• Net Sales: Increased to $311 million in Q1 2024.

• Adjusted EBITDA: Rose to $54.9 million, with a margin of 17.7%.

• Gross Margin: Expanded, driven by pricing realization and sales mix in higher margin equipment.

• GAAP Net Income: $28.4 million, up 16.9% year-over-year.

• Adjusted Net Income: $34.7 million, a 28% increase from the previous year.

• Adjusted EPS: Increased 24.8% to $1.81 per diluted share.

• Free Cash Flow: Approximately $7.1 million, adjusted for non-GAAP costs.

• Warning! GuruFocus has detected 3 Warning Signs with NMRK.

Release Date: May 03, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Tennant Co (NYSE:TNC) reported a strong first quarter with net sales increasing to $311 million and adjusted EBITDA rising to $54.9 million, resulting in an adjusted EBITDA margin of 17.7%.

• The company successfully reduced backlog for the fifth consecutive quarter, capturing pricing benefits and expanding gross margins.

• Tennant Co (NYSE:TNC) launched the X4 ROVR, a new autonomous floor cleaning machine, which has received strong interest from customers and is expected to drive revenue growth.

• The company announced the international expansion of the Tennant-branded i-mop family of products, which is expected to enhance cleaning standards globally and open new market opportunities.

• Tennant Co (NYSE:TNC) maintains a strong financial position with over $115 million in cash and a disciplined capital allocation strategy, allowing for strategic M&A activities and robust shareholder returns.

Negative Points

• Despite overall strong performance, Tennant Co (NYSE:TNC) faced challenges in the EMEA region with a declining macroeconomic environment and lower than expected results.

• The company's performance in the APAC region was impacted by phasing of customer order timing, leading to decreased sales in key markets like Australia and China.

• Operating expenses were higher due to ERP implementation costs and transaction costs associated with investments and acquisitions.

• The company experienced a decrease in parts and consumables sales by 3.8%, primarily driven by volume decreases in North America and EMEA.

• Tennant Co (NYSE:TNC) anticipates ending the year with a higher than normal backlog level, which could impact future sales and operations.

Q & A Highlights

Q: Appreciate all the detail on the call. Sounds like a lot of stuff is moving in the right direction for you right now. Q1 EPS was clearly well ahead of. It might have matched your expectations. It was well, well ahead of ours. I feel like this could turn into a repeat of the Q1 conference call discussion. Im a little bit surprised youre not moving guidance here. Q1 is not typically your very strongest quarter. Your guidance sort of implies it is, but your sales growth guidance implies you have better sales growth in the next three quarters. Your gross margins, three out of four quarters, have been 43% or higher. It seems like you are setting a new baseline there. Unless there is a lot of discretionary spend thats coming back, at minimum, you are at the high rate -- high area of guidance based on the numbers you are putting out there, unless I am missing something. A: Hi, Steve. Thanks for the question and commentary. We would share your optimism on the start to the year. We think its a really strong performance for the company coming off a record 2023 and so we share your optimism for the future. Having said that, we have got a lot of -- our strategies are hitting and we feel confident in our ability to reaffirm guidance. We have learned from the past that one quarter does not make a year. And so as we came to the first quarter, the impact of the strategies that we funded and activated around the world, are moving us in a positive direction, but still landing our forecast within our guidance range. And so we felt it was appropriate to reaffirm guidance, but we share your takeaway that we are optimistic from the start we delivered in Q1, and our outlook for 2024 is on the positive side.

Q: So what changes, given that you maintain that sales growth guidance and I know this margin was even higher than we have seen, what is your expectation? I mean you have done 43% for three out of four quarters. Is there a reason you give back the margin in the remainder of the year, or again, and I ask is, is there more discretionary spend outside of ERP implementation, which you back out anyway? I mean whats there in the numbers that maybe we see in the remaining quarters that wasnt in this quarter? A: Yes, really, margins are strong in the quarter. And when you unpack the margin performance, we are up 320 basis points on a quarter-over-quarter basis. We are up 220 basis points sequentially versus Q4. When you look at the underlying drivers, lets talk about the inflationary environment to start. Inflation is lower year-over-year, but higher than we expected in the quarter. And so that dynamic, while we more than offset it with our actions, we are watching inflation closely. The four levers we pull to drive margins are price, we monitor and drive mix to the extent we can, cost out, and productivity. So let me comment on the components of our action plan around gross margin expansion. From a price perspective, we feel really good about our price realization, and we are capturing the pricing that was captured in our backlog. So as we relieve backlog, we are realizing that price. As backlog reduction begins to reflect units that were booked closer to todays date, there will be less pricing impact. So the pricing impact from backlog reduction begins to moderate throughout the year. Thats just one component of our margin expansion in the first quarter. From a mix impact perspective, again, most of our backlog reduction is in our industrial product, and that tends to be higher margin than our commercial product. And so while we continue to meaningfully reduce our industrial backlog, we will benefit from that component in our margins. We are aggressively taking cost out of the business. We layered in a lot of inflation like most manufacturers around the world over the last two years. And our team has done a fantastic job populating a funnel of cost-out opportunities. Prioritizing those, we have resourced them and going after it to realize the cost-out benefit in our margins. Cost-out benefit is lumpy. Some of them have a long lead time to implement and realize. But we feel good about the funnel there. But in a given period, it can be lumpy in terms of the impact we deliver within a quarter. And lastly, productivity, our plants are running very well, particularly our plants in Minneapolis that builds our industrial product is operating at a very high productivity and setting record output levels. A benefit of the investments we have made in the plant from a CapEx perspective, resourcing ads, we have made across supply chain as well as the benefit of backlog reduction coming through coming through Plant 1. And so when you look at the components of gross margins, there are some puts and takes. We think we have it well in hand. And when you look at our 44.2% gross margin, its really in the ballpark of our historical, and so you specifically mentioned, are there incremental S&A investments. We will continue to invest to drive our growth, but its all baked into our forward-looking guidance. And so we felt like as we came through the quarter, we understood the drivers of gross margin. We know what we have spent on from an S&A perspective to start the year, and we leaned in heavily on growth. And we continue to expect to continue to make those investments throughout the year.

Q: Great. Appreciate the detail on that, Dave. I do want to -- before I turn it over, I do want to ask about the early signs on Rover. Is that now available? It sounded and I may have misheard this, it sounded like you were preparing to expand production capacity for Rover? Is that -- did I hear that right? And should that be a signal that early demand signs are positive? A: Thanks, Steve. Yes, you did hear that right. Early demand signs from customers are very positive. We think this can be a real game changer for us in driving robotics adoption. And you heard right, on the strength of the customer reaction to the product, we are now fully launched in terms of communicating the specifics of the product, its performance, its features, the pricing. On the response from customers, we are evaluating the opportunity, the potential to increase our production output on a full year basis. Having said that, the X4 Rover relies on some high-end sensing devices like 3D LiDAR and like cameras that have long lead times, because the world is moving towards robotics and sensing. And so we thought it was prudent given the early optimism from customers to begin the work to understand our potential to increase our production output. And what we are trying to evaluate is how quickly can we increase the production output; how much could we realize in '24 versus 2025 and have a lay of the land. We are not launched with the product yet, so we have three commitments to customers and a lot of energy and excitement around it. I am really excited about it. But we are not out in the market yet. We

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.