Good morning. My name is Debra, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's 2021 Second Quarter Earnings Conference call. This call is being recorded. Thank you for participating in Tennant Company's 2021 Second Quarter Earnings Conference Call. Beginning today's meeting is Mr. William Prate, Senior Director of Global Financing, Financial Planning and Analysis and Investor Relations for Tennant Company. Mr. Prate, you may begin your conference.

Thank you. Good morning, everyone, and welcome to Tennant Company's second quarter 2021 earnings conference call. I'm William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Dave Huml, Tennant's President and CEO; Fay West, our Senior Vice President and CFO; and Dan Glusick, our Senior Vice President of Global Operations. On today's call, we will update you regarding our second quarter performance and guidance for 2021. Dave will brief you on our operations and enterprise strategy, and Fay will cover the financials. After their remarks, we will open the call to questions. Please note a slide presentation accompanies this conference call and is available on our Investor Relations website at investors.tennantco.com. Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations of future performance. Such statements are subject to risks and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement, for a description of the risks and uncertainties that may affect our results. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items. Our 2021 second quarter earnings release includes the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results. Our earnings release was issued this morning via Business Wire and is also posted on our Investor Relations website at investors.tennantco.com. I will now turn the call over to Dave.

Thanks, William, and thank you, everyone for joining us today. Our second quarter results reflected the overall business recovery we saw across our geographic markets despite widespread global supply chain constraints and commodity inflation that cut across a number of industries and which impacted our ability to fully meet the Q2 increase in customer demand. While the demand increase exceeded our initial expectations for Q2, the impact of macro level headwinds such as parts availability, material inflation, freight costs, and labor shortages was also greater than we had expected. In response, we've taken steps wherever possible to help minimize the effects of these challenges on our customers. In most cases, these actions build upon or otherwise benefit from the strategic improvements we have made to our operating model as part of our enterprise strategy. I will now walk you through some of the actions our teams have and will continue to take to mitigate some of the macro challenges in the current environment, while serving the needs of our customers. To address the issue of parts availability, which is the result of our suppliers managing their own production, labor, and logistical challenges, our supply chain teams are leveraging our strategic partnerships to manage component and material availability. We are also developing design alternatives and identifying additional sources to keep our manufacturing lines running, all while maintaining strict product quality controls. To ensure a smoother process in securing parts in the second half of the year, our teams have developed more robust sales and inventory operations plans to better align our supply and demand. These plans not only help our manufacturing plants develop smarter strategies to meet increased customer demand, but also allow us to provide longer-term demand forecasts to our suppliers to secure the parts fully. To address material inflation, our teams are working diligently to find additional partners and, where possible, consolidating vendors to drive leverage and scale. At the same time, we continue to use value engineering to help reduce the parts and material that go into each machine. Our R&D and operations teams are regularly finding ways to help address material inflation while maintaining our value proposition of quality and innovation. Today's pressures in the steel, resin, and lead markets represent a significant challenge that is felt by industrial manufacturers around the world and one that we expect will persist for the foreseeable future. To minimize the impact of higher freight costs, we are fortunate that as part of our enterprise strategy, we had already started to prioritize local-for-local supply chain and region-for-region manufacturing. This allows us to manufacture our products closer to our customers, which helps to reduce freight costs. This does not entirely offset current headwinds given the constrained transportation market, but we are making every effort to ensure that our manufacturing lines remain up and running and that we can deliver products with appropriate lead times. Regarding labor shortages, specifically in our manufacturing areas, we are staying competitive in the market by adjusting wages and making every effort to attract new talent by providing a safe, rewarding and fulfilling work environment. We are also investing in our equipment, processes, and systems to drive increased productivity. With respect to the overall challenges we are facing in our cost of goods sold, we are also carefully and thoughtfully managing our S&A to a level that allows us to invest in the business, serve the needs of our customers, and deliver on our enterprise strategy while also maintaining our ability to meet our full-year financial targets. At the same time, we are implementing price increases where appropriate that will benefit the fourth quarter of this year and help offset some of the costs that we are not able to absorb internally. While a price increase at this time of the year is not a normal practice for Tennant, we are compelled to take this action in response to the current macro market challenges. The key improvements we’ve made internally as part of our enterprise strategy have helped facilitate our response to current market dynamics. These improvements include value engineering, plant optimization, simplifying our product portfolio, divesting non-core businesses, and adjusting our go-to-market approach in specific regions. I continue to be extremely proud of our global teams for their efforts in addressing these various operational challenges as countries and markets navigate their post-pandemic recoveries. We are taking decisive actions to safeguard the customer experience and deliver on our financial commitments while remaining focused on our long-term business objectives. As Fay will discuss, our full-year guidance assumes our continued effective management of a challenging supply chain and operations environment and reflects our growing confidence that the long-term global recovery for commercial and industrial cleaning will continue. While we remain vigilant in our overall cost management in the face of material inflation, parts availability issues and higher freight costs, we will continue to execute against our enterprise strategy and stay focused on delivering the best possible customer experience. With that, I will turn the call over to Fay for a discussion of our financials.

Thank you, Dave, and hello, everyone. For the second quarter of 2021, Tennant reported net sales of $279.1 million, up 30.4% year-over-year, including a favorable foreign currency effect of 5.4% and a divestiture impact related to the sale of the company's coatings business of negative 2.5%. Organic sales, which exclude the impact of currency effects and divestitures, increased 27.5%. Tennant Group sales into the three geographies: the Americas, which includes all of North America and Latin America; EMEA, which covers Europe, the Middle East, and Africa; and Asia-Pacific, which includes China, Japan, Australia, and other Asian markets. In the first quarter, sales in the Americas increased 22.7% year-over-year with organic growth of 25.4%, including a foreign exchange effect of 1.1% and a divestiture impact of negative 3.8%. Sales were strong, both in North America and Latin America, with growth across all channels and product categories despite a decline in the company's AMR robotics business, which lapped a large order in the year-ago period. Strong customer orders resulted in higher than normal backlog levels at the end of the quarter as the company managed parts availability related to global supply chain constraints and labor shortages. Sales in EMEA increased 55.5% or 40.2% organically, including a foreign exchange effect of 15.3%, with growth across all countries and across all product categories as pandemic-related restrictions eased. Sales in the Asia-Pacific region rose 16.6% or 9.6% organically, including a foreign exchange effect of 7%. The results were driven primarily by strength in Australia across all product categories. During the quarter, organic results in China were flat year-over-year, which was due to limited parts availability. Turning to margins. Reported and adjusted gross margin were both 41.2% compared with 41.8% in the year-ago period, which included the impact of government credits received and cost-saving measures taken in response to the pandemic. As previously discussed, the decline also reflects increased costs related to freight, materials, and labor, which were partially offset by favorable pricing and cost-saving initiatives. These headwinds are expected to continue for the foreseeable future, with added pressure in the third quarter. Entering the fourth quarter of the year, we expect pricing and other actions to start driving a meaningful impact. As for expenses during the second quarter, our adjusted S&A expenses were 30.3% of net sales compared with 28% in the year-ago period. The year-over-year deleverage is a direct result of the cost-saving actions taken in the second quarter of last year in response to the pandemic. These actions include furloughs, reduced work schedules, adjusted management incentives, government credits, and tighter project and travel spending. Net income was $9.8 million or $0.51 per diluted share compared with $14.3 million or $0.77 per diluted share in the year-ago period. Adjusted diluted EPS, excluding non-operational items and amortization expense, was $1.18 per share compared with $0.96 per share in the year-ago period, which was primarily driven by lower interest expense. Adjusted EBITDA in the second quarter of 2021 decreased slightly to $35.1 million or 12.6% of sales compared with $35.3 million or 16.5% of sales in the second quarter of 2020. As mentioned in our Q2 2020 earnings call, we estimated that $15 million of savings occurred within the second quarter of 2020 due to the cost-saving measures and actions taken in response to the pandemic. As for our tax rate, in the second quarter, Tennant had an adjusted effective tax rate, excluding the amortization expense of 4% compared with 20.4% in the year-ago period. The decrease was primarily related to a discrete tax benefit for a valuation allowance release as a result of a recent law change impacting Dutch tax loss carryovers. Turning to cash flow and balance sheet items. Tennant generated $19.4 million in cash flow from operations in the second quarter of 2021, mainly due to strong business performance. As of June 30, 2021, the company had $135.1 million in cash and cash equivalents, while managing our leverage within the stated guidance of 1.5 to 2.5x. In April, the company restructured its credit agreement to optimize the debt structure. This change allows for greater flexibility with minimal covenants and no pre-payment penalties, while also reducing future interest expense by approximately $1 million per month, which was already reflected in our prior guidance. Lastly, turning to guidance. As Dave mentioned, our guidance reflects management's confidence in a broadening economic recovery, our ability to implement our long-term growth strategy, and our effective management of the current supply chain and operational challenges. It also assumes there will be no significant pandemic-related restrictions in our major markets. As included in today's earnings announcement, Tennant affirms its guidance for the full year 2021 as follows: net sales of $1.09 billion to $1.11 billion with organic sales rising at 9% to 11%; GAAP earnings of $3.45 per share to $3.85 per share, adjusted EPS of $4.10 per share to $4.50 per diluted share, which excludes certain non-operational items and amortization expense; adjusted EBITDA in the range of $140 million to $150 million; capital expenditures of approximately $20 million and an adjusted effective tax rate of approximately 20%, which excludes the amortization expense adjustment. With that, we will open the call to questions. Operator, please go ahead.

Your first question comes from the line of Chris Moore with CJS Securities.

Good morning, guys. Thanks for taking a few questions. Maybe just big picture. I think at the beginning of fiscal '21, the expectation was that revenue could approach pre-pandemic levels by the end of 2022. Most recently, you felt that you could get there perhaps by the middle of '22. I just want to get your kind of take on that. Is that still the case point?

We are optimistic based on our Q2 experience. Demand rebounded significantly across our geographic markets, channels, and product categories, leading us to feel confident about demand exceeding expectations for the quarter. However, it still falls short of 2019 levels for the quarter. Looking at the trajectory, we expect the first half of 2022 to be when we transition back to pre-pandemic demand levels.

I understand. I appreciate that. While I know there are uncertainties, how would you describe the current situation regarding both the supply chain and input costs? For instance, at this point, do you anticipate an improvement late in Q3, or will it likely remain challenging as we move into Q4?

Yes, listen, it's a great question. That's one that we think about on a daily basis. I will tell you the actions we’ve taken relative to our guidance. So we are very close to our supply chain and working closely with our supply partners to understand what challenges they are trying to overcome. We’ve got our best forward-looking forecast for demand as well as a backlog that we are very interested in working down as quickly as possible. We are acknowledging the reality of the constraints that we have in our supply chain and operations, and that’s reflected in our guidance. So the forward-looking view on when sort of recovery could occur, we don't see recovery in the foreseeable future. And so I don't want to get into projecting a quarter when things will improve; it's always difficult to tell. I will just tell you that we have fully acknowledged the reality of the challenges we see today in our forward-looking guidance. And I’m really proud of the actions the team has taken to address the issues that we are aware of and can anticipate being a challenge for us as we go forward.

Thank you for that information. In terms of our overall enterprise strategy, standardizing our products is a major priority, and we have made significant progress in that area. Can you discuss our current status regarding SKU reduction and what our long-term objectives are in this regard?

Yes. So we’ve made fantastic progress across our enterprise strategy, and you're highlighting one of the components which is optimizing our portfolios. You look at some of the moves we’ve made at the enterprise level to exit businesses and divest businesses that were non-core and not accretive to where we are going to business. From a standardization process, we're standardizing across two facets, both in our models, but then also standardizing across our model portfolio and the individual products themselves, where we value engineer the products to harmonize and use more common components. We’ve made fantastic progress. We’ve got some internal targets that we are striving to achieve. We’ve not pegged an end to that process, and I’m not sure if you're ever done with that process. We've made significant progress over the last 18 months, and we've been public about the progress we've made. It will continue to be a focus for us as we go forward. We’ve mentioned that we had a 35% reduction in our models within our product portfolio. We are proud of that. That was a step change in our product portfolio, and we continue to refine that offering. At the same time, I think it's important to note, we are launching new innovative products, which represents new SKUs into our product portfolio. So, really, it's a balance of the life cycle of our product, the new innovative products we are launching, and then enhancing our portfolio by pruning those and streamlining our offering in the existing portfolio.

Got it. Very helpful. I will jump back in line. I appreciate it, guys.

Your next question comes from the line of Steve Ferazani with Sidoti & Company.

Good morning, everyone. You mentioned the supply chain challenges you're facing. Can you provide any figures related to sales lost this quarter due to those challenges? Are you postponing everything to later this year? How should we approach this situation?

It's challenging to quantify. In a quarter where our demand exceeded expectations and we faced significant supply chain and operational challenges, our backlog has increased. To elaborate, our backlog is approximately twice the normal levels, which represents a substantial increase. This reflects the number of customers we intended to serve in the quarter but couldn't due to supply chain constraints and other issues we previously mentioned.

Okay. That's helpful. Regarding your reluctance to raise prices, it sounds like you're now considering it. Can you discuss the timing of this decision, customer reactions, and the potential impact on margins by Q4?

Yes, I’ll address that. It’s not that we haven’t wanted to raise prices; we are cautious about it because it can affect customer relationships. Raising prices takes time away from our sales teams who could be selling new and innovative products. While raising prices can be beneficial financially, we need to ensure that we can justify those increases. We offer a premium product with a strong value proposition, and we must ensure we can maintain the premiums we set. It’s not that we are reluctant to raise prices; we just want to be sure that we can effectively communicate this to our customers. We have implemented a price increase and made an announcement about it recently, so it’s still early to get feedback from customers. In my opinion, I don't believe anyone will be caught off guard. The macro market challenges we are facing are well-known, and our customers are aware of them. I think if they weren’t anticipating this, they won’t be surprised by the discussion around the price increases. I also want to recognize our sales and service teams for their efforts in conveying this message. They do an excellent job of communicating the value of the price increase and ensuring that it resonates with our customers.

The one thing I would add is that, while we just recently announced these price increases due to the current backlog, we don't really expect a meaningful impact until the fourth quarter.

Right. So you are not repricing the backlog?

Correct.

Okay. Fair enough. To switch topics a little bit. Obviously, the balance sheet keeps improving given the environment. How are you thinking about uses of cash over the next couple of quarters?

So our capital allocation priorities really remain the same, haven't changed dramatically. And first and foremost is reinvesting in our business to drive growth and to execute against our enterprise strategy. So that's priority number 1. We are also managing our balance sheet and we want to be with the stated leverage target of 1.5x to 2.5x because of the financial flexibility that we need that we would like to maintain as well as optionality. We are always in support of our quarterly dividend. And we have a history of our dividends, and we will continue to return capital to shareholders by way of dividend and potentially opportunistically share repurchases as we evaluate cash flow. And then lastly, is opportunistically evaluating what our opportunities are to enhance shareholder value through M&A. So those are our priorities.

One last one in terms of I know that you were lapping the big sales in the autonomous product for your first launch, given that in the last year, you’ve launched two more of the autonomous products. Can you provide any kind of color in terms of marketing sales, the two more recent autonomous products?

Let me provide some insight on that. Last year, we fulfilled a significant order from the world’s largest retailers, which we are very proud of. That order consumed most of our capacity and our focus to ensure it was implemented successfully and met our customers' expectations. It's important to mention that these large customer orders have led to reorders, indicating that early adopters of our technology have recognized its value and are investing in it again. This reinforces our confidence that we are moving in the right direction. We have since launched two additional products, the T380AMR and are in the process of launching our T16AMR. The feedback from customers for both products has been excellent. Although the sales volumes for these products do not match the significant orders from last year, there is still considerable customer interest in them. Having a three-product portfolio allows us to cater to a wide array of vertical market applications. We have trained our global sales team and deployed demonstration units worldwide, which enables us to engage customers across all our key verticals in robotics discussions. I am particularly enthusiastic about the T16AMR as it opens doors into industrial verticals. In these settings, robotics addresses critical business challenges such as labor shortages while maintaining a safe operating environment. Industrial customers are typically more inclined to embrace automation and already utilize robots in their facilities, making it a receptive market for selling robotics. The feedback we are receiving about all our products, especially the T16AMR, is extremely positive. We are optimistic about the AMR segment. We take great pride in securing large customers right from the start, and we are now actively pursuing other global customers, remaining very confident in the future potential of AMR.

Great. Thanks, Dave. Thanks, Fay. I appreciate the time.

Thank you. Thank you again for joining us and for your interest in Tennant. I want to thank our global Tennant teams for all of their hard work and dedication in this extremely challenging environment. I couldn't be more proud of the team and how we are performing. This concludes our earnings call. Have a nice day.

Ladies and gentlemen, you may now disconnect your lines.