivity and efficiency and automation, as well as the new product development portfolio that I highlighted earlier. That's our first priority is defend and grow the core to deliver on our organic growth commitments. We also want to maintain our debt leverage ratio in the 1x-2x range, and we're a strong dividend payer, and that's an important part of our value expected from our investors. Beyond that, we look at strategic acquisitions, and I'll talk a bit about the pillars we look at for acquisition opportunities.
If we don't have M&A opportunities kind of in the near term as we look out one, two quarters, then we wanna be very disciplined about share buybacks when the share price affords us an opportunity to buy in at a great entry point like we are today. A very disciplined approach, and I think we're a strong cash generator, and we can put the cash to work to create value for shareholders in a very disciplined way like we did, like we have since we've come into office and certainly demonstrated in 2025, and we'll continue to do so in the future. Just touching on M&A, we have three pillars we talk about. I'm really gonna focus on the first two because that's where we're spending most of our time, effort, and energy.
Our first priority is to defend and grow the core, and so if we think there's opportunities, and we've talked about our innovation vectors. There's opportunities to fill product gaps within our portfolio by buying competitors that allow us to further penetrate these attractive spaces highlighted, as well as expand our channel reach by buying distribution. That can be a very effective way to establish a direct presence in a geography where we think the market will support it, and we can grow differentially with a direct presence versus just working through distribution. We have been active in that space. Beyond defending and growing the core and kind of those product gap fills and channel acquisitions, we think robotics is a fantastic growth opportunity, and we wanna make sure that we're positioning ourselves to continue to grow in connected autonomy.
Looking at software providers that could offer us a unique and compelling opportunity to more fully participate in the value creation of recurring revenue, as well as robotics competitors that may have better robots or robots that can fill gaps in our line that we don't have today better than their competitive offerings. We're looking at robotics manufacturers. We're looking at robotics manufacturers that have software capability as well. And then the ecosystem support required to support robotics, sell robotics in as well as service to customer after. We're really looking at things that we could invest in from an acquisition perspective that would give us a differentiated capability to grow our robotics presence differentially from the past. Those are the two primary areas we're focused on.
Opportunistically, we're looking at other mobile equipment adjacencies, and if there was something that came to market that was a logical extension of one of our core assets and capabilities, we would look at it if we could buy it at the right price and view that as another growth vector for the business. Our primary focus is on the left-hand side of the chart. We have a disciplined set of threshold criteria that we use to evaluate potential M&A targets from an operational, financial, and strategic perspective. I think we're really well set up. We're cultivating a funnel, a robust funnel of hundreds of companies and making a lot of outreach activity to make sure that if someone's in a position to move, that we can be there first.
With that, I'll turn it back to you, Steve, for questions.
Great, Dave. Appreciate the color and the information in the presentation. We already have about four or five questions. As a reminder, we have about eight minutes remaining. 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. I can group a couple of them. It's not gonna surprise you, Dave, a lot of questions are either around ERP or AMR. Why don't we touch on the ERP, get that out of the way first? A lot of questions about where you are today versus so we're almost a month since the earnings call. In terms of fully stabilizing the system and fully getting back to, you know, top operational efficiency, where are you now?
Is this fully resolved within the first half, in your opinion?
Yeah. You know, we need to be careful about in-quarter comments.
Yeah. I understand.
keeping everyone equally informed. I'll just caveat my comments. Listen, we are at or ahead of where we thought we would be in the quarter. What we talked about was using Q1 to establish stability in the system and make progress against our backlog 'cause we created some backlog that we couldn't serve as coming out of Q4, and now we created additional backlog in Q1. We have continued to run the business on the new ERP since we went live, so there was no retrenching back to the old system or-
Okay.
Or, you know, sort of punting on some capability. We have continued to improve our output from the plants and our distribution centers and get kinda caught up from the outages we had at that time. The team has made tremendous progress in those regards. Our output at the plants is where we need it to be, and our outputs at the distribution centers from a parts perspective are where we need it to be. We're cleaning up some of the remnants of the challenges we had. Our goal was to insulate our customer from the challenges. Our priority is to get customers taken care of, so then we can focus our view internal, intercompany shipments and some of the processes and how efficiently we're operating internally.
Our goal was to insulate the customer from the challenges, and I think we're largely on track for that in Q1. In Q2, we'll turn our sights to improving our efficiency internally and going back to regain the business and repair the relationships with our customers. We baked into our 2026 plan some incentives to go out and give customers a reason to come back maybe sooner than they otherwise would, especially distributors who may have swung some of their-
Yeah.
... discretionary volume to other competitors. We wanna make sure that they have incentive to come back and work with us, you know, again in Q2. You know, don't like that we went through it, obviously.
Yeah.
We're not the first company in the world to go through it, but that's small consolation.
For sure.
For us and our customers. You know, all things considered, we're on track for recovery.
I mean, when I think about your guidance as we modeled it in for the year, it to some degree, depending on exactly how you do it quarter to quarter, it sort of implied your margins are pretty much back to historic levels in the second half of the year. Do you agree with what that's what's implied in your guidance essentially?
Yes. Yes.
Okay.
In addition to that, we tried to provide some detail around how the year would start.
Yeah.
If you just stand back and think about Q4, we lost three weeks because of our ERP challenges. Q1, we lost two weeks because of physical inventory. Both of those quarters, we're throwing overtime. We're running the plants flat out trying to increase production, reduce backlog.
Yeah.
... take care of customers. Our first quarter will look very much like our fourth quarter from a top line and a margin rate perspective. Then Q2, we'll see recovery and then back to run rate margins in the second half.
Got it. That's extremely helpful. In turning to AMR, you know, a lot of questions around that $250 million target. Clearly you're setting the bar very, very high for your team. Typically, when you see these types of targets, they tend to be five-year, seven-year. Yours is three years, so you must see a clear path to hit that number to put it out there. Any color on... 'Cause that's a big jump from $85 million- $250 million in three years, the confidence level on it.
Yeah. We have a lot of work to do. This is not in the bag, and I can't map exactly.
Right.
You know, what we're gonna do. It's not gonna be linear. We've learned that over the last five years in robotics. You tend to win large deals that can sway the volume in a given period, given quarter, et cetera. I have a level of confidence we can do this, and I think the market opportunity is real. There's a market there that's growing. The customer pipeline looks really robust. We know what we're capable of doing with our current product line. We know where we wanna go with the new products. We're taking really bold steps from a value perspective, from an offering perspective, from surrounding the customer and converting the customer from an interest to a pilot, to a demo, to a sale.
I look at the actions we're taking to dedicate the resources. Having people get up every day of the week and come in, and their sole responsibility is driving robotics disruption is a really powerful thing.
We've got over 100 people on the team that's across new product development and marketing and demand generation and customer service and field sales and strategic accounts and deployment support. It's a really powerful thing because we can flow that resource and drive a differentiated action on the marketplace. I think the market opportunity is real. We've gotta go create it. We've gotta go make it happen. I think the early returns are really positive, but we're really in early days. You know, in full candor, the team came with a higher number than $250 million.
Okay.
That's a good problem to have when your-
Yeah.
When your team is even more aggressive.
Wow.
I didn't have to talk them up to the $250 million. Listen, it's not gonna be easy. I don't think the competitors are gonna just roll over and let us take the share. I think we've got a very commanding head start. When I look at our assets and capabilities as a business, our aftermarket service, our customer relationships.
Yeah.
... our channel reach, and just, you know, the fact that we can sell non-robotics and robotics. I'm drawing comfort from the fact, or confidence from the fact that some of the world's largest customers have chosen Tennant, and they've scoured the globe to look at alternatives reordered from Tennant. I, you know, I don't wanna come across as arrogant, but I've got data points to support my optimism.
Yeah. Any concern, but you certainly talked about this a month ago in terms of new entrants who might have lower price points. Any concern that can affect your ability to reach those targets you've set, and how that might-
Yeah. I wouldn't.
Go ahead.
I think concern is too strong a word.
Okay.
Listen, I think we need to acknowledge the reality of the market as it exists. Our team is doing a great job of looking at the market and saying, "Okay, here's who's in the space. Here's the product offering they have. Here's their price. Here's what customers are telling us about our product and our value prop versus them." I think the fact that we've won some, you know, we're selling Walmart, we're selling people like Amazon.
Yeah.
We're selling to very large customers. We know what it took to win those deals at volume against traditional competitors and upstart competitors, robotics-only competitors, where we've seen them, as well as in the distribution channel, because I think some of the upstart competitors really have to start going through distribution. They don't have direct selling.
That's right.
They don't have service. We get a line of sight through there. What are the price points? What's their value proposition? How do the units perform in the field? How do they handle aftermarket? I think we're going in with our eyes wide open, but this is a rapidly evolving space. We wanna take a fresh look, you know, kind of every six months and say, "All right, what's going on now? What are we hearing from customers now?" Make sure that we're appropriately positioned to go out and take more than our fair share. I think the market as it exists today is different than it was two years ago and different two years before that. I think it's a matter of just. It's not a matter of concern.
To me, it's a matter of let's just step back, take a, snap a line, and acknowledge the reality of the marketplace today. If I were a customer trying to decide if I was gonna move into robotics, where would I look, what would I see, and what would I see as my viable alternatives? How do we stack up versus those alternatives?
Got it. I know we're running a little bit long, but there's a couple more questions I do have to get in. They're both capital allocation related. The first one in terms of you laid out that M&A funnel, you know, several quarters ago. The one standout that's not on there is consolidation, and a few months ago, we saw your largest publicly traded competitor announced it was gonna get acquired. It wasn't on your funnel. How do you think about industry consolidation versus these other options? Why do you think the other options maybe are the better route for Tennant?
Yeah. Consolidation is on the funnel.
Okay.
I mean, when you look at that first pillar, defend and grow the core.
Okay.
We talk about buying product manufacturers or buying channel. I think you're talking about Nilfisk being acquired by Freudenberg, obviously.
Yeah.
That would be squarely in that first pillar.
Okay.
Looking at, that would have been a transformational deal in terms of the size and kind of the industry structure. Yeah, buying a competitor gives us another brand, another product set, another set of channels, maybe some geographic strength that we don't have. It's clearly in that first pillar.
There was no interest in Nilfisk?
No. Nilfisk was in our funnel. You know, I can't-
Okay.
... comment on anything we don't public-
You know, I have to ask.
Yeah. No. That's kinda not a new idea.
Correct.
That idea of us combining.
Correct.
... with Nilfisk has been bantered around, probably predates me at this company.
Yeah.
Let alone me in this role. Strategically, that made a lot of sense. You know, on paper, and I think I articulated earlier, we evaluate all value creation opportunities up to and including transformational deals of that magnitude, on a financial, strategic, and operational basis. It's gotta hit the thresholds on all three for it to be a deal we're gonna go after.
Fair enough. Okay, last one. The stock being where it is today, if I look at even where you're trading on a forward multiple to this year, it looks cheaper than historically. If I look at things normalizing and what we're estimating for next year, I can't find a multiple that was this low over the period. Does that change your capital allocation strategy? You have been a little bit more aggressive in the buyback last year. How do you think about capital allocation, best returns of capital, and best returns of ROI when your stock is at this level and you have a confidence level you're gonna be able to resolve these ERP issues?
Yeah. I think I mentioned we're disciplined about those capital allocation priorities, and so-
Yeah.
Our willingness to move into share buybacks at a big level is dependent on the share price and the value it offers us, the value creation opportunity it offers us based on where it's priced versus today and where we think we can take the stock and where it should rightly be valued, balanced against our sort of imminent M&A opportunities. If we don't have anything that's at post LOI moving towards certainty of being done, then we're gonna flex and put our capital to work to create value by buying back shares. I would highlight we bought back shares last year.
Yep.
... when we thought we were an attractive buy, and we're even more attractive this year. We are active in the market as we speak. We'll update progress on that when we come out of the quarter.
Fair enough. Dave Huml and Fay West from Tennant. Appreciate all the comments over the last half hour. Any closing comments before we wrap it up, Dave?
No, Steve, I just really appreciate the time. Appreciate everyone taking the time to attend the group call. If you're interested in having additional conversation, I know Steve can connect us.
Yes.
Reach out directly. Happy to make the time.
Okay. Thanks so much. Thanks for joining us. Hope everyone appreciated the last half hour and enjoys the remainder of Sidoti & Company's Small-Cap Conference. Thanks, everyone.
Thanks, Steve.