Good morning. My name is Jesse and I will be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's 2019 Third Quarter Earnings Conference Call. This call is being recorded. There will be time for Q&A at the end of the call [Operator Instruction] Thank you for participating in Tennant Company's 2019 Third Quarter Earnings Conference Call. Beginning today's meeting is Mr. William Prate Director of Global Financial Planning and Analysis and Investor Relations for Tennant Company. Mr. Prate, you may begin.

Thank you, Jesse. Good morning, everyone and welcome to Tennant Company's third quarter 2019 earnings conference call. I'm William Prate, Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Chris Killingstad, Tennant's President and CEO; Keith Woodward, Senior Vice President and CFO; Tom Stueve Vice President and Treasurer; Andy Cebulla, Vice President of Finance and Corporate Controller; and Mary Talbott, Senior Vice President and General Counsel. Today, we will update you regarding our progress against our core strategies, our third quarter performance and our full-year guidance. Chris will first brief you on our strategies and operations and Keith will cover the financials. After our remarks, we will open the call up for questions. We are using slides to accompany this conference call. These slides, along with a replay of today's call, will be 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 these 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 affect our results. Additionally on this call, we will discuss non-GAAP measures that include or exclude certain items. Our 2019 third quarter earnings release include 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. Now I will turn the call over to Chris.

Thank you, William, and thanks to all of you for joining us today. Our third quarter results reflect our commitment to delivering consistent profitable growth in order to create long-term shareholder value. During the quarter we, once again, delivered positive organic growth and EBITDA expansion, while navigating mixed economic and market conditions worldwide. Specifically, our organic growth was 2.8% and we expanded EBITDA margins by 50 basis points over the prior year quarter to 11.2%. As we've shared with you in previous quarters, Tennant Company is moving from a period of strategic expansion during which we extended our geographic footprint and addressable market and we are now focused on unlocking the value and profitable growth potential of our broader platform. This will involve balancing -- rebalancing of reasonable growth with stronger EBITDA performance, which represents the core of the strategy we've been implementing and we're encouraged that the initial results of that strategy can be seen in our performance thus far in 2019. And our year-to-date and third quarter results signal that we are on the right track as we move forward and improving our operating model. As you may recall from our last earnings call, our strategy is based on three pillars in support of profitable growth. The first strategic pillar is winning where we have competitive advantage. We are evaluating all aspects of our business portfolio, including our products, geographies, channels, and customers to truly understand where we have the strongest competitive advantage. Tennant is a much larger and more diversified organization than it was three years ago. This gives us many strengths and advantages, but also underscores the importance of refining our business portfolio to optimize its capabilities. The second strategic pillar is reducing complexity and building scale across our products and operational and business processes. By…

Thank you, Chris, and good morning, everyone. Please note that in my comments today, references to earnings per share both GAAP and non-GAAP are on a fully diluted basis. Tennant's third quarter results reflect a number of factors from mixed end market conditions to our ongoing efforts to better balance our growth goals with profit enhancing initiatives. For the third quarter of 2019, Tennant reported net sales of $280.7 million, up 2.7% year-over-year. Organic sales, which exclude the impact of recent acquisitions and currency effects rose 2.8%. Our total organic sales growth demonstrates the value of diversifying our revenue streams. This growth is especially encouraging in light of the tough comparison to the strong organic sales growth in Q3 of last year, which rose 6.1% versus last year as well as softness across the European and Asia-Pacific markets this quarter. On the bottom line, we reported net earnings of $14.6 million or $0.79 per diluted share. On an adjusted basis, net earnings grew 15.8% to $11.7 million or $0.63 per diluted share. We are encouraged by our results for the quarter, which we believe reflect our ongoing operating model improvement efforts to expand our profitability. We will now take a closer look at our sales results. We group sales into three geographies; the Americas, which includes all of North America and Latin America; EMEA, which covers Europe, the Middle East and Africa; and Asia Pacific, which includes China, Japan, Australia and other Asian markets. Sales in the Americas region were up 6.2% or 6.7% on an organic basis, reflecting strong performance in North America and Latin America. The growth in North America was driven by demand for Tennant's autonomous cleaning machine, strength in the direct channel related to Industrial Equipment, and continued growth in the service and parts and consumables…

Thank you. [Operators instructions] Your first question comes from Chris Moore with CJS Securities. Your line is open.

Hey, good morning guys.

Good morning, Chris.

Good morning. Just start with the AMR. I know Walmart had talked about 1,500 autonomous scrubbers by the end of January 2020. Does that -- from your perspective, does that still look likely or might be a little bit aggressive for kind of the pace that you're seeing?

No, I think we're on track with both Walmart and our expectations regarding the rollout of AMR for this year and moving into next year. Good news is that we are also beginning to sell AMR units to other customers in North America and our interest continues to build. We've commercialized in Japan and are looking at expanding in other parts of Asia Pacific. And as we said in the call today, we are introducing AMR in Europe this month. So, we are extremely pleased with the progress we're making so far with AMR and we think we are in a leadership position.

Got it. And is it reasonable to think that there is additional sales to Walmart coming in 2020 or too early for that to know that?

Chris, we don't comment on customer orders. That was a fairly unique situation with Walmart when they announce their initiatives. So, we as a general rule, we do not comment on that.

Got it. R&D, it's been roughly $8 million a quarter or so. Is that kind of the level that where it will be at moving forward, or is there kind of additional expenditure coming there?

Yes, it's a bit of timing, Chris, and it's related to just kind of the ramp up on a lot of our innovation efforts, which have been more back-end loaded this year. I will tell you, it's in the areas we want to continue to innovate on. A lot of work in old robotic space and we continue to like that space and invest accordingly.

Got it. The two products that you talked about discontinuing, the ATL and Sentinel, did they contribute significantly to revenue for the first nine months of this year?

Yes, it's -- it's not a huge amount for us, Chris. It's in the $15 million to $20 million range on an annual basis. We will still be in the market with those partially through 2020, and out of those businesses really in the back half of 2020.

Got it. It's helpful. And we've been through this a little bit, but -- so if the -- my understanding is a longer-term EBITDA target, let's just say that's 15%. Gross margins were improved this quarter. I'm still trying to get a sense even though I know EBITDA is the focus, is there kind of that mix between improved gross margin and improved -- better absorption, better -- on the operating expense side. Is there a level on the gross margin that you're targeting as well?

I've talked about this before, Chris. We have to get it in all parts of the P&L. So in terms of our focus on efficiency efforts and kind of our cost out, making sure we are handling any increases as it come at us in the way of tariffs, inflation etcetera. We have to make sure our gross margins are right and we'll continue to focus on that, but also all the way through the P&L. So it's safe to assume it's going to come from both areas and we like the performance that we're seeing on gross margins for the year and we are going to keep focused on that as well as our S&A costs going forward. So it will be a combination of both.

Got it. Okay, I appreciate it. I will jump back in line.

All right. Thanks, Chris.

[Operator Instructions] Your next question comes from Marco Rodriguez with Stonegate Capital Market. Your line is open.

Good morning, guys. Thank you for taking my questions.

Good morning, Marco.

I was wondering if -- hey, I was wondering if you can maybe talk a little bit more about the Americas and the growth you saw there. Pretty strong organic growth of just shy of 7% and you had a pretty nice organic growth rate in the prior year quarter as well. You’ve kind of pulled out the T7 the direct channel services. Maybe if you can kind of rank where the strength was that kind of drove that organic comp there would be helpful.

Yes. No, I would say that it's across all those categories. I mean, we've said that the T7 AMR was a significant contributor to sales in the third quarter and most of it or all of it still in North America. But we were pleased to see kind of a strength in the industrial direct channel, which is our historical sweet spot and also has the highest margins. That part of the business also tends to draw the most parts in consumables, which also are high margin businesses and that came through as well. What I would say about North America, it has been the most robust market for us through all quarters this year. And now you saw the declines in EMEA and in APAC. So those markets, I think, just holistically across all markets in Europe are fairly weak right now, whether it's short term or long term, I think that's anybody's guess. We have seen a significant drop-off in activity in China. In North America, it has remained robust, but I think we are signaling that there is a little bit of a slowdown that we're seeing in the North American market too, again, based on what's happened over the last two, three years, we've seen slowdowns and then they ramp back up. So, there's no way for us to tell at this point, if it's just a lull in the action or a more sustained step down in business activity as we move into 2020.

What I would add to that too, Marco, is just you know innovation continues to be the driver and the demand for innovation in robotics is a very positive initiative, certainly in North America, but certainly globally as well. So that will continue to be a big support and focus for us.

Yes. And I think that's been a differentiator for us versus our competition. You may have seen, the only company in our industry that publishes results publicly is Nilfisk and they’re struggling in all geographies including North America, and I think that puts our performance in a much more favorable light. We like our position.

Got it. That's very helpful. Just wondering as well though, I know that obviously nobody has -- no one has a perfect crystal ball, but from what you're hearing from your clients in North America and in Asia, specific to China, I think this is the first time you guys have called out China as far as starting to see some weakness there and you're obviously saying that the Americas seem to be kind of softening a bit. I mean, what is the feedback that you're receiving for this sort of change in outlook, if you will.

Well, in China, we -- our business is split into two. We have an extensive dealer network and we have an emerging kind of a direct sales and service business. And the two parts of it perform differently, but the dealer business is still by far the biggest. That's where we saw the slowdown where dealers felt they had enough inventory and really pretty much stopped ordering in the third quarter to draw down inventory in these more uncertain conditions. So whether that's to be sustained or not, I don't know. But the good news is, is that the direct sales and service channel we're building it is growing and continues to gain momentum. So that's a positive sign for us going forward and we very much like to see that be a bigger and bigger part of our sales mix in China over time. Now having been at Tennant since 2002 and seen a lot of ups and downs and recessions and all of that, for us the key signal historically has been when our U.S customers start to delay their orders, meaning that they place them and then they keep delaying them. We are not yet seeing that. One of the things we are facing is that we are coming off a period of a lot of really big deals, right, that have positively impacted our sales. So I think that what it is, is that there are customers out there that are being a little more cautious in deciding when is the right time to pull the trigger on replacement of large fleets, big deals that could come to us. So that's the one piece we're watching carefully. But the kind of day-to-day up and down the street business, so far we're not seeing the traditional signals that precede past market downturns.

Got it. Very helpful. Then shifting now here to the gross margins, you guys brought out positive pricing mix, lower freight costs and overall reductions of manufacturing expenses. Can you talk a little bit about the pricing aspects. I think you kind of touched on the mix, maybe with the direct channel being the higher percentage of your overall sales. But did you push through some significant increases in prices across the board or can you just kind of help us think through these different buckets?

Yes, I mean we took pricing this year, Marco, and what I would say is we got ahead of it at the beginning of the year where if you go back to 2018, we are a little bit behind. We didn't see the tariffs coming, we didn't see the inflation, the freight costs that were going to hit us in 2018. So we took mid-year pricing in 2018, and I would tell you that we got ahead of it and took it in January for 2019, so that's carrying through that first half of the year, which really helped our gross margins and we're sustaining that in the back half. And on a relative basis, pricing a little bit more in 2019 than 2018.

Got it. Helpful. And then last quick question here, just kind of understand a little bit more on the SG&A side, in your comments earlier to an earlier question. Obviously, you need to take actions here on your gross margin level. And then your OpEx side to hit those EBITDA margin targets. With the add back of the contingent consideration you're running around $88 million; in the prior two quarters you were $90 million and $92 million. Just trying to get a sense of how much more can you take out of the SG&A line, assuming obviously you don't want to take too much away from R&D, given the innovation part of your strategy.

Yes, it's like I said before, Marco, I just tell you, I think there are continued opportunities in all parts of the P&L. I like what we are doing on our cost out and just kind of productivity initiatives and cleaning up our portfolio and really getting focused on the gross margin side. And then I would tell you, on S&A, I think as Chris said in his earlier comments, that will start to streamline our processes and feeds through. So I think there are additional opportunities there to continue to just, how do we grow into being kind of this large organization and getting more efficient processes across the organization? Really getting focused on where things matter and taking more of a disciplined approach to a lot of our professional services, etcetera. So I still see opportunities for us in that space and we will continue to focus on it and get after it.

I would also say that to get after that and to actually get to the efficiency levels that we think are possible, it's going to take some short-term investments in areas like service and IT to ensure we’ve the appropriate enablers to make that happen.

In the way we are going about that is, we are just being very thoughtful about as we see that kind of appear, if you will, throughout the P&L, then we earn the right to invest in those things and do it in a disciplined fashion.

Got it. Understood. Appreciate your time, guys.

Thanks, Marco.

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

Thanks, Jesse. So thanks again for joining us today. So, as a final note, we will be hosting an Investor Day on March 10, 2020 in New York City. We are looking forward to providing investors with an end up and comprehensive look at our strategy, operations and goals and we look forward to seeing many of you there. So, this concludes our third quarter earnings call. Thank you and have a nice day.

This concludes today’s conference call. You may now disconnect.