Earnings Call Transcript - TNC Q4 2024

Operator, Operator

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's Fourth Quarter and Full Year Fiscal 2024 Earnings Conference Call. Today's call is being recorded. There will be time for Q&A at the end of the call. Operator instructions were provided. Thank you for participating in Tennant Company's fourth quarter and full year fiscal 2024 earnings conference call. And beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.

Lorenzo Bassi, Vice President, Finance and Investor Relations

Good morning, everyone, and welcome to Tennant Company's fourth quarter and full year 2024 earnings conference call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Huml, President and CEO; and Fay West, Senior Vice President and CFO. Today, we will review our fourth quarter and full year performance as well as our initial guidance for 2025. Dave will discuss our results and enterprise strategy and Fay will cover our financials. After our prepared remarks, we will open the call to questions. Our earnings press release and slide presentation that accompany 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 file with the Securities and Exchange Commission. We encourage you to review those documents, particularly our Safe Harbor statement for a full 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 2024 fourth quarter and full year earnings release and presentation include the comparable GAAP measures and the reconciliations of these non-GAAP measures to our GAAP results. I'll now turn the call over to Dave.

David Huml, President and Chief Executive Officer (CEO)

Thank you, Lorenzo, and hello, everyone. On today's call, I will be discussing highlights from the fourth quarter and full year 2024, the progress on our enterprise strategy, and our outlook for 2025. I am pleased to report our strong finish to a successful 2024. Our team's commitment to executing our enterprise strategy initiatives drove results aligned with our long-term targets, achieving new highs for the company in net sales, adjusted EBITDA and EBITDA margin. For the full year, net sales reached $1.287 billion, while our adjusted EBITDA rose to $208.8 million and our adjusted EBITDA margin expanded to 16.2%. Our full year organic growth rate of 3.2% was driven primarily by price growth across each of our regions and the second half of 2024 also showed positive volume trends. In the fourth quarter, our team achieved volume growth of over 5%, concluding the year with robust momentum following three consecutive quarters of nearly double-digit order growth. Looking at the full year, our orders increased 6.4% over 2023, well above our long-term targets. In 2024, teams across the company worked diligently to meet our customers' needs, successfully reducing our backlog by $125 million and closing the year with normalized levels and market competitive lead times. With backlog levels now stabilized going forward, incoming orders will more closely align with revenue. Regional highlights for the year varied. In the Americas, order rates during the year were up high single digits compared to the prior year period. This was driven by our enterprise strategy initiatives, specifically within our new products like the X4 ROVR, which contributed to our record $75 million in AMR equipment sales in 2024. In contrast, we experienced lower-than-anticipated demand for our industrial equipment, specifically in the rental channel driven by extended fleet replacement cycles. This sluggish industrial demand enabled us to draw down backlog as previously stated. Overcoming currency-related headwinds in Brazil, our strategic investments in the Americas continue to deliver order rates outpacing market growth, reinforcing our confidence that our strong leadership position is growing. In EMEA, despite strong execution of growth strategies, continued market demand softness during the first three quarters was compounded by lapping a previous year with higher backlog reduction benefit. In the fourth quarter, we saw signs of market rebound and we drove revenue growth across all product categories within the region, led by double-digit growth in Spain. Additionally, in Eastern Europe, our first quarter acquisition of TCS continues to perform very well. This business drove 2.6% inorganic growth for the region during the year, and we are excited about the opportunity it provides in this attractive region. Turning now to APAC. Continuing the trend from previous quarters, business performance in APAC was impacted by stark demand declines in China and government-induced overproduction, which is creating price and margin pressure in the mid-tier commercial product categories. Australia is also showing signals of slower demand. Customers are either delaying equipment orders or shifting to rental units, reflecting their growing uncertainty in their economic outlook. These macro market-driven challenges more than offset the positive impacts from our growth strategies in the region and we have pivoted our approach to focus on more favorable areas in this market environment. Looking at 2024 as a whole, our aim in 2024 was to grow top-line revenue and expand bottom-line margins through pricing discipline, launching innovative new products, improving our channel reach and capacity and reducing backlog to normal levels. Our results give us confidence that we are on the right path to carry this positive momentum into 2025 and beyond. I'd like to point out several key accomplishments the team made on these fronts. First, our 2024 results were primarily driven by price growth across each of our regions. At an enterprise level, we target approximately 50 basis points to 100 basis points of annual price impact. In 2024, we exceeded our target, delivering over 200 basis points. Each region contributed to this performance and the backlog reduction also contributed materially to price realization in the year. Second, we activated multiple go-to-market initiatives in 2024 aligned with our enterprise growth strategy. In North America, we increased our service capacity, which helped drive an increase in service revenue year-over-year. Additionally, go-to-market initiatives drove growth in the UK and investments in expanding our distribution network in Italy resulted in strong organic growth. Many of our go-to-market initiatives delivered year-over-year growth, but that impact was overshadowed by the previously communicated declines within the North America rental channel and China. Lastly, we drove successful product innovations in three key areas: AMR, small space and product line extension. Within AMR, the X4 ROVR that we launched mid-2024 has received strong reception, and coupled with continued high demand for our existing AMR products, reinforces our confidence in our AMR growth strategy. Within small space, we introduced our i-mop family of products into new geographic markets, including Brazil, France, Portugal and Spain. This international expansion drove incremental growth of i-mop products in 2024. We are pleased to announce that beginning in 2025, we have further expanded our sales reach by 30 additional countries. We see this expanded footprint as an exciting opportunity to gain share in the rapidly growing small space segment. We expanded our product line extensions portfolio with the release of the T1581 Ride-On Scrubber in the first quarter and the T291 Small Walk-Behind Scrubber in the third quarter of 2024. Our product line extensions have proven to be an effective growth strategy, positioning our mid and premium tier products to grow share and generate incremental profitable revenue. New product-driven growth in AMR, small space, and product line extensions exceeded our long-term growth target of 150 basis points to 200 basis points per year. Built into our enterprise strategies is our commitment to adjusted EBITDA margin expansion. As we drove pricing and cost-out initiatives across each of our geographies in 2024, we also maintained discipline in our spending to generate operating leverage on the volume increase. This resulted in a 70 basis point improvement in adjusted EBITDA margin in line with our long-term target of 50 basis points to 100 basis points per year. In addition to these accomplishments, we also activated our M&A framework in 2024 through our investments in Brain Corp and our acquisition of TCS, a longstanding distributor serving countries in Central and Eastern Europe, Africa, and the Middle East. These investments will contribute to our long-term target of adding $150 million of net sales growth from our M&A strategy over three years. We continue to evaluate potential M&A targets, prioritizing opportunities that provide Tennant with the right strategic value, operational fit, and financial return. Overall, our first full year of our enterprise strategy is yielding positive results and we are excited to continue to execute on our initiatives in 2025. Given the importance of AMR to our future, I wanted to spend a few minutes discussing the acceleration of AMR. Sales momentum from our legacy AMR products has been very strong. In 2024, we had AMR equipment sales of $75 million. Customers are choosing Tennant AMR machines, supporting our belief that we have a winning product portfolio, differentiated service capability, and strong value proposition in the market. We continue to see AMR as one of the fastest growing Floor Care segments, and we believe the investments we are making into AMR through new products put us on the path to increased customer adoption and drive long-term growth. I'm excited to announce the newest model in our AMR product portfolio, the X6 ROVR. We designed the X4 ROVR as a scalable platform, allowing us to bring new products to market more quickly and cost-effectively. Building on the early success of the X4 ROVR and our accelerated product roadmap enabled by our strategic partnership with Brain Corp, the larger X6 ROVR targets customers in retail, education, healthcare, manufacturing, logistics, warehousing, and large public space vertical markets. The X6 ROVR features an optional autonomous charging station, eliminating the daily need for an operator to remember to charge the machine. The new X6 ROVR offers superior cleaning performance, improved maneuverability, and nearly three times the cleaning capacity of the X4 ROVR. We plan to start shipping our first X6 ROVR units in the second quarter of 2025. The rapid growth of AMR is driven by the global megatrends of labor shortages and rising labor costs. That is why we continue to focus and invest heavily in automating the floor cleaning process to create and capture value by solving one of our customers' most pressing floor cleaning challenges. We are now targeting AMR revenue to exceed $100 million in annual net sales by 2027. Reaching this goal requires outpacing the market growth and solidifies our position as the industry leader in the robotics market disruption. Looking ahead to 2025, we enter the year with significant momentum in the business. Globally, outside of APAC, we are expecting a stable market environment and are forecasting to grow our order demand in the range of 3.5% to 7%, driven by pricing discipline, go-to-market investments and new product innovation. However, it is important to note that strong order growth will not directly translate into similar organic sales growth due to the $125 million backlog headwind year-over-year. As a result, we anticipate negative 1% to negative 4% organic sales decline. We also anticipate significant foreign currency headwinds, which Fay will address later. We remain focused on expanding margins in 2025 and are taking decisive actions to achieve this goal. We anticipate gross margin expansion in 2025 through our proven pricing discipline and cost reduction initiatives. We have proactively optimized our organization through strategic restructuring, enhancing operational efficiency, and prudent cost management. To fund our journey as we have streamlined S&A costs, we have intentionally reinvested these savings into strategic growth initiatives. We are committed to prioritizing investments that align with our strategic objectives and directing resources to drive growth while maintaining discipline in our spending to deliver sustained profitable growth. With that, I will turn the call over to Fay for a discussion of our financials.

Fay West, Senior Vice President and Chief Financial Officer (CFO)

Thank you, Dave, and good morning, everyone. In the fourth quarter of 2024, Tennant delivered GAAP net income of $6.6 million compared to $31 million in the prior year period. Full year 2024 GAAP net income was $83.7 million compared to $109.5 million in 2023. Focusing on the full year performance, net income benefited from a 3.5% increase in net sales and an improvement in gross margin. However, results were impacted by higher R&D costs due to increased investment in new product development, which supports our long-term growth initiatives. Operating expenses also rose year-over-year and included costs associated with our ERP modernization project, transaction and integration-related costs, restructuring-related charges, and legal contingency costs. Let me provide a little color on these costs, which we have classified as non-GAAP. Regarding our ERP project, in 2024, we invested approximately $37 million in the design and build phase of this project and successfully completed our 2024 milestones. Of this amount, $14 million was expensed and reflected in the P&L, and $23 million was capitalized. We are well positioned for the next phase of this critical project and are excited about the operational efficiencies that this project will unlock. In 2025, we will begin a staggered go-live of the ERP implementation and will make the necessary investments to limit business disruptions throughout the year. Additionally, as part of our enterprise strategy to drive efficiency, manage costs, and increase productivity, we executed a global workforce reorganization, which resulted in an $8.2 million restructuring charge in 2024. We expect to save about $10 million annually from these actions beginning in 2025. Our 2024 results also include a legal contingency expense. In November 2024, we received an adverse jury verdict related to an intellectual property dispute. The dispute involves a plaintiff alleging that Tennant infringed a patent through its manufacture and sale of the ec-Water option on commercial floor scrubbers sold between 2015 and 2023. A jury ruled against Tennant and awarded $9.8 million in damages plus prejudgment interest of $4.7 million to the plaintiff. We strongly disagree with this verdict and are exploring all available options, including seeking to overturn the verdict and the resulting judgment through an appeals process. This ruling does not impact our ability to sell any of our products and is not expected to affect our long-term financial performance. When excluding non-GAAP costs, adjusted EPS for the full year 2024 was $6.57 per diluted share, flat compared to the prior year. Looking at fund operating income, interest expense decreased due to lower interest rates. Our average interest rate net of hedging for the full year 2024 was 4.6% compared to 5.3% in the prior year. Our effective tax rate was 20.1% for the full year compared to 11.6% in 2023. The increase in the effective tax rate was primarily driven by the value of certain non-cash discrete items in each period, which will not reoccur in the future years. Absent these items, the effective tax rate for each period would have been approximately 24%. Looking a little more closely at our quarterly results. For the fourth quarter of 2024, consolidated net sales totaled $328.9 million, a 5.6% increase compared to $311.4 million in the fourth quarter of 2023. On a constant currency basis, organic sales increased 6.3%. Approximately 90% of the year-over-year growth was attributed to volume, while the remaining 10% was driven by pricing. Overall, we delivered 7.2% growth in equipment sales and 6.8% growth in service revenue in the fourth quarter of 2024 as compared to the prior year. Turning to the geographic breakdown. Organic sales in the Americas increased 10% compared to the prior year period. The increase in the Americas was driven by volume and price growth in both North America and Latin America. Volume growth was the primary driver contributing 9% growth compared to 1% growth from price realization. Organic sales increased 4% in EMEA, primarily driven by growth in all product categories, and organic sales decreased 19% in APAC. Adjusted EBITDA for the fourth quarter of 2024 was $47.4 million, up $5.9 million compared to the prior year period. Adjusted EBITDA margin increased 110 basis points to 14.4% of sales. Adjusted gross margin decreased 90 basis points to 41.3% in the fourth quarter due to inflationary pressure on materials as well as elevated freight costs. Adjusted S&A expense decreased $3.1 million in the quarter, driven primarily by lower variable compensation. As a percent of net sales, adjusted S&A improved 250 basis points to 27.4% compared to 29.9% in the prior year period. Moving on to full year results. For the 12 months ended 2024, consolidated net sales were $1,286.7 million, a 3.5% increase compared to the $1,243.6 million in 2023. On a constant currency basis, organic sales increased 3.2%. Approximately 80% of the year-over-year growth was attributable to pricing, while the remaining 20% was driven by volume. We drove 4.2% growth in equipment sales and 8.5% growth in service revenue in 2024 compared to 2023. Parts and Consumables sales were down 1.9% year-over-year, in part due to the unfavorable impact of distributor consolidations during the year. Turning to the geographic breakdown. In 2024, net sales in the Americas increased 5.7% over the prior year or a 6.3% increase on an organic basis. The increase in net sales was driven by a relatively even split between volume and price. Volume growth across the region was generated primarily from our commercial equipment sales, while volume growth in our industrial equipment was flat. Net sales in EMEA increased 1.3%, primarily due to the acquisition of TCS, which contributed 2.6% of inorganic net sales growth. Organic net sales declined 1.6% due to lower volumes in both equipment sales and parts and consumables, partially offset by price realization in all product categories. EMEA volumes were impacted by weaker-than-expected market conditions and a smaller contribution from backlog reduction in the current period. Net sales in the Asia-Pacific region decreased 10.3% or 9.5% on an organic basis. This was driven primarily by volume declines in China and Australia, partially offset by price growth in Australia. Turning to adjusted EBITDA. Adjusted EBITDA for the full year 2024 was $208.8 million, an increase of $15.9 million versus the prior year. The improvement in adjusted EBITDA was primarily due to strong sales growth driven by both price and volume, specifically in the Americas. Adjusted EBITDA margin was 16.2% in 2024, a 70 basis point increase over the prior year, and benefited from operating leverage driven by sales growth. Full year 2024 adjusted gross margin increased to 42.7%, a 20 basis point improvement compared to 2023. Our margin profile for the full year 2024 was impacted by shifts in our geographic, product and customer mix. Our pricing and cost-out initiatives more than offset the impact of inflation for the full year of 2024. Adjusted S&A expense of $352.1 million increased $3.3 million compared to 2023 primarily due to higher compensation and benefits expense associated with an increase in headcount. This was partially offset by lower variable compensation in 2024. Adjusted S&A expense as a percentage of net sales improved 60 basis points to 27.4% in 2024. The S&A leverage benefit was primarily due to improved operating performance throughout the year. Turning now to capital deployment. Net cash provided by operating activities was $89.7 million in 2024 compared to $188.4 million in 2023, and we generated free cash flow of $68.8 million for the year. The decrease in cash provided was the result of working capital usage mainly related to inventories and $37.3 million for our ERP project. Excluding amounts related to the ERP project, we converted 113% of net income to free cash flow in 2024. The company continues to deploy cash flow towards operational capital needs and to return capital to shareholders in line with its capital allocation priorities. In 2024, we reinvested in our core business, investing $20.9 million in capital expenditures, returned capital to our shareholders with dividend payments of $21.4 million, deployed $57.8 million to M&A, and repurchased approximately 200,000 shares of our common stock for $19.6 million. As part of our commitment to deliver value to our shareholders, on February 11th, our Board of Directors authorized a new share repurchase program of 2 million shares of the company's common stock, in addition to the approximately 580,000 shares remaining under our current repurchase program. Tennant's liquidity remains strong with a balance of $99.8 million in cash and cash equivalents as of the end of 2024 and $449.3 million of unused borrowing capacity on the company's revolving credit facility. Our net leverage was 0.48 times adjusted EBITDA, lower than our stated goal of 1 times to 2 times. Thanks to our strong cash flow generation and disciplined capital allocation strategy, we maintained our leverage and strengthened our balance sheet, paving the way for strategic acquisitions to be a growth opportunity going forward. Moving to guidance. As Dave mentioned, we plan to build on our 2024 momentum to drive order growth in the 3.5% to 7% range. Accounting for the impact of the 2024 backlog reduction headwind, this translates to a negative 1% to negative 4% organic sales decline in 2025. In addition to this organic sales decline, our net sales guidance also includes a foreign exchange impact of a negative 2% given the recent developments in the FX markets, particularly in Europe, Brazil and China. We anticipate a return to our historical quarterly sales seasonality patterns beginning in 2025 as our business will no longer be impacted by the elevated backlog levels of 2023 and 2024. This shift is expected to align our sales more closely with order demand. Typically, the first quarter and the third quarter of the year exhibit seasonally lower sales volumes. We will also focus on managing our costs, both at the gross margin and operating margin level. At the gross margin level, we anticipate favorable pricing actions and cost saving initiatives to drive expansion and outpace our inflation assumption of approximately 2% to 3%. Our guidance does not anticipate any unforeseen incremental costs from tariffs, but we are taking all the necessary steps to minimize our exposure. At the S&A level, the strategic restructuring action will provide approximately $10 million of savings to be used for strategic investments and to also help offset inflation. We will remain disciplined and prudent in our spending, focusing our investments in the areas that position us for future growth, including R&D spending and increased operating efficiencies. We are also targeting 100% conversion of net income to free cash flow on a full year basis, excluding the impact of the ERP modernization costs, which we anticipate will be approximately $50 million in 2025. We will continue our disciplined approach to allocating capital and maintaining a strong balance sheet. For 2025, Tennant provides the following guidance. Net sales of $1,210 million to $1,250 million, reflecting organic sales decline of negative 1% to negative 4%. GAAP EPS of $3.80 to $4.30 per diluted share. Adjusted EPS of $5.70 to $6.20 per diluted share, which excludes ERP costs and amortization expense. Adjusted EBITDA in the range of $196 million to $209 million. Adjusted EBITDA margin in the range of 16.2% to 16.7%. Capital expenditures of approximately $20 million and an adjusted effective tax rate of approximately 23% to 27%, which excludes an adjustment for amortization expense. With that, I will turn the call back to Dave.

David Huml, President and Chief Executive Officer (CEO)

Thank you, Fay. We have a few upcoming events if you wish to learn more about our company and the direction we are heading. In March, we will participate in two virtual investor conferences. The first on March 19th is hosted by Sidoti and the second on March 20th is hosted by CL King. With that, we will open the call to questions. Operator, please go ahead.

Operator, Operator

Thank you. And we will now begin the question-and-answer session. Operator instructions were provided. And your first question comes from the line of Steve Ferazani with Sidoti & Company. Your line is open.

Steve Ferazani, Analyst (Sidoti & Company)

Good morning, everyone. Appreciate all the detail on the call, covering an awful lot of ground. So I'll try to group my questions here because there's a lot to cover for sure. You talked quite a bit about expectations for 2025 margins. Generally, it's very hard to keep margins flat to even grow them in a declining revenue environment and we understand completely why the revenue is declining given the massive backlog conversion last year. That being said, your gross margin sequentially declined in the last three quarters, but you're saying it could be flat to up in 2025. I'm just trying to figure out how you get there given what have been clearly inflationary pressures. You don't have the benefit of price realization from backlog conversion. I'm just trying to figure out how you're comfortable getting to that.

Fay West, Senior Vice President and Chief Financial Officer (CFO)

Good morning, Steve. From a margin perspective, we are taking action to manage costs both from a COGS perspective as well as from an S&A perspective. When we look at the gross margin line, we're anticipating expansion in line with our long-term targets of roughly 30 basis points. When we look at all of the components of gross margin we think that cost-out initiatives that have been very successful for us in the past as well as productivity initiatives that we've implemented will more than offset inflation. We also believe that our pricing realization, net of any mix impact that we might be anticipating, will drive the gross margin expansion. So those are the components as we're looking at that.

Steve Ferazani, Analyst (Sidoti & Company)

Okay. And then with the restructuring that's resulting in $10 million in cost savings, is that all out of SG&A?

Fay West, Senior Vice President and Chief Financial Officer (CFO)

Some of it is—most of it is from S&A. There is some component that's coming from COGS as well. On a year-over-year basis, S&A is decreasing on an absolute spend. So year-over-year, we're going to be reducing the spend, but we are deleveraging slightly in 2025 just given the top-line performance. Most of the EBITDA expansion will come from our gross margin line.

Steve Ferazani, Analyst (Sidoti & Company)

Excellent. Appreciate that. You may have said it and we covered a lot of numbers. Did you give the Q4 order rates? And after that, if you could talk about trends in the first month and a half of 2025?

David Huml, President and Chief Executive Officer (CEO)

Steve, I want to make sure we understand your question. Are you asking about order rates in Q4 and then how the start of 2025 has been?

Steve Ferazani, Analyst (Sidoti & Company)

Yes. And then also if you can give any kind of color on how the start of 2025 has been?

David Huml, President and Chief Executive Officer (CEO)

Let me dimensionalize 2024 order rates. I'm really proud of what the team accomplished, although the impact was somewhat muted with the backlog reduction benefit on top of it. We were providing order rates in 2024 to give you a sense of the momentum we're building in the business. After a pretty tough start to the year in 2024 and Q1, we delivered almost double-digit order rates in Q2 through Q4. So in each quarter, Q2, Q3, Q4, we had about double-digit order rates year-over-year. We didn't specifically call out order rates in Q4 in the prepared remarks, but suffice to say that as a result of executing our enterprise strategy, we've developed significant momentum coming through the second half of the year and we exit the year with significant momentum in order rates, driven by execution of our Elevate strategy. When you look at our guidance, and you noted it, Steve, we have to overcome this mathematical headwind of the backlog reduction benefit. But when you look at the midpoint of our guidance, we're going to drive 5% to 6% order rates in 2025 to deliver on our plan. We think the momentum that we generated in the second half of 2024 gives us confidence that we've got the right set of actions in place and we'll continue to execute against our growth strategies to deliver on that 5% to 6% order rate in full year 2025 to deliver on guidance. It's worth noting 5% to 6% order rates is above our 3% to 5% long-term commitment for growth. If you look back at 2024, absent the backlog dynamic, we would have grown at 6% sales, if incoming order rates were 6%, we would have put up a 6% growth year. So that's a reason we have confidence in our 2025 guidance and feel good about the set of actions that we're executing against for growth.

Steve Ferazani, Analyst (Sidoti & Company)

That's great. If I could get one more, it's just about the share repurchase announcement last week. Typically, you've used the share repurchase just to offset dilution. This was a much bigger number. It's more than 10% of your float. Can you just give us a sense of the strategy here? Is there a time limit on this? And how are you changing the way you think about the share repurchase moving forward?

Fay West, Senior Vice President and Chief Financial Officer (CFO)

So there is no time limit on the share repurchase. If we look over the last few years, we've been in the market every year since 2021. From 2021 to 2024, we repurchased roughly 770,000 shares for roughly $60 million. Over that time period, we repurchased 770,000 shares. We continue to repurchase shares in the market and our primary focus is to offset dilution. But we can be opportunistic as well, and the authorization allows us flexibility and gives us runway over the next few years to execute against that strategy. Of course, share repurchases are part of our overall capital allocation framework where we're balancing all of our capital priorities, including returning value to shareholders via dividends, reinvesting in our business, maintaining the right leverage, and pursuing M&A. So it's part of our playbook and gives us the right runway.

Steve Ferazani, Analyst (Sidoti & Company)

Your guidance for 2025, is that assuming you're just offsetting dilution? So any kind of strategic purchases could lift that EPS number?

Fay West, Senior Vice President and Chief Financial Officer (CFO)

When we think about from a cash flow perspective how to utilize that cash, offsetting dilution has been our playbook, but we have the opportunity to pull that lever a little bit stronger if needed.

Steve Ferazani, Analyst (Sidoti & Company)

Okay. Great. Thanks, everyone.

David Huml, President and Chief Executive Officer (CEO)

Thanks, Steve.

Operator, Operator

And your next question comes from the line of Tom Hayes with CL King. Your line is open.

Thomas Hayes, Analyst (CL King)

Hey. Good morning, Dave. I appreciate the color and congrats on a nice finish to the year.

David Huml, President and Chief Executive Officer (CEO)

Thanks, Tom.

Thomas Hayes, Analyst (CL King)

Hey, Dave. I was just wondering, you provided a lot of color on geographic markets. Maybe just your thoughts on the opportunities for you guys in the Asia-Pacific markets in '25 after kind of a challenging '24?

David Huml, President and Chief Executive Officer (CEO)

Thanks for the question. It's certainly been a rough ride for us in APAC coming through 2024 and I want to acknowledge the significant efforts of the team on the ground in those geographies, operating in a challenging environment, a rapidly changing marketplace, particularly in China, which has required a significant amount of agility to manage through. Our planning assumption heading into 2025 is not for recovery in China specifically. We're acknowledging the reality on the ground and it will likely take governmental-level action at the country level for macro market recovery in China. That's not something Tennant is likely to be able to influence. Instead, we've acknowledged the operating environment within China and the halo effect throughout Asia-Pacific. We have noted signals of market uncertainty from Australia. We've taken steps to pivot our approach. For us, that means focusing on vertical market areas, product categories and customers where we think there's less competition and less price and margin pressure, and where we are advantaged to compete, whether that advantage is product performance, our service capability or our channel reach. We've taken a step back and said, if the market does not improve, what are we going to do to win in that environment? I'm really proud of the team demonstrating significant agility to adjust course heading into 2025 specifically in APAC. We are not counting on any recovery in APAC in our guidance; if we get any recovery, that would be a positive development for us. We're going to pivot and drive success in the market as it exists.

Thomas Hayes, Analyst (CL King)

I appreciate that. That's great. Maybe on the fantastic news on the X6 ROVR rollout. I think you said you start taking orders in Q2. Could you go over again the target markets for the product?

David Huml, President and Chief Executive Officer (CEO)

Glad you asked. We continue to be very bullish on our AMR opportunities. AMR solves for our customers' major challenges in the space of labor availability and labor cost. That's a global dynamic that will provide us a tailwind well into the future. Our products provide a solid customer ROI in solving that labor challenge. I'm proud of the results we've delivered in AMR over our first five years. Cumulatively, we've shipped over 9,000 units to about 900 customers in 25 countries, and generated about $250 million in profitable sales cumulatively over that period. If you straight-line $250 million over five years it's about $50 million per year, although AMR sales have not been linear due to product launches and large wins. 2024 was a breakout year with $75 million in AMR sales driven by the X4 ROVR reception and fleet repurchases of legacy products. We continue to scale the T16AMR industrial product and are benefiting from our Brain exclusivity agreement and participation in ARR from navigation software subscriptions. The X6 is the next evolution in the market disruption of robotics. We designed the X4 so we could easily scale it up and launch the next model. The X6 is coming to market about one year after the X4, which is very rapid product development for a robotic machine. The X6 also features a charging dock which allows the robot to charge itself and return to its charging dock without human interaction. Regarding vertical markets and use cases, think of it as a high-end commercial product and a mid-to-low-end industrial product. It fits larger retail store formats, large educational institutions, large hospitals and healthcare institutions on the commercial side. On the industrial side, it's a fit for manufacturing, warehousing, and logistics. We can sell the X6 across a very broad range of our vertical markets and activate our entire selling organization to take the X6 to market. It's another addition to the game-changing X platform for AMR.

Thomas Hayes, Analyst (CL King)

Just maybe a follow-up on that. Would you imagine that some customers would order both the X4 and the X6 or are they pretty separate?

David Huml, President and Chief Executive Officer (CEO)

I think it's possible but probably not the norm. The X4's cleaning capacity on one tank of water and one charge is around 20,000 square feet, while the X6 is about 75,000 square feet. I doubt that customers would want a combination fleet as the norm. They will likely size the appropriate piece of equipment for the site and then purchase multiples for that site or across multiple sites depending on their operations.

Thomas Hayes, Analyst (CL King)

Okay. I appreciate it. Maybe just one last question for Fay. On the ERP charges, I think you said in your prepared remarks about $50 million in charges in '25. I guess two parts. One, is there any view you could provide as far as how those charges progress during '25 and any split between S&A and capital between that $50 million?

Fay West, Senior Vice President and Chief Financial Officer (CFO)

The $50 million is a comprehensive view of the total project costs, which includes internal resources that support the project as well as things like license costs before go-live. The calendarization throughout the year is likely to be evenly split. There's nothing we anticipate being large in one month or one quarter versus another. We expect to see more expense in 2025 versus 2024. When you're in the design phase, you're able to capitalize more than during go-live. As you go live, certain components of those costs will be more likely to be expense versus capital.

David Huml, President and Chief Executive Officer (CEO)

If you think about flipping compared to 2024 where we had more of a 40/60 split, here you're going more expense on the 60/40 expense-to-capital basis.

Thomas Hayes, Analyst (CL King)

Cool. Appreciate the color. Thank you.

David Huml, President and Chief Executive Officer (CEO)

Thanks, Tom.

Operator, Operator

Your next question comes from the line of Aaron Reed with Northcoast Research. Your line is open.

Aaron Reed, Analyst (Northcoast Research)

Thanks for the opportunity and great quarter, David.

David Huml, President and Chief Executive Officer (CEO)

Thanks, Aaron.

Aaron Reed, Analyst (Northcoast Research)

So one thing I wanted to follow up on Tom's question, and I just want to make sure I have this correct. After the deployment of the X6, you're going to be up to five AMR products available, correct?

David Huml, President and Chief Executive Officer (CEO)

Correct.

Aaron Reed, Analyst (Northcoast Research)

Okay. So can you tell me a little about where those are deployed? I know a lot of those are starting in the U.S. How much of those have made their way across the pond? And what does that look like in terms of footprint for those different AMR products?

David Huml, President and Chief Executive Officer (CEO)

We have product deployed in 25 different countries. Our global selling and service organization is fully capable of selling and deploying AMR across the geographies we serve. Our cumulative units deployed to date roughly follow our geographic mix as an enterprise. We launched the X4 ROVR in Q2 in the U.S. and later in the second half in EMEA, so we haven't had a full year experience with X4 in any geography. 2024 showed a very positive customer response to X4. We have an opportunity with the X4 to drive accelerated adoption in mature and ancillary markets given its performance and price point. Our portfolio is designed to serve all of the core vertical markets across geographies. We aimed to have a robotics offering for all core vertical markets because labor challenges are consistent across verticals. The T7, T380 and T16AMR were developed to ensure full vertical market coverage. The X platform is a step change in maneuverability and performance; the X4 and future X products will continue to upgrade capabilities. We will continue to expand our reach as uptake accelerates across vertical markets.

Aaron Reed, Analyst (Northcoast Research)

Okay. Great. That's super helpful. Piggybacking off that, I thought there was a new manufacturing facility come online for the T16AMR in the Netherlands. Is that fully up and running? Can you tell me more?

David Huml, President and Chief Executive Officer (CEO)

Can you clarify your question? I'm not sure what you're referring to with a new manufacturing facility.

Aaron Reed, Analyst (Northcoast Research)

I misread. I thought there was a new manufacturing facility in the Netherlands, or is that not correct?

David Huml, President and Chief Executive Officer (CEO)

We do have manufacturing in mainland Europe, and we're evaluating where we build our AMR products for each of the regions, but we haven't launched a new T16 manufacturing line in the Netherlands.

Aaron Reed, Analyst (Northcoast Research)

Okay. Then my mistake. And then on the ERP side, can you provide an update on the status or any milestones you've achieved so far? How does the timetable look for completing the rollout? Lastly, how can we expect those benefits to be deployed throughout '25 and going forward?

David Huml, President and Chief Executive Officer (CEO)

This ERP consolidation is on an aggressive timeline. We plan to complete the program in three years. The first year was largely devoted to planning, partner selection and contract negotiation in 2023. 2024 focused on designing and building the system — gathering and scoping requirements and harmonizing processes. In 2025, we're moving into data loads and user testing to ensure the system performs as expected before go-live. That's the first half of 2025. In the second half, we'll have a series of staged go-lives by region and plan to complete those go-lives within calendar year 2025. This is an aggressive timeline and we're keeping pressure on ourselves to make progress. We are focused on minimizing potential risks of go-live and reducing impact on customers. We are spending time, effort, energy and investment to mitigate risk and insulate our customers. We'll keep you posted as 2025 is a pivotal year and as we approach regional go-lives.

Fay West, Senior Vice President and Chief Financial Officer (CFO)

At completion of the project, we anticipate seeing savings roughly between $10 million and $15 million on an annual run rate basis. That will come from efficiencies unlocked by harmonizing our ERP platform into one system.

Aaron Reed, Analyst (Northcoast Research)

Great. Thank you for the color.

Operator, Operator

And your final question comes from the line of Iva Prcela with Northcoast Research. Your line is open.

Iva Prcela, Analyst (Northcoast Research)

Hey. Good morning, guys.

David Huml, President and Chief Executive Officer (CEO)

Good morning.

Iva Prcela, Analyst (Northcoast Research)

You did talk a little bit about it on the call, but how much exposure do you have to parts manufactured in China? And what is your level of concern regarding potential trade wars?

David Huml, President and Chief Executive Officer (CEO)

Tariffs are top of mind for our operations, supply chain and commercial teams. To dimensionalize in the U.S., China is less than 10% of our COGS and represents around a $50 million exposure for the company. About $20 million of that is directly imported by Tennant, where we would be exposed to tariffs directly. The remainder is exposure through our suppliers who source subcomponents on our behalf or add value to subcomponents from China. Are we worried? Yes, but we're taking decisive actions to mitigate the impact. We have alternatives to offset tariffs including negotiating with suppliers, improving local-for-local sourcing, dual sourcing components to avoid tariffs, designing around tariff-challenged products over the longer term, and passing tariffs through in price if needed. Our preference is to mitigate internally using the capabilities we've built rather than reissuing new price changes, especially since we just set 2025 pricing in early January and are working to realize that impact.

Iva Prcela, Analyst (Northcoast Research)

All right. Thank you. That was super helpful.

Operator, Operator

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

David Huml, President and Chief Executive Officer (CEO)

Thank you. I could not be more proud of the results that our high-performing teams have achieved in 2024, and I'm really looking forward to our plans for 2025. I'm confident that we have the investments, initiatives, and talent in place to achieve our strategic objectives and deliver on our financial commitments. I want to thank you all for your participation today and your interest in Tennant Company. This concludes our earnings call. Have a great day.

Operator, Operator

Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.