Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2023 Third Quarter Earnings Conference Call. This call is being recorded. Thank you for participating in Tennant Company's 2023 third quarter earnings conference call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.

Good morning, everyone, and welcome to Tennant Company's third quarter 2023 earnings conference call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Huml, Tennant's President and CEO; and Fay West, Senior Vice President and CFO. Today, we will provide you with an update on our third quarter performance. Dave will provide you an update on our operations and enterprise strategy, and Fay will cover our financials. After our prepared remarks, we will open the call to questions. An earnings press release and slide presentation that accompanies this conference call are available on our Investor Relations website. 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 2023 third quarter earnings release and presentations include the comparable GAAP measure and a reconciliation of these non-GAAP measures to our GAAP results. I'll now turn the call over to Dave.

Thank you, Lorenzo, and hello, everyone. Today, I will share highlights from the third quarter, our outlook for the rest of 2023, how we are performing against our current enterprise strategy targets, and the transition to our new planned enterprise growth strategy. I am very pleased to report our strong Q3 results, continuing the momentum we built in the first half of the year. This marks the fourth consecutive quarter our global team has achieved significant organic net sales and adjusted EBITDA growth exceeding our expectations. Our performance positions us to deliver a record-setting year. I am incredibly proud of the teams who have worked hard to execute our enterprise strategy, manage supply chain challenges, and serve Tennant's customers worldwide. In the third quarter, we reached net sales of $304.7 million, driven by organic sales growth of 13.9%. Orders have shown resilience, and we significantly reduced backlog for the third straight quarter. We have successfully minimized lead times and provided the exceptional products and services our customers expect from Tennant. Backlog levels have returned to normal for nearly all product lines, aside from those industrial products made exclusively in our Minneapolis plant. We increased gross margins to 43.3% and achieved adjusted EBITDA of $45.9 million. Our pricing strategies, combined with a moderating inflation environment, fueled this strong operating performance. Moreover, we converted over 100% of net income to free cash flow as we improved working capital. This allows us to focus on strategic investments and returning capital to shareholders through dividends and share buybacks. Based on our performance this quarter and our outlook for the fourth quarter, we are raising our full-year 2023 net sales guidance to between $1.23 billion and $1.25 billion and adjusted EBITDA guidance to between $190 million and $200 million. Both figures represent record highs for the company. We expect order rates will continue to be resilient and that parts availability and inflation will remain stable, enabling us to achieve outstanding results for 2023. Fay will elaborate on our new guidance as she reviews our financials. Over the past few years, we have provided regular updates on Tennant's enterprise strategy, developed in 2019, which aims to drive structural improvements to deliver enhanced profitability. Its three pillars are: winning where we hold a competitive edge; reducing complexity and building scalable processes; and innovating for profitable growth. These pillars were crafted to drive shareholder value and increase adjusted EBITDA margins to 15% by 2024. I am pleased to announce that, based on our anticipated full-year results, we expect to meet each of our key financial targets by the end of 2023. We had set a target of a net sales organic growth rate of 2% to 3% net of divestitures, and we expect to achieve an organic growth rate of approximately 3%. We had aimed for annual adjusted EBITDA growth of 6% to 10%, and we expect to deliver 9%. We aimed for an annual adjusted EBITDA margin improvement of 50 to 100 basis points, and we anticipate an average expansion of approximately 75 basis points per year, reaching an adjusted EBITDA margin of over 15%. All of this has been accomplished a year ahead of schedule, despite the global pandemic and significant supply chain disruptions. This demonstrates the strength of our global team and our organizational agility. As we conclude our previous enterprise strategy, we are preparing for the next chapter of growth. Over the last four years, we have developed new execution capabilities and made structural changes that provide a solid foundation for Tennant. We plan to utilize this foundation as we advance. The long-term outlook for Tennant Company is very positive. Our new growth-focused enterprise strategy, set to launch in 2024, will concentrate on strategic pillars for growth, performance, and people. Our growth pillar will target differentiated sales growth in the mid-single digits and above-market rates. We will enhance profit margins and maintain operational efficiency through pricing discipline, careful expense management, and investments in productivity. Our performance pillar will improve how our business operates to optimize costs, quicken decision-making, enhance customer experience, and integrate our sustainability goals into our enterprise strategy. We will achieve this by standardizing and optimizing global processes based on our customer value proposition; investing to modernize our ERP systems to a best-in-class SAP cloud-based solution—this initiative will provide digital infrastructure for Tennant that will scale with our growth, enhancing operating efficiency and producing cost savings; and accelerating our sustainability efforts by embedding our Thriving People, Healthy Planet framework across the enterprise to generate positive outcomes for our customers, employees, and stakeholders. Our performance objectives can only be reached if we attract and retain talented individuals who can drive change and deliver exceptional products and services. Our people pillar will be achieved by investing in our employee value proposition to clearly communicate reasons for employees and prospects to work at Tennant Company, and by advancing our diversity, equity, and inclusion roadmap to foster an inclusive environment where all employees can thrive. Through our growth strategy, we plan to complement organic growth with strategic acquisitions that increase shareholder value. With our financial strength, attractive value proposition, and scalable business model, we believe we are well positioned to drive growth through acquisitions. Tennant holds a solid position in an appealing and expanding core market, with a 13% share of an $8.5 billion addressable cleaning market. Our initial focus will be on growing our core through bolt-on acquisitions, filling product gaps, and enhancing our channel position in attractive regions. We will also explore adjacent markets and expand into non-cleaning mobile equipment, specifically targeting companies that share similar supply chain and manufacturing characteristics, markets, or channels, and potential cross-selling opportunities with our current offerings. Our ideal targets will allow us to enhance autonomy and utilize our service infrastructure and expertise. Lastly, we will prioritize the connected autonomy technology stack by determining which products and services to develop internally, source from the market, or acquire directly. Our disciplined M&A strategy will focus on opportunities that present the right strategic fit and financial returns. We are transitioning our M&A approach from reactive to proactive and will resource our organization accordingly. With that, I will turn the call over to Fay to discuss our financials.

Thank you, Dave, and good morning, everyone. In the third quarter of 2023, Tennant delivered net income of $22.9 million, an increase of $7.3 million from the prior-year period. Strong operating performance was fueled by higher net sales and gross margin expansion. Net sales growth and gross margin improvement were driven by both higher price realization and volume increases. Selling and administrative expenses were higher in the quarter as compared to the prior-year period due to higher variable costs associated with the increase in operating performance. As a percentage of net sales, S&A expense for the third quarter of 2023 increased by 170 basis points to 28.9% from 27.2% in the prior-year quarter. As we discussed during the second quarter, we anticipated an increase in S&A expense and focused our incremental spending on employees and strategic investments to fuel growth opportunities. Higher interest expense and higher income tax expense also impacted net income, in line with our expectations. Net interest expense increased to $3.3 million in Q3, up from $2.2 million in the prior-year period. The increase was due to rising interest rates on our variable interest rate debt. Our interest rate, net of hedges, was approximately 4.4%. Income tax expense of $7 million was $2.8 million higher than the prior year. The comparison between periods was impacted by a decrease in discrete tax benefits recognized during the quarter, along with unfavorable changes in the mix and forecasted earnings by country. The third quarter's effective tax rate of 23.4% is in line with full year expectations. Third quarter adjusted earnings per diluted share, which excludes amortization, increased to $1.34 per share from $0.98 per share in the prior-year period, driven by our strong operating performance. Turning to Slide 9. Net sales for the quarter were $304.7 million, a 15.9% increase compared to the prior-year period, or 13.9% on an organic basis. Approximately 65% of the year-over-year growth was attributed to pricing, while the remaining 35% was driven by volume. We ended the quarter with approximately $214 million of backlog, a reduction of $41 million from the end of the second quarter. Continued parts availability and a relatively stable supply chain environment allowed us to increase our production. This helped us service outstanding backlog and deliver customer orders. Net sales growth of $41.8 million in the quarter was primarily due to this reduction in backlog. As a quick reminder, Tennant groups its sales into three regions. The Americas include all of North America and Latin America. EMEA covers Europe, the Middle East and Africa. And Asia Pacific includes Australia, China, Japan and other Asian markets. Each of our regions achieved year-over-year net sales growth. Net sales in the Americas grew substantially, 21.4% to $211.2 million, or 20.8% on an organic basis, while FX had a favorable impact of approximately 0.6%. This significant year-over-year growth in our largest region was well above expectations. It was driven by an approximately equal mix of price realization and volume increases, led by strong equipment sales in North America. Net sales in EMEA in the third quarter increased 4.3% over the prior year to $72 million. A favorable FX impact of approximately 7.1% was partly offset by an organic sales decline of 2.8%. The organic sales decline was driven by volume declines in both equipment and parts and consumables, partly offset by price realization in all product categories. EMEA volumes were impacted by weaker-than-expected market conditions. Net sales in the Asia Pacific region increased by 8% over the prior year to $21.5 million, or 11.8% on an organic basis. This was driven primarily by price realization in Australia and volume growth in China. However, it was partly offset by a net unfavorable impact from foreign currency exchange of approximately 3.8%. We also group our sales into the following categories: equipment, parts and consumables, and service and other. We experienced growth in all categories in the third quarter of 2023 as compared to the prior-year period, most notably in equipment sales, which grew 23.2% year-over-year, well above our expectations. Turning to adjusted EBITDA. Adjusted EBITDA for Q3 was $45.9 million, an increase of $12.1 million versus the prior-year period. Adjusted EBITDA margin was 15.1%, an improvement of 220 basis points versus the prior year. Our sales growth, driven by both volume and price, along with expanded gross margins, were the most significant drivers of adjusted EBITDA growth. Gross profit of $132 million was $31.3 million higher than the third quarter of last year. Gross margin of 43.3% in the third quarter of 2023 improved 500 basis points compared to the prior year. We have successfully returned to pre-pandemic gross margin rates, based on strong price realization, which offset the multi-year impact of inflation. S&A expense of $88.2 million increased $16.8 million compared to the prior-year quarter due to higher variable costs associated with increased operating performance and incremental spending on strategic investments. We anticipate S&A expense as a percentage of sales on a full year basis will be comparable to the prior year. Turning now to capital deployment. Net cash provided by operating activities was approximately $54 million in the third quarter compared to net cash used in operating activities of approximately $15 million in the year-ago period. The increase was the result of improved operating performance, coupled with a significant reduction in strategic inventory spend. Capital expenditures of approximately $4 million were in line with our expectations and are on pace to meet our full year guidance. In alignment with our capital allocation priorities, we returned capital to our shareholders with dividend payments of $5 million and repurchased approximately 22,000 shares of our common stock for $1.7 million. We also announced a 5.7% increase in dividend to $0.28 per share, marking the 52nd consecutive year the company has increased its annual cash dividend payout. Tennant's liquidity remained strong with a balance of $97 million in cash and cash equivalents at the end of the third quarter and $316.9 million of unused borrowing capacity on the company's revolving credit facility. At the midpoint of our full year guidance range, our net leverage was approximately 0.6 times adjusted EBITDA, lower than our stated goal of 1.5 times to 2.5 times. We have remained focused on maintaining a strong balance sheet. Given our robust cash flow generation and in the current interest rate environment, we have directed cash to reduce debt by $56.2 million in the third quarter. Moving to guidance. Our strong performance in 2023 has been above our expectations. It is a direct result of our ability to effectively manage the global supply chain crisis and emerge stronger than ever. As Dave mentioned, we navigated a global pandemic and supply chain disruptions while still delivering on our enterprise strategy a year ahead of schedule. The changes we have made over the past three years demonstrate that our goal of mid-single digits and above-market growth rates is sustainable. We are pleased with our third quarter results, and based on the continuing trends, we are increasing our full-year 2023 guidance. Our year-to-date results have benefited greatly from a significant increase in the availability of parts, and we believe we will continue to see overall improvement in our supply chain. The improvement in parts availability allowed us to increase our production to fulfill open orders and meaningfully reduce backlog. Given this trend, we expect fourth quarter net sales to be between $298 million and $318 million and adjusted EBITDA to be between $39 million and $49 million. Implied in our guidance is our expectation that we will be able to reduce backlog below $200 million and will return to more normalized levels of backlog by the end of 2024 or early 2025. Overall, demand has been resilient. We are monitoring global order rates very closely, especially as we see some market softening in EMEA. Further, we anticipate continued strong price realizations. However, gross margins may see some variability in the fourth quarter as our revenue mix will see some seasonal geographical changes. Based on the timing of spend, R&D expense will be higher in the fourth quarter. We remain cautious and prudent in our spending. But as expected, we anticipate that S&A will be higher in the fourth quarter, as we invest in employees and strategic growth opportunities. Given these factors and the strong profitable growth in the first three quarters of the year, we are raising our outlook for the full year of 2023. Specifically, we now expect net sales to be in the range of $1.23 billion to $1.25 billion, reflecting organic sales growth of 12.5% to 14.5%; adjusted EBITDA to be in the range of $190 million to $200 million; and adjusted EBITDA margin to be in the range of 15.4% to 16%. With that, I will turn it back to Dave.

Thank you, Fay. We are on pace for a record 2023 for Tennant Company, and I could not be prouder of the work our high-performance teams have achieved. I'd like to take this opportunity to invite everyone to an Investor Day we will be having in New York in spring of 2024. More details will be published soon. With that, we'll open the call up to questions. Operator, please go ahead.

Hello?

Hello?

Yeah. I'm not sure if the line is dead or...

No, it's not.

Good morning. We're having trouble locating our operator. Why don't you go ahead and ask your question? We'll moderate ourselves.

Terrific. All right. This is Chris Moore from CJS. All right. First of all, congratulations, a great quarter, great year-to-date. It looks interesting, lots here. So, you talked about orders being resilient. I think they had been pretty much flat year-over-year, Q1 and Q2. Is that about where you ended Q3?

Well, first and foremost, thank you. I appreciate the recognition of the record quarter. We're really proud of the results we delivered. From an order perspective, yeah, we've been describing our order pattern as resilient, given all of the potential for disruption over the last five quarters of supply chain crisis and growing backlog and inflation, etc. Q3 orders were slightly up versus the same quarter in 2022. If you recall, Q2 was a tougher order quarter for us, and we described it as flattish, which left us questioning what Q3 would hold. So the fact that Q3 orders were up on a quarter-over-quarter basis gave us some confidence as we look toward the fourth quarter. It also appears that we're returning to some semblance of normal seasonality, which allows us to be more predictable in how we forecast our business. Q3 was in line with our expectations. And I'll note, at an enterprise level, if you dig within the quarter, one of the metrics we use to get a signal from the business about how the order demand is shaping up is an average daily order rate. And on an average daily order rate basis, September was actually our highest month year-to-date. So, one month is not a quarter or a year to make, but the fact that we finished Q3 strong is another important data point that gives us some optimism, not only on the quarter but for the year. The one area we're monitoring very closely is EMEA. Orders have been softening in EMEA year-to-date. They were down slightly in the quarter. We think we understand what's underneath that, and that's driven from a macroeconomic perspective. So, we want to keep close tabs, and we're taking appropriate actions as far as how we plan our business, given the softening order pattern in EMEA. But we're monitoring closely to make sure that we're rightsizing the business appropriately and responding to the signals we're getting. Having said that, our share position provides significant upside for us in the EMEA marketplace. And so, we're not folding up tents and going home just because orders are a little bit soft, and there are some macroeconomic headwinds.

Got it. Very helpful. Conversely, it looks like volume was up a bit in China, which lots of companies are calling out kind of challenges there. Anything you're seeing on that front?

It was a strong quarter in China. With markets reopening, we experienced over 20% growth in the region. Although it was an easier comparison, the ability to operate freely and deliver our products directly to customers has allowed us to take advantage of the reopening in the marketplace. This presents a positive outlook. We foresee similar demand for orders in China in Q4, maintaining a trend of year-over-year growth. We remain optimistic about our potential in China. Our investment in the Gaomei brand acquisition and our broad product portfolio, along with ongoing investments in our multichannel strategy, position us well to benefit from the reopening and market demand in China as we approach the end of the year and prepare for 2024.

Got it. And just lots of talk about a longer, higher Fed equation. Just curious how you're looking at pricing beyond '23. Historically, maybe normal was 1% or 2%. Just any big picture thoughts in terms of what pricing will look like beyond '23?

Yeah. We're working on that now and pulling the data from the marketplace, not only from internal inflation projections, etc., but also market competitiveness. There's been so many moves in the marketplace over the last couple of years, we're going to make sure that we're offering a very compelling value proposition with our products and continue to offer strong customer economics with our price positioning as we move into 2024. Having said that, we're imagining that we will move to a more traditional kind of an annual price increase kind of pricing structure for 2024. In 2021, '22, we obviously had to do mid-year price increases in response to the massive inflation that was layering into our business. So, we expect to move into more of a normal annualized kind of price increase. I think in the low-single digits is reasonable, if you look at what the outlook for inflation is. And importantly, the price increases we've published to date and coming through 2023 cover us on a multi-year inflation basis. So, we feel like we trued up and we're whole as we enter 2024, and we'll look for a kind of low-single digit type increase across the board. Within that average across the company, there are opportunities where we can take more price and be more aggressive. Where we have a competitive advantage, where we have a strategic opportunity, we want to make sure that we're harvesting those opportunities, and in other categories, where it's more competitive, and we've got to get more aggressive to go gain share. We're going to pull that lever as well. The other piece relative to pricing that we'll maintain is our discipline around discounting. That was a muscle that we enhanced coming through our prior enterprise strategy. And so, all of our operating geographies and our business units have a very rigorous process and discipline in place for managing discounting to make sure that where we give discount, it's specifically targeting incremental volume or share gain.

Got it. Maybe just the last one for me. The pivot to growth looks really interesting. On the M&A side, is there much in the current pipeline at this point in time? Or is it really being renewed at this point?

Yeah. We're populating the pipeline as we speak. Given that the first leg of our M&A strategy is to grow the core, we know many of these players from operating in this marketplace. And so, populating the funnel, at least with our known potential targets, is relatively simple. We are taking a very comprehensive look back and within each of the three pillars of our strategy to populate the funnel with potential candidates, and then we'll put them through a filtering to decide which ones we want to pursue proactively, while we're monitoring the entire category for action if something becomes available and we have to be more opportunistic. But I would say that the grow the core funnel is probably the most populated just because that's the closest adjacency, but we've begun to populate the rest of the funnel as well, and we'll be activating reach-outs here. We have started and will continue the reach-outs here as we move into the coming quarters.

Got it. Really helpful. I will step back and hopefully operator will get things going.

Thank you.

Thanks.

Good morning, everyone. I appreciate the details shared on the call. I was surprised by how strong the gross margin remained during the quarter, considering the reduced backlog conversion. With your guidance adjustment indicating you're now at the high end of the sales range, is the change in guidance on the EPS side primarily due to the robust gross margins, even though you mentioned a potential slight decrease in Q4?

Answering your second question first, yes, the drop-through on the expanded margins are reflected in our increased guidance. And the gross margin expansion has really been a hard-fought battle here as we've tried to weather the inflation that's layered into the business over the prior seven to nine quarters. We have a number of levers we pull to offset inflation. At first blush, we push back on increases in every form possible. We also have built a cost-out muscle so that we have a very comprehensive cross-functional process we use to rack and stack the greatest opportunities to drive cost back out of the business, and we fund and resource those as part of our annual plan. We're also improving our SIOP capability through our enterprise strategy we just concluded so that we can operate with greater productivity as to sort of having a better outlook and forecast for what we expect to sell allows our manufacturing supply chain to plan better and operate more productively. As kind of our option of last resort, we move with strategic price increases. And so, the margin expansion that you saw in the quarter is really a result of strong price realization and publishing prices to cover a multi-year inflation. So, this is inflation we already incurred in the business, either in this year or in prior years, and really making ourselves whole.

Did you have more than one price increase this year?

No, we didn't. This is the realization on the formerly published price increases.

Fair. Okay. You've announced and released a lot of new products over the last 12 months. Can you, if not quantify, at least qualitatively talk about success or future potential reaching a wider audience with some of these new products? And also whether you're starting to see greater sales with your current customer base, given the greater availability of products?

We are very enthusiastic about our new product pipeline. Looking back at the products we've launched, they can be grouped into three main categories. One category focuses on small spaces, which is a highly appealing segment due to the numerous small space applications in nearly all of our served vertical markets. We can market these products across all our channels, making it a valuable component of our strategy. Notable launches in this category include our i-mop products—i-mop, i-mop XL, and i-mop Lite—as well as the CS5. We are genuinely satisfied with their success and plan to continue developing and introducing more products in this category. Although these items typically have a lower price point, they are essential for capturing the entire market with our customers. Our channels help us strengthen our brand as a comprehensive supplier. Ultimately, our aim is to transition customers from traditional mop and bucket cleaning to mechanized solutions, and we are pleased with our progress so far. We will keep rolling out new products in the small space category. We are expanding our product line by rebranding acquired platforms from IPC and Gaomei and introducing them to new regions, allowing us to compete at more competitive mid-tier price points while preserving our margins. This strategy has successfully helped us maintain premium pricing on our legacy Tennant brand, serving both existing and new customers at competitive rates without needing to discount our premium products. Now, we have offerings specifically designed for the mid-tier market that we can sell profitably while ensuring an excellent customer experience. We integrate both premium and mid-tier products within the Tennant ecosystem of aftermarket service and support, creating a compelling proposition for both new and existing customers globally, as mid-tier opportunities are present in virtually every market we participate in. Lastly, we’ve made significant strides in the AMR sector, introducing multiple products and building what we believe to be the broadest portfolio. Our T16AMR is particularly exciting, as it caters to industrial applications in manufacturing and logistics—areas where Tennant has traditionally excelled. Our customers have expressed the need for robotic solutions in these markets, and we think our offerings are distinct. We also expect faster adoption in these environments since they lack the complexities of public foot traffic, and customers are usually more prepared to invest capital and achieve returns within the confines of their facilities. Over time, we believe this could result in a considerable market opportunity for robotics compared to some earlier ventures. We are eager about the AMR sector and the new opportunities it presents. You can anticipate more products in these three categories as we progress. We have consistently invested in R&D over the past years, and we expect to see the results of these efforts with future product launches. I am truly excited about the direction of our new product pipeline.

Great. If I get one last in, it's not the most exciting topic, but it was in your deck, modernization of ERP. I know that can go for companies really, really well. And it can also, in the near term, present challenges. Can you talk a little bit about where you are on that? What do you think the opportunities are and how you avoid problems that other companies, obviously, have historically run into wouldn't have tried to implement new ERP?

I appreciate the question. It's certainly a priority for us, and we believe it’s important to communicate that we are actively planning for this. ERP migration is not particularly exciting or fun to think about, and it does come with risks. However, I firmly believe it is essential for developing our digital infrastructure, supporting our growth, enabling scalability, enhancing our cybersecurity, improving our compliance, and ultimately providing a better customer experience to make doing business with Tennant Company easier. We currently operate on a 15-year-old system and have eight different ERP systems across our global enterprise, which complicates our operations. Therefore, this transition is essential. You might wonder why we are taking this step now. We've largely overcome the disruptions of the previous years, including supply chain issues, and have shown significant progress in reducing backlog while operating more predictably. Importantly, we're launching a new three-year strategy, which provides the context for introducing ERP consolidation aligned with our growth strategy, allowing us to allocate resources effectively and plan for the necessary investments while continuing to grow our core business. I view this as a long-term investment for the next 10 to 15 years of this great business we manage. In 2023, we focused on planning. We've made key decisions early, selected our final ERP, and are in the process of negotiating work statements and choosing partners for integration. We are also developing our resource plans to ensure we have the right internal and external resources for the project, and assessing the investment required and the expected return. 2023 was dedicated to planning, which has been crucial based on advice from best practices we've studied and discussions with others who have undertaken similar journeys. Proper planning, early scope decisions to avoid delays, choosing the right partners, having clear expectations, and resourcing the project appropriately were all highlighted as ways to reduce risks associated with such a program. This will require a significant investment of time and money as we move forward. We will finalize our business case and expectations for returns on the investment and share more details as they become available. We want to ensure you know that we are making progress and moving in that direction.

Great. Thanks, Dave.

You bet.

Thanks, and congratulations on the very impressive gross margin expansion and, clearly, the operational efficiencies. It was really nice to see the 9% hike to the adjusted EPS midpoint of the range this year. Fay, you already gave commentary maybe about the fourth quarter possible gross margin. But how should we think about gross margin for next year? Is 41% more realistic of your magnitude, maybe after you lap some of the heavier price realizations this year?

We are currently focused on our plans for 2024 and will share more detailed guidance after the first quarter of next year. We believe we are operating within achievable gross margin ranges that could be sustainable in the future. So, please stay tuned for more specifics on our expectations for 2024. For now, I think our full year results provide a good indication.

Great. That's helpful color, and I look forward to the February earnings call. And I just had a question about your backlog. It was an inevitable decrease, more normalized supply chain. All the industrial companies, their backlogs are coming down in the sector. I was just wondering maybe, Dave, how close are you to maybe a more normalized component supply chain and line disruptions? I know that you made a lot of good progress on that. I'm just trying to think in my head, are you like 90% on the way there with avoiding that drag from the supply chain, as I try to parse out really the gross margin expansion from better operational efficiencies and utilization versus kind of the catch-up pricing realization?

Yeah. I would say, broadly speaking, we're through the major supply chain challenges that we experienced. It's hard for me to put a percentage on it because we always manage supply chain challenges. I would say, we spent seven quarters talking about pumps and circuit boards. And while we're still actively managing those commodities in those parts for our production, it's not at the heightened crisis level that we were in, as you say, like this time last year where we were spending a lot of time and energy and resources and investments to try to overcome those two specific commodities. So, yes, I think we're approaching a more normalized kind of supply chain environment. We have enhanced our capabilities around supply chain management. We've made some investments to improve our capability there. As recently as this quarter, we've invested both in people and in systems to improve our supply chain capabilities. And that's really to enable ourselves to operate more productively and support our growth going forward. We're not going back and preparing for yesterday's problems. We're looking forward and saying, we've survived, we've built some new muscles, most of the investments we've made have paid off over time, and now, we want to make sure that we have the capability to support the business going forward. I think your question led off with kind of the backlog reduction and how to think about backlog. In the quarter, we took backlog down at the enterprise level from $255 million to $214 million. At our inflation adjusted rate, a normalized backlog level for the enterprise would be in the $50 million, $60 million range, varying by quarter. Obviously, we have some seasonality. We would be buying ahead to service, but $50 million to $60 million. So, you can think about the gap still to close from the $214 million that we're exiting this quarter, down to the more normalized rate. And we expect to make progress against that in the continuing quarters on the strength of supply chain and the strengthening supply chain. Having said that, the backlog is becoming increasingly consolidated in industrial product that is manufactured in one plant in Minneapolis. And those products are only built for the globe. They're only built in that one plant. And so, when you think about having an elevated backlog, concentrated in one or two or three assembly lines, it becomes more difficult to move the needle on a quarterly basis as we reduce those backlogs. So, it allows us a laser focus on the investments and adjustments we need to make to reduce the backlog. Every dollar of backlog represents a customer that's waiting on a Tennant product. So, we are highly motivated to get the product out the door. And we'll update on the progress we make, but I expect that we'll be able to reduce backlog at a decreasing rate as we move forward because of the consolidation on single products within the Minneapolis plant.

That's useful information. I have a two-part question. Dave, you've done a great job explaining some of the factors driving the industrial end markets, including warehouses, logistics, and compact sectors. Are there any other factors contributing to growth on the industrial side that seems to be significantly outpacing retail, schools, and hospitals?

I believe this is a very dynamic sector, possibly more so than it has been during my time with the company. Depending on how broadly we look, there are discussions around reshoring, and some of our businesses are anticipating future benefits from this trend, particularly near the border and in Mexico. Companies are considering increasing their physical space to serve the domestic market more locally. We see investment in Industry 4.0 driven by labor shortages and rising inflation, particularly in labor costs. As labor becomes scarcer and more expensive, investing in automation to lessen reliance on labor is favorable across various markets. The labor challenge is a common issue across all sectors we operate in, with nearly every market automating processes to reduce dependency on labor and to facilitate hiring of lower-skilled workers. The macroeconomic trends are significantly advantageous for us. Regarding manufacturing, warehousing, and logistics, certain segments within those categories are experiencing higher growth rates. Notably, the expansion in electric vehicles and related supply chains is creating demand for new spaces. Additionally, the ongoing growth of e-commerce has resulted in increased square footage in both retail and distribution centers to support this sector. As e-commerce continues to expand and is expected to play a major role in the upcoming holiday season, opportunities arise for us. It's important to note that our equipment tends to come into play later in the construction timeline of new facilities. After a project is announced and goes through construction—often delayed by labor shortages—cleaning equipment is one of the final investments made before operations begin. We anticipate significant benefits from the new spaces being added. Overall, we are optimistic about the macro trends and our markets as we look towards 2024 and beyond.

Great, Dave. That was very helpful. My next question is about Gaomei. Can you provide an update on that, which is a more affordable cost platform in China? Is it still being rebranded for other low-cost countries like Brazil? Additionally, could you give us some progress on that and the opportunity for a low-cost compact ride-on as well?

We've been utilizing our acquired platforms to enhance our competitive position and target mid-tier markets globally. This includes both our IPC legacy platform made in Italy and our legacy Gaomei platform produced in China. We're integrating these into local brands worldwide, successfully bringing both Italian and Gaomei products to new markets. Recently, we rebranded the Gaomei product for Latin America and have seen some early success. We're also expanding its presence in Southeast Asia. There is potential for further growth with the Gaomei legacy platform in additional brands as we explore opportunities in other regions. In developed markets such as North America, Europe, Australia, and New Zealand, we are considering whether we need three different price tiers to compete effectively. This could involve offering our Gaomei legacy, IPC legacy, and Tennant legacy products. However, a two-tiered approach may be more sensible based on our analysis of applications, customers, channels, and positioning strategy. The key decision now is whether the IPC product or Gaomei product is better suited for the mid-tier segment in these regions.

That's terrific to hear. Thanks for sharing that. And I'll turn it back over to the operator. Thank you.

Since there are no further questions at this time, I would like to turn the call over to management for closing remarks.

Thank you. And thank you for your interest in Tennant Company. This concludes our earnings call. Have a great day.