Good morning, everyone. Apologize, we're having a bit of technical difficulties, but thank you so much for standing by. I see the room is still filling in. We'll give it a few seconds. I can take the time to introduce myself. I'm Steve Ferazani, an analyst at Sidoti. Been covering Tennant for it's about to hit six years. I know this has been a name that I've been taking a lot of calls on lately. It's been certainly in demand. We're so pleased to be able to be joined by Tennant Company this morning. We're joined by CEO Dave Huml and Lorenzo Bassi, VP of Finance and Investor Relations. I know they have a full presentation, and we expect some lively Q&A, so I don't want to take up any more time. Let me turn it over to Dave Huml, CEO. Dave?
Thank you, Steve. Really appreciate the introduction and for everyone on the call, I appreciate you taking the time out of your day to attend the presentation. We've got about a half hour earmarked and given the technical challenges, we're starting a bit late. I'm going to deliver a few prepared remarks, kind of overviewing the business and the company for people that are new to the story. I'll weave in, to the extent I can, some more current color around the business, and then leave ample time for question and answer within our allotted time. Let me start with an overview of kind of the investment thesis around Tennant Company. If you're not familiar with the company, we are a global leader in manufacturing floor care equipment, mechanized floor cleaning equipment. This is about a $9 billion TAM.
We have a differentiated product portfolio, a broad range of products, machines to fit a broad range of vertical market applications, as well as a differentiated service offering, aftermarket service, and these machines have a decent aftermarket tail to them. A significant part of the value proposition is that aftermarket service and capability to keep the machines running for our customers. We think our business is underpinned by some really significant tailwinds, mega trends in the marketplace that provide us growth opportunities. I'll articulate kind of what those are and how we think they translate to growth for our industry and growth for our company, and how we're positioning ourselves to take advantage of those tailwinds.
I'll do a little bit of a double-click on our world-class service model because it's unique, differentiated within our industry and marketplace and provides a significant competitive advantage and a bit of a competitive moat as we think about traditional competitors as well as new entrants into the space. We've been known as an innovative company across floor care equipment, a number of firsts and a broad set of IP around our equipment. More recently, we are driving robotics into our industry and using robotics as a lever to gain share and grow our business at the same time. I want to talk a little bit about disruptive innovation and how we're driving the future of robotic cleaning, how that business has evolved, where we're at today, and where we see it going in the future.
We have been, we think, really good stewards of our balance sheet, making sure that we are growing profitably and that we have got the firepower and the ammunition, financial firepower to fund our own journey, but then also insulate ourselves from any cyclical downturns to take advantage of unique and interesting ways to create value for shareholders, whether that be through share buyback or strategic acquisitions. I will touch on acquisitions strategy as well. I mentioned the $9 billion TAM, the way that breaks out geographically, and we run our business and report our business by geography, about a $4 billion TAM in the Americas, North, South America, about a $3 billion TAM in EMEA, and the remainder spread throughout Asia Pacific. Our largest share as a business has been in North America and Latin America, specifically Brazil, U.S., and Canada.
There are still geographies of growth, and with a 25% share position in those geographies, still upside opportunity within our core legacy region of Americas. Lesser share position, about 10% share in EMEA. I think it is worth noting that the competitive makeup of the industry, there are three major global players, ourselves, Nilfisk, and Kärcher. Nilfisk and Kärcher are both privately owned businesses based out of Germany. You can kind of think of it as Tennant is the big horse in the Americas, and Nilfisk and Kärcher, based in Europe, playing on their home turf, are kind of the big players within Europe. Then we battle each other in each other's backyard. Asia Pacific, we have a single-digit share position. I would say Asia Pacific is largely kind of up for grabs from a competitive standpoint. I talked a little bit about competition with the Big Three.
Big Three comprise less than half of the market, less than 50% share. The rest of that market is really broadly distributed, diversified amongst a number of competitors that compete either in kind of a single product set or a geography or a channel. There is still opportunity to grow through acquisition and roll up some of these smaller players as well. On a combined basis, about a 14% share for Tennant. We think we are kind of holding share coming through the last year or two, holding, serving in EMEA, gaining in Americas, and giving back some share position in Asia Pacific, primarily in China and a halo effect around China. We can talk about that a little bit more in Q&A if you are interested.
I talked about the mega trends that provide fuel for our growth, tailwinds for our growth, and I want to just touch on what those trends are. The major one is automation. If you step back and just think about the business we are in, we make mechanized equipment that improves productivity of labor, and so it is much more efficient and productive to use a machine to clean than it is to do it manually with a mop and broom or a bucket and broom or a broom. Increasingly with robotics now, we are growing because of the pressures being put on the labor market. It is not just labor cost, but clearly across the globe, but especially in more mature markets, the cost of labor is increasing, which provides an opportunity and an impetus for customers to move into productivity-enhancing technologies, inclusive of robotics.
But there's also a topic of labor availability, and it's not just the cost, and labor variability. Cleaning is, in most parts of the country, a professional last resort. There's high turnover in cleaning, and there's a cost of that friction. Lower reliance on labor for cleaning is a driver across all of our vertical markets that we serve. I would say it's acute in retail environments. It's acute amongst building service contractors, hospitals, education, K- 12, higher education. But also in industrial settings, trying to find labor and/or allocate labor to floor cleaning, pushing a machine around, it's a high need but a low priority. We can offer solutions to improve productivity of labor and reduce or eliminate the need for labor in the cleaning operation in those vertical markets. It's a compelling trend.
We think that the labor scarcity is here to stay. This has always been an entry-level, high-turnover type proposition, broadly speaking. We think that this tailwind of labor challenges driving the need amongst our customers for automation is here to stay over the long term. There is a shift towards modernization, away from mop and bucket, especially in developing countries, as they seek to raise the standard of clean and present cleaner, safer shared spaces in their societies. That's a longer-range trend that we expect to continue. As standards of living increase, people have a higher expectation for clean. Electrification is also a tailwind, and you've seen this ebb and flow, but clearly, the world is on a path towards less reliance on internal combustion engine technology. We think electrification is one of the key power sources to move customers off of gasoline-powered equipment.
We've got, primarily in our industrial range of product, we still have machines that are internal combustion driven. We've converted from gasoline to LP powered, but the next evolution is to go pure battery powered. Sustainability, not just electrification, but sustainability specifically across water usage, chemical usage, and circular economy of our products. Where do our products go at end of life is a topic that is on the mind of many of our customers that varies across vertical market and varies across geographies. We think that the drive for sustainability, thoughtful sustainability, is going to be a tailwind for us and opportunity for us, given that we make equipment that's used in a variety of shared spaces, that uses water, that uses electricity. We think some of our customers have shown they're going to be interested in.
I think these four major mega trends are durable. We think they'll continue at some pace, ebb and flow, for the next 10+ years. We think we're uniquely positioned to take advantage of these as tailwinds to our industry and also for our business. Our long-term growth model, we're committed to an LRP of 3%-5% top- line growth on an organic basis, 50- 100 basis points of EBITDA margin expansion, and we get there through a combination of gross margin expansion and SG&A leverage. 100% free cash flow conversion, and I'll talk a little bit about that when we talk about capital allocation. We put a placeholder out there for $150 million in inorganic and in acquisitions. The nature of acquisitions is you can't predict when they'll happen.
We have a funnel of opportunity that we are cultivating, and we thought $150 million would be a good mile mark as we looked at out three years, what we hope to add in terms of inorganic growth. Having a strong financial position, managing our balance sheet well, delivering on our commitments allows us to fund our journey and deliver on a significant value creation opportunity for our shareholders. Let me double click into product innovation and talk about where we're innovating and how. I talked a little bit about robotics earlier. We intend to lead the disruption of robotic cleaning, moving robots into a space that has largely been a manual effort, a manual plus machine. Heavy human involvement in cleaning. We've been in the robotics business commercially for the last seven or eight years.
We think we've got a significant start, a head start, and a share position. We have doubled down on this space more recently by creating our TNC Robotics venture. We carved out a number of resources inside the company and focused them 100% on accelerating our growth in robotics. We layered that venture on top of our core business. It's not a separate sideline adjacent business. It's meant to be an accelerant and bring more new products to market faster, improve our value proposition, and improve our support capabilities, and have a really talented group of people that are capable of moving at the speed of this business up against some formidable competitors. I think the early returns are really positive. We're excited about our opportunity in AMR. We have invested significantly in AMR, and we continue to invest significantly in AMR.
We're also moving into small space cleaning. We've talked about this a bit over the last two plus years. We've built this business on a size machine that's sort of mid-range, commercial up through industrial, and moving down the line into cleaning smaller spaces with mechanized solutions, inclusive of opportunity in robotics, is interesting for us because those are spaces we haven't traditionally competed in and had products that could perform well at a price point that was attractive for small space cleaning. It does give us access to new adjacencies, as well as new products to sell into existing customers that have small spaces within their larger facilities. Think about if we sell a big machine for a warehouse operation, they also have a break room and restrooms and an office space that needs to be cleaned.
We've also leaned into product line extensions, and what we do here is we take our product platforms that are designed at a different cost and durability price point, leverage them and rebrand them and take them into other geographies to compete at multiple price points within our core geographies. We bought a business in China. We have a Chinese product line that is built and designed at a lower cost point, which allows us to compete at a lower price point and compete with, in this case, Chinese competitors in Europe and somewhat North America as well. Kind of three focus areas for our product innovation. We've been investing, we invest around 3.5% of sales back into R&D. That's significant, that's our growth lever as well as can be our margin expansion lever as well.
I talked a little bit about scaling our TNC Robotics venture in 2026. We launched this at the end of 2025, so we're kind of coming up on Q3 of having the venture intact. Really pleased with the progress thus far and how it's reading out in terms of results. We have launched new products. We've committed to launching 10 new products in the robotics space in the next two years. We launched the X16 SWEEP. We are launching now the X2 ROVR, which is moving down the line into smaller store formats. We've made significant progress in investing in our go-to-market capabilities. I talked about the pre-sale, prepping the customer for deployments, deploying large fleets and getting everyone trained up and getting the reporting in place, making sure the customer will have a fantastic experience, that we understand what good looks like and what KPIs matter to that customer.
Adding resource to support our existing sales and service infrastructure to make sure that we deliver a seamless customer experience. We are focused in 2026, moving into building service contractors and into our distribution channel. Prior to this, we've been largely focused on, we say, direct cleaners, people that clean their own space, as our primary focus and footprints of larger magnitude, which are typically not where distributors play. With the X2 ROVR launch, we now think we have a product in the X2 ROVR and X4 ROVR that really fit the distributor model really well and the vertical market customers they serve. So kind of a new set of vertical market customers we're moving into with the venture in 2026, leveraging our existing infrastructure and adding some specific parts of the ecosystem. We partner with Brain Corp for our navigation software. Really pleased with that relationship.
We have iterated our relationship with them over the years. We are exclusive with Brain Corp in the floor cleaning space, and they are our partner in accelerating this new product rollout, some of which is software features. I would point at our Clean 2.0, with SelfPath AI capability as an example of a new product, new feature in our software. This significantly enhances cleaning performance and productivity on the ground for our customers. We're targeting $250 million in robotic sales by 2028. First half robotic sales are up 56% year- over- year. We finished last year at $58 million. Excuse me, $85 million in AMR revenue, full year 2025. That number was $57 million coming through the first half of 2026. So we think we're seeing an inflection in our robotics growth, leveraging our core and our TNC venture as an accelerant.
One of the noteworthy pieces of our performance has been our ERP implementation. We went live in Asia Pacific in Q3 of 2025, really without much disruption. That was not the case in North America when we went live in November of 2025. So we spent a lot of airtime educating people and being very transparent about what happened and what we're doing to correct it. We have been on a recovery path in North America from the ERP implementation, and we updated coming out of Q2 that our customer demand is intact. Our NPS scores have recovered. Our order rates are up significantly, double digits kind of year to date. Q2 orders were up 7%, so customers have returned to us in North America.
We spent a lot of time and effort to retain those customer relationships, begin to re-earn their trust, but also insulate the customers from our continuing recovery from ERP. We put up 39.5% margin in the second quarter, coming off of 38.1% in first quarter. So sequential improvement, and we are on a trajectory to get back to our. Our normal margin rates are on the 41%, 42% rate. So we need to exit Q4 kind of above 40%, 41% to be in striking position to be back on track for 2027, which is our plan. We continue to work on North America, we call it optimization. We are running the business on the new ERP, transacting business, booking orders, building product, shipping, collecting.
Now we are working through where things are not working the way we would intend them to be, and where we do not think we are yet capturing the full value of the new ERP. More work to be done there, which is largely inside the four walls. Did make the decision to halt our EMEA deployment. EMEA in our ecosystem is a much more complex venture than even North America based on the starting point of our ERP landscape. Given our North America focus on optimization of ERP, I felt it was prudent to take ERP in EMEA off the table with no definitive time when we would get back to it. So, we are well towards healing in North America.
EMEA is off the table, and we are really getting back to focusing on growth and our customers and all the interesting strategies we have to grow the business top and bottom line across the enterprise. I talked about our strong balance sheet. Let me just make a quick comment on capital allocation. Our number one priority is to invest in the business and fuel our organic growth. We generate more cash than we need to fund that journey. We would need about $20 million-$25 million CapEx per year to fund both our operational needs as well as our innovation needs in the business. That leaves us with a considerable amount of cash, to invest elsewhere to create value. We then prioritize managing our debt and paying dividends. We are a dividend aristocrat and have a long history of increasing paying dividends.
We think that is a strong part of our value expected from stakeholders. Managing our debt to within 1x or 2x debt leverage, we think, gives us a significant amount of firepower to do something strategic from an acquisition perspective. We balance acquisitions against share buybacks, and so we try to be very disciplined in terms of having the firepower available. What this looks like in practice is we are managing and cultivating our M&A funnel aligned with our M&A strategy. We look out one to two quarters and see if we think there is something there that is going to heat up and be actionable. Obviously, we would prefer to not be in a process, but if it is a process, those are more predictable. If we are exclusive, maybe we are more in control of the timing. If we have something, then we want to retain the firepower to go do strategic acquisitions.
If we do not have something in the near future to invest in, then we want to be disciplined about buying back shares. You have an algorithm for what attractive looks like. For example, when we came through the ERP disruption, we expected our lower guidance, our lower results to be reflected in our share price. We felt that we were punished beyond what was reasonable mathematically, so we leaned in heavily on buybacks in Q1, bought back $60 million shares on the dip. We want to be very disciplined about it, but we think that share buybacks should be an important part of ongoing value creation. I talked about M&A. Let me just touch on our priorities from an M&A perspective. Our number one priority is to defend and grow our core in that $9 billion TAM.
We have opportunities to buy primarily other equipment manufacturers, where we could buy a unique product offering that is attached to cleaning and brand it and put it through our channels. We would look for some sort of selling synergies in those cases, as well as there may be some cost-side synergy. The other primary focus within our core is around go-to-market footprint, where we can acquire distributors, for example. That gives us a direct footprint in a new geography to establish multi-channel go-to-market and after-market service. We have proven that can be a strong growth lever, and I would point to that acquisition we made in 2024 in Eastern Europe, which is growing well for us in places like Romania, Czech Republic and Hungary.
We have also made smaller strategic tuck-in acquisitions in Austria and in Scandinavia, again, to give us a direct footprint in interesting geographies where we think we can grow by just having a more direct sales and service footprint. The second priority is to grow in robotics. The opportunity here, we look at OEM robot manufacturers, people that are building robots and maybe have a product line that is differentiated to ours, maybe probably at the lower end offerings and maybe in adjacent applications. Specifically, somebody who has got navigation software capability. Really pleased with our partnership with Brain. A common question I get all the time is, "Is Brain on our acquisition funnel?" They are, and we are very open with Brain about that. Part of the partnership is being transparent about what our future value creation plans are and paths are. That is one option.
Moving into be a more direct participant in the navigation software, we think it is going to be a key component of growing robotics, and we think robotics grows in importance to the enterprise. So we have got to do it in a way that is accretive financially, but we think strategically it makes a ton of sense for us to move into software as well. Those are the two priorities that we really action. We have a third category that is opportunistic around other mobile equipment. If something were to come up that fit our model strategically, financially, and operationally, we would take a look at, but it is not our primary focus from an M&A perspective. With that, I will conclude and open up for questions.
Thanks so much, Dave. I know we started a little bit late, so we can let this go about five minutes long because I know there's some topics. There's three or four big topics that are coming up in every conversation I have with investors. I'm sure same for you. You sort of know what's coming. Two of them are in the queue. Let's start with the positive one first, which is the robotics demand has been, we've seen it growing. I know when we had Pat at the conference in June, he was using the term inflection point, which is always a positive. The question here is, robotics revenue was almost $60 million in the first half. You're guiding for $130 million-$145 million for the year, and then I'll throw in $250 million in 2028.
Confidence level in hitting those marks and what you've seen so far this year that would instill more or less confidence?
Yeah, I think it's a bold ambition. I am confident in our ability to deliver, and the confidence really comes from the customer demand, and the tenor of the conversations with customers in robotics. The conversations have moved from concerns about safety and will the machine work, and sort of how will I integrate it over to Let me make sure I'm going to get an ROI, but let me make sure that I can deliver some differentiated operational outcomes as well. I think customers have moved to a place of acceptance around robotics. I think that's because of the installed base and some flagship customers moving into robotics successfully. I think that part of that tipping point that Pat referenced is around customers and adopting, not just putting a toe in the water, but looking at full fleet deployment. I'll start with the customer.
Customer interest and demand is strong, and our funnel of opportunity is strong as well. Obviously, you can't predict when and where customers will move, but it's a dynamic space. We've also recast our analysis of the market, thinking about how big is the market really, and how is it growing. We came out with our initial estimates in 2024, headed at just south of a $400 million space for cleaning equipment robots, growing at about 15%. We're in the midst of reassessing that, and I think we're going to find out that the market is larger than that, and growing at a higher rate, which I think gives us some greater confidence on delivering the $250 million in 2028. Our new products are being very well-received.
Now, we've got to get a lot of new products to market in a very compressed amount of time, which means we have to move more quickly and be more agile. Brain, our partner, Brain Corp, has to as well. That's sort of operational excellence and moving at a speed that we need to for the market. That's a differentiated speed from what we've been moving from in the past and maybe we've been moving in our legacy business. So that's a point of friction. I think it's controllable, and I think we've got a good start. We've got to keep the pressure on ourselves to keep
Have you started delivering the X2 ROVR and X16 SWEEP yet?
X16 SWEEP, yes. X2 ROVR, no.
Okay. That would contribute to sort of the second half being better than the first half. That alone, plus the continued
Yeah.
growth trajectory.
Yeah. We need those products in market. We have got orders for both, so getting them lost. You are right, those are strong contributors to second half. We also need. Our funnel consists of some large fleet deployments and then medium-
Right.
smalls. We need some of the largest to get across the finish line here, in second half as well.
Got it.
Yeah, confident in the near term. I am confident. I am glad we stood up the TNC Robotics venture. I think it has given us a differentiated capability in terms of how we attack this market, so we look more like a startup, in terms of our speed to market.
Yeah.
Our agility with customers. If there is one point of new concern for me, it is around supply chain, being able to ramp production at the pace that we need to hit the $250 million. This space, especially around sensing, whether it be 2D LiDAR, 3D LiDAR, high-def cameras, NVIDIA chips, these are components that are in high demand across a broad range of markets. We have kind of held our own. We have seen some risks come through in terms of availability. We have been hedging with inventory.
But when I think about the pace we need to ramp our supply chain volumes to keep up and deliver on the $250 million, and what is going on in the marketplace and what we are hearing from suppliers and the hoops we are jumping through to make sure we have continuity of supply, when I look out at 2027 and 2028, I think that becomes an even more acute risk, because I do not see the demand for these components going down in the broader market. I think if anything, they are going to accelerate as the cost comes down the cost curve and there is more autonomy.
Yeah.
And semi-autonomy that need these sensors out in the marketplace.
Yeah. Switching to the other big topic, which obviously has been ERP implementation and the updated guidance coming out of Q2. I think the question we just had come in covers it pretty well, which is we know ERP implementation can be fluid. In terms of how you hit guidance, the question I was getting a lot was the guidance implies pretty significant EBITDA, incremental EBITDA margins, which is going to require more than just sort of that gross margin, targets you've put out there, which would sort of imply SG&A that you've been using to stabilize has to come down at some point this year. Where are you on that? What's your comfort level on that?
Yeah. So those are the two components that allow us to get the significant expansion in EBITDA. Let me start with the SG&A. We spent about $10 million in kind of cost, ERP recovery in the first half. We targeted about a tail of about $2 million in Q3. So we need that to come down, and not repeat in second half. The other driver is getting the production ramped. Now we're sitting on a significant portion of backlog, and especially in our industrial product line, which is higher margin product. So we need to ramp production in, and it's in North America, in North America, in industrial product, and take our backlog down to under $100 million, just south of $100 million, which I think is about a $27 million reduction of backlog in the second half.
With those two things being true, we think the guidance is well within reach. SG&A, I think we've got in hand. We may be off by $1 million or $2 million, but I feel pretty good about our ability to manage it relative to ERP recovery cost. We are working mightily to overcome supply chain challenges and ramp production. I think I've seen certainly some improvement in that regard as we've come kind of through Q2 and now again in Q3. We're in a quiet period. I don't want to preview Q3, but listen, I still think that we're capable of doing that.
But we can even go back to your guidance, which you said your mix was going to be, the expectation was mix would be better in 4Q. SG&A would take some time, so probably better 4Q. Probably 4Q is the biggest driver to hitting that number, more so than 3Q. That's the impression I got when you said it.
Yeah, I think that's fair. Q4, that's the big proof point. We got actually Q3 showing that we're capable of ramping production output in North America, specifically in industrial product and at margin. We didn't guide to quarterly margin, but we need to
Right.
kind of be exiting north of 40% to feel like we're within striking distance of exiting Q4 at 41%. That is driven by the industrial product at a higher margin.
In fact, I know we're a little long, but I need to squeeze this one. Competitive landscape, you've brought it up on calls in terms of new robotic competitors. I know Pat addressed this a bit in June. Anything in the last three months you've seen shifting with newer models trying to enter the market?
No, I think the players remain the most formidable Chinese-based robotics competitors. It's the same group of names. I think they're expanding their product line and trying to expand distribution coverage. I think it's the same players, same dynamic, just doing what they're doing. I think you're going to see separation amongst Chinese-based competitors. I think that the handful of the Pudu and the Gausium and maybe the CenoBots are going to pull away, and there'll still be a churn of new entrants, which makes it a bit easier to target when you know exactly who you're going to be up against.
Right.
in deals of consequence, if there's a silver lining to that.
Got it. The differentiator really for you guys is you have the service and the long-standing relationships and the track record. Correct?
Yeah, I think the install base and the relationships. Our aftermarket service is a significant differentiator, and we're hearing it on robotics. Customers are going to spend 2x-3x the sell price per unit and put a new technology out in a broad number of locations. They say, "Who am I going to call if this thing isn't working? I need the uptime to deliver on the ROI of this increased investment." So I think our factory direct service gives a significant leg up in robotics.
I could do this for another half hour, but I do have to-
Me too.
We went way long. Dave Huml, CEO of Tennant. Thanks for your patience on the technical side, and appreciate you answering all our questions today. Dave Huml, CEO of Tennant Company. Thanks so much, Dave.
Thanks, Steve, and thank you all.