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Tennant Co (TNC 2.93%)
Q3Â 2020 Earnings Call
Oct 29, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to Tennant Company's 2020 Third Quarter Earnings Conference Call. This call is being recorded.
[Operator Instructions] Thank you for participating in Tennant Company's 2020 Third Quarter Earnings Conference Call. Beginning today's meeting is Mr. William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations for Tennant Company.
Mr. Prate, you may begin.
William Prate -- Senior Director, Investor Relations
Thank you, Chris. Good morning, everyone, and welcome to Tennant Company's third quarter 2020 earnings conference call. I'm William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Chris Killingstad, Tennant's President and CEO and Andy Cebulla our Interim CFO. Our Chief Operating Officer, Dave Huml, is tending to a family matter today and is not able to join the call.
On today's call, we will update you regarding our third quarter performance and full-year outlook. Chris will brief you on our operations and the progress we're making toward our enterprise strategy, then Andy 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 file 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 2020 third 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'll now turn the call over to Chris.
Chris Killingstad -- President & Chief Executive Officer
Thank you, William, and thank you, everyone, for joining us today. We hope that you and your loved ones are managing to stay safe through this pandemic. As you may have seen, in September, we celebrated Tennant's 150th anniversary.
While our current operating environment could not be more different than what our founder George Tennant encountered in 1870, the Company has always maintained a tradition of innovation and resilience, demonstrated by our ability to adapt and stay relevant to our customers.
When the pandemic started, we were quick to respond and established three guiding principles; to keep our employees and customer's safe, to manage our costs and cash flow, and to stay in a position to ramp up quickly when markets recover. At the same time we honored our commitment to provide our customers with the innovative solutions they needed to keep their facilities clean and safe.
We continued with that approach in the third quarter and saw encouraging signs of recovery across all of our regions. Our global teams have worked hard in overcoming the unprecedented sales and operational challenges resulting from the pandemic, and we work closely with our customers, supply chain partners, and carriers to avoid operational disruptions.
Furthermore, the execution of our Enterprise Strategy yielded improvements in our operating performance with third quarter EBITDA growth, despite a year-over-year COVID-19 related decline in organic sales. While the pandemic continues to pose considerable macro level uncertainty, especially as some markets see spikes in COVID 19 cases, we have a high level of confidence in our near-term business outlook.
As Andy will speak to in a few moments, we are reinitiating our full year guidance for 2020 which not only reflects our revenue and profitability expectations, but also our commitment to investing in our business to support our long-term enterprise strategy. That strategy includes, winning where we have competitive advantage, reducing complexity and building scalable processes, and innovating for profitable growth.
While the global pandemic impact or the economic impact of the pandemic is nothing anyone could have predicted a year ago, it has not diminished our ability to execute on our enterprise strategy because the key elements are all within our control. For example, while innovating for profitable growth might sound like a lofty ideal; for Tennant it represents how we take customer insights and leverage our tremendous engineering capabilities to solve real world problems.
A recent illustration of this commitment is our October 1st introduction of our new T380AMR, which complements our current robotic offering by providing a smaller-sized machine that enhances maneuverability and navigation to help customers with smaller footprints. This new product and our continued partnership with Brain Corporation enabled us to finalize agreements in the third quarter to provide two national retailers and a separate regional retailer with our full suite of autonomous floor scrubbers.
Additionally, we are starting to achieve wins in additional verticals like logistics, education and aviation. Following our initial roll-out with Walmart earlier this year, wins like these demonstrate how we're continuing to lead with innovation and deliver value to a more diverse customer base.
In support of our enterprise strategy, we recently hired Dan Glusick as our Senior Vice President of Operations, reporting directly to our COO, Dave Huml. Dan has broad enterprise leadership and deep functional expertise across all aspects of manufacturing operations, supply chain management, and enterprise transformation and he brings more than 25 years of Global Operations leadership experience to Tennant.
Dan is an important hire and will play a critical role in the implementation of our Enterprise Strategy as we advance our supply chain and optimize our operations to support our product standardization and local for local initiatives. In short, this is an important area of focus as we position Tennant for success in a post pandemic world.
Lastly, given the improving demand trends that we've seen since May and our confidence in the improved trajectory of our business, we recognize the need for strategic investments to support the continued execution of our strategy, to backfill key leadership roles, and to recognize and retain our best talent. This is core to the guiding principles we outlined at the start of the pandemic.
We began making such investments in Q3 and we'll continue to do so in Q4. They are essential to how we can support our customers, emerge strong as markets recover, and continue to drive shareholder value.
With that, I will now turn the call over to Andy.
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Thank you, Chris, and hello, everyone. Please note that in my comments today, any references to earnings per share, both GAAP and non-GAAP, are on a fully diluted basis. As Chris noted, while Tennant's third quarter results reflected the continuing impact of the pandemic, we did see some encouraging trends across all of our regions.
Overall, for the third quarter of 2020, Tennant reported net sales of $261.9 million, down 6.7% year-over-year. Organic sales, which exclude the impact of currency effects declined 7.1%. This represents the significant improvement in our sales trajectory when compared to the 27% decline we experienced in the second quarter.
For the third quarter, we reported net earnings of $11.7 million or $0.63 per share, down from $14.6 million or $0.79 per share in the year ago period. Adjusted EPS, which excludes certain non-operational items and amortization, totaled $0.90 compared with $0.85 in the prior year.
We'll now take a closer look at our third quarter sales results by geography, which we divide into three regions; 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 Asia markets.
Sales in the Americas declined 9.9% year-over-year and were down 8.8% organically. Declines in direct Industrial business sales and distributor sales were partially offset by the continued success of Tennant's AMR platform and strong growth in Brazil.
Sales in EMEA declined 0.3% or down 4.5% organically in the quarter as a result of market weakness across the region. The declines were mainly in the United Kingdom and the Iberian Peninsula, which offset growth we experienced in France and Italy.
Sales in the APAC region declined 0.8%, down 2.3% organically. Declines in Southeast Asia and Korea were partially offset by growth in direct sales in Australia.
Overall, the Company's service and parts and consumables business trends continued to be a bright spot. While equipment sales were down approximately 12% year-over-year for the quarter, aftermarket revenue was up 6% over the same period last year, reflecting our efforts in helping customers meet their rapidly evolving cleaning needs during the pandemic.
Now onto margins. Adjusted gross margins during the third quarters of 2020 and 2019 were 40.2% and 40.8% respectively. The year-over-year decrease reflects a number of strategic investments and deleverage on lower volume which were partially offset by cost out actions driven by strategic initiatives.
Turning to expenses, during the third quarter, our adjusted S&A expenses were 29.8% of net sales compared with 31.2% in the year ago period, mainly as a result of cost containment efforts and adjustments to management incentives. This included a number of strategic investments that we made during the quarter. Given the macroeconomic uncertainties created by the pandemic, careful S&A management continues to be an important part of our response.
Combining these results, our EBITDA in the third quarter of 2020 was $32.6 million or 12.4% of sales compared with $31.4 million or 11.2% of sales in the third quarter of 2019. The increase as a percent of sales was attributed to adjustments to management incentives and reductions in discretionary spending that were implemented in the quarter.
As for our tax rate, in the third quarter, the Company had an adjusted effective tax rate of 11.3% compared to 16.1% in the year ago period. The lower tax rate primarily resulted from an increase in discrete tax items in the quarter and a favorable mix of earnings.
Turning now to cash flow, capital allocation and balance sheet items. In the third quarter of 2020, Tennant generated $48.9 million in cash flow from operations, primarily driven by business performance and improvements in working capital. Also in the third quarter, we repaid an additional $17 million of debt. As of September 30th, we had $124.7 million in cash and cash equivalents, and approximately $172 million of undrawn funds on our revolver.
Lastly, turning to guidance. As you may recall, in April, we withdrew the full-year guidance we had provided in February due to the uncertain nature of the pandemic. While there is still uncertainty in the market, we do have a higher level of confidence in our near-term projections and we are reinitiating full-year guidance for 2020.
As included in today's earning announcement, our full year 2020 guidance is as follows; Net sales of $995 million to $1,005 million with organic sales declining 12.5% to 11.5%; GAAP earnings of $2.00 to $2.20 per share; adjusted EPS of $2.80 to $3.00 per share, which excludes certain non-operational items and amortization expense; adjusted EBITDA in the range of $116 million to $121 million; capital expenditures of approximately $35 million; and an effective tax rate of approximately 17%.
It's worth mentioning that our guidance does include approximately $5 million to $8 million of government benefits, which is primarily driven by the wage subsidies we received and mentioned in our second quarter results. Also, and as Chris noted, this guidance incorporates continued investing in our business to support our enterprise strategy.
At the same time, while we believe the underlying business performance is improving and we expect our revenue will continue to increase sequentially quarter-over-quarter, it's important to note that organic sales would reflect a difficult year-over-year comparison as Q4 2019 was Tennant's second highest revenue quarter ever. As a result, we are anticipating that our implied fourth quarter organic decline will be greater than the third quarter; and due to the continued strategic investments that I just mentioned, our anticipated EBITDA dollar and percent of revenue will be lower than previous quarters.
With that, we will now open the call to questions. Chris. Please go ahead.
Questions and Answers:
Operator
Thank you. [Operator Instructions] The first question is from Michael Shlisky from Colliers Securities. Your line is open.
Michael Shlisky -- Colliers Securities -- Analyst
Hey, good morning everybody.
Chris Killingstad -- President & Chief Executive Officer
Hey Mike.
Michael Shlisky -- Colliers Securities -- Analyst
I wanted to ask first about the T380 and how it's gone so far. You had mentioned there has been some adoption from several customers. I'm not sure, are those just tests or are they going full scale for the entire chains. And just give us a sense as to what the kind of more recent trial rates are on that products since the launch?
Chris Killingstad -- President & Chief Executive Officer
Yeah. So the -- in the third quarter, we actually did started rolling these out to the retailers that we -- that we referenced so that we are in full sales mode. We launched it officially on October 1st. All the demo and all that happened prior to that period. So, we did have some sales of the 380AMR in the third quarter and we're excited with the prospects of that product going forward, given that it is relevant in facilities with smaller footprints, requiring greater maneuverability. And we think that business [Phonetic] like aviation, logistics, education, healthcare and retail with smaller footprints is really the core target market for the product.
Michael Shlisky -- Colliers Securities -- Analyst
Okay, just to clarify, you said in your remarks that you had finalized agreements with several national and one regional store for a full scale suites of autonomous scrubber, but is that in all their stores or just for a couple of stores as a test?
Chris Killingstad -- President & Chief Executive Officer
Yeah. So it is -- you know that's for all of their stores in the first phase. It is for a significant number of their stores in the first phase. So it's not just a couple of units test, no. This is being rolled out broadly.
Michael Shlisky -- Colliers Securities -- Analyst
Excellent. So if we also step back to last quarter, I wanted to follow up on a previously new product, the CT5 and CS5. You mentioned those were also good. They were not autonomous of course, but they are good products for smaller spaces as well. Curious as to how those efforts are going so far?
Chris Killingstad -- President & Chief Executive Officer
Yeah. No, so, they continue to perform well. They -- we did not have right product for small space cleaning at the right price point to get people to proactively start switching from mop and bucket to automated to -- or to mechanized cleaning. These products both in North America and in Europe are off to a great start. So this is a market where we've been underrepresented and we're excited by the prospects going forward.
Michael Shlisky -- Colliers Securities -- Analyst
Okay. So maybe lastly from me. Over the last, I think it was two quarters, you've been talking about how there has been a theory out there that this pandemic has -- had a lot of companies questioning or reconsidering how they clean their spaces and there could be some additional business to be had if they choose to go ahead and make a more intensified cleaning effort going forward.
Any news as to whether you're hearing some big customers make some real permanent changes to their sanitation policies beyond the pandemic?
Chris Killingstad -- President & Chief Executive Officer
Yeah, I mean we've said over the last couple of quarters that really what -- the focus remains on high-touch cleaning areas, disinfecting and sanitization. We do still believe that a more robust cleaning protocol would be put in place realistically in the future. We're not seeing a dramatic move in that direction yet.
So what we would say is that our service and aftermarket business, as Andy indicated, is up 6% in the quarter, much higher than our equipment revenue. That's often a leading indicator of more cleaning activity happens, because what the customers do before they buy new equipment, they tend to use their existing equipment more intensely that it requires more service and aftermarket.
So historically anyway, it's been a leading indicator that more robust cleaning is starting to take place outside the high touch sanitizing and disinfecting. We're monitoring that trend and hopefully it also starts to lead into equipment sales growth in subsequent quarters.
Michael Shlisky -- Colliers Securities -- Analyst
Got it Chris. That's great color. I appreciate it. I'll pass it along.
Chris Killingstad -- President & Chief Executive Officer
Sure. Thank you.
Operator
The next question is from Marco Rodriguez with Stonegate Capital Partners. Your line is open.
Marco Rodriguez -- Stonegate Capital Partners -- Analyst
Good morning guys. Thank you for taking my questions.
Chris Killingstad -- President & Chief Executive Officer
Good morning, Marco.
Marco Rodriguez -- Stonegate Capital Partners -- Analyst
Hey, I was wondering if maybe we could talk a little bit more on the cost reduction actions here. You provided some nice color in terms of the wage benefits you received that just sort of at least implies helping you obtain the gross margin expansion you saw year-over-year despite the volume declines.
I'm just trying to get a little bit better of a handle here on once we sort of clear the major uncertainty related to the pandemic, I'm just trying to get a little bit better of an understanding of where perhaps your normalized S&A run rate is at? Also trying to kind of layer in some of the -- it can be issues or not issues, but the strategic initiatives that you're sort of putting through to reduce cost as well. Just trying to get a handle on that.
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Yes. So we won't get specific on the numbers of improvements we had in both margin and S&A, but we've been talking about in past quarters we certainly have seen, you know our strategy is playing out nicely and we certainly see benefits from that in -- saw it in Q2, saw it again in Q3. So continuing to play out nicely.
It's just obviously muted by the pandemic right now and the lower volumes that we're experiencing and in some of the investments we're making, frankly, in both the cost of sales and the S&A area. So, without getting into specifics, just rest assured, we are making progress on our strategy and we do think -- you know we talked about longer term, we talked about that 50 basis point to 100 basis point EBITDA expansion and I think I'd focus kind of thinking about in that respect rather than getting specific on margin or S&A, just think about that as we exit this pandemic, that's still our goal, it's still our commitment and that's something we think it's certainly within our reach.
Marco Rodriguez -- Stonegate Capital Partners -- Analyst
Got it. And then I know this is a difficult question, perhaps to answer. But I mean if you kind of try to strip away the situation that everybody find themselves in right now, is there any way you can sort of give us a measuring stick as far as where you are in obtaining that 50 basis point to 100 basis point leverage on the adjusted EBITDA line?
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Yeah, you're talking for 2020. We've talked about this in the past. Part of that is volume dependent. So we certainly can make impacts or things to our -- toward the way we manufacture and you get a lot of those benefits as the volume goes up. So I'd say and we talked about last quarter, I'd say we certainly haven't slowed down on how we're focusing our improvement efforts in executing our strategies. We haven't slowed that down.
We think we are positioning ourselves well to take advantage of the improvements we've made as volume comes back. So I would say we're on track, although it's muted for -- through 2020 because of the pandemic. But we're certainly on track for how we feel about our strategy being implemented.
Marco Rodriguez -- Stonegate Capital Partners -- Analyst
Got it. That's helpful. And then just kind of switching onto or staying on the topic of your strategic initiatives, specific to the process improvements and reduction of manufacturing complexity to your business. Is there any sort of data or specifics, again notwithstanding the pandemic and the issues that that has brought in terms of your volumes. Are there any sort of information that you can kind of point to investors that show or demonstrated that you're kind of moving in the right direction and improving those areas?
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Yeah, the one thing I'd say, just if you look at the bottom line impact, you think of our EBITDA last year at 12% was a record and the guidance we're implying certainly has resulting in near that level from a rate perspective, despite being down, call it roughly 12% at the midpoint of our guidance. So that to me is an internal way we can point to that and you can see that in our guidance reflected there.
And if you think about, roughly we're guiding to a midpoint around $1 billion. And if you look back at history, the last time we're at $1 billion, our EBITDA was substantially lower in terms of dollars. So there is just some guide points you can point to, facts that just say that we certainly made progress in the last year or two in how we're executing our strategy and how we're focusing differently as a company.
Marco Rodriguez -- Stonegate Capital Partners -- Analyst
Got it. And then last question, just kind of wondering if you could perhaps update us on any sort of supply chain issues or disruptions or kind of give us some color in terms of how that's working for you guys right now?
Chris Killingstad -- President & Chief Executive Officer
Well, I think we stated in the script that that's one of the things we worked intensely on and today we have no material disruptions in our supply chain. And with our suppliers in terms of with our freight providers and we are really able to deliver to our customers on time and in the quantities they need. So all of that is going extremely well.
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Yeah. And just to build on that, we talked about that in prior quarters. Initially as the pandemic rolled out that was one of our first concerns. Obviously, we first all heard about it in China, but the team has done a wonderful job really mitigating that any kind of risks we have with suppliers, finding maybe multiple sources for goods. And I think they've done a really nice job. So just to echo Chris' point, we really haven't had any issues to-date. It is something we continue to watch closely and we'll monitor it as we go forward, but so far no issues.
Marco Rodriguez -- Stonegate Capital Partners -- Analyst
Got it. Thanks a lot guys. I really appreciate your time.
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Thanks Michael.
Chris Killingstad -- President & Chief Executive Officer
Thanks Michael.
Operator
The next question is from Chris Moore with CJS Securities. Your line is open.
Brendan Popson -- CJS Securities -- Analyst
Hi guys, this is Brendan on for Chris. I just want to ask about comparing this environment to 2008, 2009 environment, obviously it's a little different circumstances, but it took about three years like FY '11, when revenue returned to your '08 level. Can you talk about similarities and differences and is it reasonable to think you can return to FY '19 revenue levels more quickly this time around and just like to hear your thoughts there.
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Yeah. So, today, obviously we're not giving guidance for 2021. So it's difficult to predict. What we said there and just to be clear was, we have a greater visibility to the near-term and that's why didn't felt comfortable giving the guidance for the rest of this year and you getting -- it's three months. And we're not going to talk about 2021.
So there's still lot of uncertainty in the market. It's still a lot -- a lot of things will have to play out to understand. There are some good trends know like Chris talked about. And I mentioned in my remarks service is up year-over-year for the quarter and that -- in '08, '09, that was the way that guided us out of that recession. And so it's a possibility, I should say, that that could be the same thing here. So we're monitoring that, but it's a positive sign at this point.
Chris Killingstad -- President & Chief Executive Officer
Yeah, you know this is a very different situation than 2008. But -- and who knows what the results are going to look like in 2021, I think nobody really knows at this point, given all the uncertainties. But what I would say is that, if you compare us today versus 2008 on the input side of the equation, we have more positive good things going on with our GPS strategy, with AMR small space cleaning and other initiatives that bode well for the future once markets recover.
Brendan Popson -- CJS Securities -- Analyst
Great. That makes sense. And then, with -- looking at autonomous sales, could you speak to how they impacted Q3 and then moving forward?
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Yeah, like I said in my remarks, there continue to be positive trend. So like in Q2 that was a bright spot for us, even despite the large decline. Same with Q3, that was a positive trend for us. It was up year-over-year and not an easy comparison. But we won't get specific on that, but it was certainly up for year-over-year. We feel good about it and we feel good about our future prospects in that with the new product launch and the position we have in the market.
Chris Killingstad -- President & Chief Executive Officer
Right. And we're starting to diversify our customer base with AMR, which is a good sign. I know we've been -- a lot us have been capacity constrained on our part. So we focused mainly on retail and large retailers. I mean now that -- we now have a regional retailer on board and we're diversifying into some other verticals like logistics and aviation. So I think that's a really positive sign. So, it says that we've been able now to shift our focus a little bit, continue to do well on the retail side, but we're seeing interest in other verticals starting to increase, and we have those relationships and we believe that our solution is superior and we have great chances of winning many of those contracts as they -- as they come up for bid.
Brendan Popson -- CJS Securities -- Analyst
Great, thank you. I appreciate it.
Chris Killingstad -- President & Chief Executive Officer
Thank you.
Operator
[Operator Instructions] Our next question is from Brett Kearney with Gabelli Funds. Your line is open.
Brett Kearney -- Gabelli Funds -- Analyst
Hi guys, thanks for taking my question and great execution, and then obviously, very difficult market environment here.
Chris Killingstad -- President & Chief Executive Officer
Thank you.
Brett Kearney -- Gabelli Funds -- Analyst
So I guess with the strength you're seeing in the aftermarket part of the business and given how that typically, as guided in past recoveries, could you provide any color on kind of how that's trending maybe geographically. And then also at maybe a high level, what the profile of the service parts and consumables profile is of the AMR platform?
Chris Killingstad -- President & Chief Executive Officer
Yeah from a geographic perspective, it's fairly consistent across the regions. So it's a positive trajectory across all regions, which is a good sign, some a little more than others, obviously, but it's fairly consistent. I mean you think of AMR there's certainly an opportunity for that down the road, it's still fairly early in that process and that AMR is relatively a new product still, you know less than a year or two. So we haven't seen that fully play out yet. But we think it's certainly an opportunity as we go forward.
Brett Kearney -- Gabelli Funds -- Analyst
Okay, great, thank you so much.
Chris Killingstad -- President & Chief Executive Officer
Thank you.
Operator
Since there are no further questions at this time, I'd like to turn the call back over to management for closing remarks.
Chris Killingstad -- President & Chief Executive Officer
Thank you, Chris. So before we conclude, I want to thank our global Tennant team members for their support and dedication during this ever changing environment from our sales and operations teams to our service tech and everyone across the globe.
They are the ones allowing us to support our customers' needs and, at the same time, helping us secure our leadership position in our industry. We have a great team and I truly appreciate their dedication and support.
With that, thank you, again, for joining us today. This concludes our third quarter earnings call. Be well everybody.
Operator
[Operator Closing Remarks]
Duration: 34 minutes
Call participants:
William Prate -- Senior Director, Investor Relations
Chris Killingstad -- President & Chief Executive Officer
Andy Cebulla -- Vice President, Finance and Corporate Controller & Interim Chief Financial Officer
Michael Shlisky -- Colliers Securities -- Analyst
Marco Rodriguez -- Stonegate Capital Partners -- Analyst
Brendan Popson -- CJS Securities -- Analyst
Brett Kearney -- Gabelli Funds -- Analyst
