Good morning. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's Fourth Quarter and Full Year Earnings Conference Call. This call is being recorded. There will be time for Q&A at the end of the call. [Operator Instructions] Thank you for participating in Tennant Company's 2019 fourth 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, Chris. Good morning everyone and welcome to Tennant Company's fourth quarter and full year 2019 earnings conference call. I am William Prate, Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Chris Killingstad, Tennant's President and CEO; Andy Cebulla, our Interim CFO, Tom Stueve, Vice President and Treasurer and Mary Talbott, Senior Vice President and General Counsel. Today, we will update you regarding our progress against our core strategies, our fourth quarter and full year performance and our guidance for 2020, Chris will brief you on our strategies and operations and Andy will cover the financials. Our remarks -- excuse me, after our remarks, we will open the call up for questions. Please note our 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 risk and uncertainties and our actual results may differ materially from those contained in the statements. These risk 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 risk and uncertainties that may affect our results. Additionally, on our conference call we will discuss non-GAAP measures that include or exclude certain items. Our 2019 fourth 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'll turn the call over to Chris.

Thank you, William and thanks to all of you for joining us today. In 2019 we made meaningful progress in improving our operating model and achieved record revenue and EBITDA for the full year on top of a strong 2018. General strength in our Americas business which has recorded 10 consecutive years of organic growth offset the effect of continued broad-based macroeconomic challenges in Europe and China. Our fourth quarter was characterized by continued organic revenue growth with pricing and cost-saving initiatives that helped to offset tariffs and material inflation. Our overall Q4 and full year results demonstrate our ability to manage reasonable growth with improved profitability. While we are in the early stages of our operating model improvement plan, we believe the momentum we've established will help drive shareholder value through this year and beyond. Today, I'd like to provide a deeper dive into the key elements of that plan. As we've discussed our enterprise strategy, which we call our global positioning strategy or GPS is based on three pillars in support of our value creation objectives. One, winning where we have the competitive advantage; two, reducing complexity and building scalable processes; and three innovating for profitable growth. The first pillar winning where we have a competitive advantage is based on a thorough evaluation of all aspects of our business, including products, market geographies, channels and customers in order to identify where we have the strongest competitive advantage. Our key initiatives in this regard are to simplify our product portfolio, strengthen our local advantage and optimize our customer portfolio and go to market capabilities. In simplifying our product portfolio, we will streamline, rationalize and invest where needed with the goal of enhancing value for our customers and for Tennant. In doing so, we will discontinue certain categories and products…

Thank you, Chris and good morning 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. Tennant's fourth quarter results reflect a number of factors and demonstrated our ability to manage reasonable growth with improved profitability. As Chris mentioned, we made meaningful progress throughout 2019 in improving our operating model and these improvements allowed us to achieve record level revenue and EBITDA for the full year. For the fourth quarter of 2019 Tennant reported net sales of $294.8 million, up approximately 3.4% year-over-year. Organic sales, which exclude the impact of recent acquisition and currency effects, rose 2.8%. On the bottom line, we reported net earnings of $10.9 million or $0.59 per share, up from $7.7 million or $0.42 per share in the prior year. Adjusted EPS, excluding non-operational items, totaled $0.64 compared with $0.54 in the prior year. As Chris mentioned, these results reflect continued operating model improvement efforts. We'll now take a closer look at our fourth quarter sales results by geography. As a reminder, 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; Asia-Pacific, which includes China, Japan, Australia and other Asian markets. Sales in the Americas improved 6.7% or 7.2% organically, resulting from what was the ninth consecutive quarter of organic growth for the region, driven by strength in both North America and Latin America. Our North America results reflect demand for Tennant's autonomous cleaning machines as well as continued growth in our service and parts and consumables businesses. Growth in Latin America was driven by broad-based strength across the region but specific strength in Mexico during the quarter. Sales in the EMEA region were down…

[Operator Instructions] Your first question is from Joe Mondillo with Sidoti & Company. Your line is open.

Joe, good morning.

Good morning, guys.

Good morning.

So I guess just a couple of small items regarding the guidance. First, the adjusted EPS. How much non-operational items are you excluding from that? I'm just curious what's going to be weighing on the GAAP earnings related to non-operational items.

It's relatively small in 2020. It's mostly the after-tax amortization that's adjusting that.

Okay.

You can see a reconciliation of the 2019 numbers in our earnings release and it's relatively consistent. They will be a little bit lower in 2020 but relatively consistent to 2019 how much the amortization was.

Okay. And just for future year purposes and trying to think about it in terms of the tax rate, is there anything abnormal that's bringing that tax rate down or would you sort of consider at this point knowing what you know that 19% to be sort of normalized?

Yeah. We always had some variability in our tax rate for things that happen during the year, but I think 19% is a fairly normalized rate for us going forward.

Okay. And then, so to get into the business, the Americas business has just been performing quite well. I think you've called out the automation and what you've been doing there in terms of those products really driving that growth. I'm curious because I know you received the big order with Walmart early in 2019 and I'm sure that's been part of that growth. I'm wondering what the backlog sort of looks like in the Americas. And I'm just asking because if there is any risk to that Walmart order falling off, do we see a couple of quarters or do things slow down at all? So, just comment on the backlog, I guess, in Americas.

So from a backlog perspective, we don't really see that as an issue going into 2020. And as far as the AMR rollout goes, it's going to be fairly consistent during the year. So, yes, we did get a large order from Walmart last year, but we've got other things in place to fill that gap.

And also AMR was a significant contributor to our fourth quarter results and we expect it to be a significant contributor to our results in 2020 as well. We're very excited by the prospects.

Okay. So your guidance is sort of suggesting, I assume, considering that Americas is your biggest piece of the business, is assuming sort of a slowdown. So what's driving the slowdown?

Well, I think -- we think we're going to -- first off, we're going to experience growth across all the regions. And what I'd say -- keep in mind, we are reducing or exiting certain products that it does have a 100 basis point impact on our organic growth is one thing, I'd say. And two, it's just -- this is probably a more I think 2019 perhaps reflected some large order, initial enthusiasm about AMR and I think this is probably a more appropriate level to think about our sales growth going forward.

And the other thing is, as we know, I mean there are segments of the U.S. economy doing well. And then -- but the manufacturing or industrial economy is still continuing to struggle and we have a big piece of -- a chunk of our business that's sold into that segment. And so we're seeing -- I would say that 2020 over 2019, we're seeing a little bit of a market slowdown in some of the categories in which we compete.

Okay. And then in terms of your EMEA geography, tough year in 2019. I'm just wondering what your expectation -- I guess, you just called out that you expect every region to see growth, but I'm specifically highlighting EMEA, mainly because you just started introducing AMR products at the end of 2019. So I'm really wondering how that's been progressing and how you see the year progressing EMEA especially based on your AMR offerings there?

Remember, we made the IPC acquisition in 2017 and we've been working hard to basically integrate the two businesses and a lot of that effort occurred in 2017. So I think in some ways, we were internally focused that we -- to make sure we got that right and built this firm foundation for future growth. And we were doing it also at a time when the macroeconomic conditions in Europe were less than ideal, matter of fact they were extremely soft. So I think both of those things impacted us. I think we're more bullish on 2020 even if the economy doesn't improve, because I think we're better positioned as a business in EMEA to execute and we are launching some new products that we're very excited about in addition to AMR. AMR, I think when we said we introduced it in late last year, it was really basically got to get out there and demoing the machines with some key customers. So we start to -- we expect to make some progress to AMR in Europe this year, but I don't think that it's necessarily going to be material to our results in EMEA. I'm thinking 2021 really is when we should take off with AMR in Europe.

Okay. And then just a follow-up continuing on AMR. I'm just wondering if you could talk about the progress that you're making, R&D, can we expect any new models beyond the T7 this year? Just curious of anything else that you can sort of tell us regarding the progress that you're making there.

Well, I mean, as I said we're excited about the long-term prospects for automated cleaning. And so, yes, it's fair to assume that our R&D efforts are focused on second and third generation products and solutions. So this is a very dynamic environment and -- which we are excited about investing appropriately behind and every indication is this is going to continue to grow at a nice clip.

And specifically to sort of the -- I understand in the long term you're probably going to introduce a ton of new products over the course of several years, but just give us a sense of timing. Do we -- can we expect new models this year or is this more of a three-year progression? Just wondering in the near term...

As we get -- I think what we'll do is, as we get closer to having solidified the plans and we know what the kind of market launch dates are, that's when we start to communicate publicly. And we do that also just for competitive reasons, right. And this is a very dynamic marketplace with a lot of competitors, both inside our industry and outside our industry trying to make a mark.

Okay. Understandable. I appreciate you taking my questions this morning.

Your next question is from Mike Shlisky with Dougherty & Company. Your line is open.

Good morning, guys. Can you hear me?

Hey, you're great.

Hey, Mike. Good morning.

So I wanted to maybe first ask about what's going on over in China. There has been some Corona virus stuff happening there. You've got a new deal there and a presence there. I guess maybe just -- maybe there's two questions there. One, in the kind of near term, in this current quarter, has there been any impact to your business? And then perhaps more over the kind of medium to kind of longer term, do you think you [really] have opportunities there as practices around clean services might be changing there given what's been going on? Is it possible that this could actually be a opportunity for Tennant over the kind of longer-term here?

I mean, I would say -- we view it as an opportunity. I mean, there is two reasons to be optimistic. I mean the infrastructure building in China is crazy, right. There is new buildings going up, new airports going up, new train stations going up all the time. I think the cleaning standards in China are also improving. The Corona virus is only going to accelerate that. But also the other thing we've talked about many, many times in the past is that we see in emerging markets, when labor rates get to a certain tipping point that's when mechanized cleaning really, really takes off and that has not yet happened in China. So, you asked about 2019 results and that's more based on just slowing growth in China and also our business in China is separated into kind of a distributor channel and a direct sales channel and it was really the distributor side of our business that struggled. I think we have invested behind and continue to grow the direct side of our business and that's actually performing very well. It's going to take a while before that kind of matches and maybe even surpasses our distributor business, but we're very bullish on that piece. We're hoping that the distributor business in China kind of picks back up in 2020. Corona virus, I think, yeah, just like any other company that you read about, there is going to be some short-term impact and we're hoping it is short term that it impacts Q1, it may have some impacts in Q2, but at the back half of the year we're back to business as normal.

Yeah, just to add in here like that one thing, clearly when we get to Q1 we will give an update on how it impacted our business. As Chris said, it will have an impact, we're still -- it's a dynamic situation. We're still evaluating that. I think our guidance though, we feel comfortable with that. With where we are today, we feel comfortable our guidance as we stated it.

Okay, great. I wanted to ask, secondly, about the rental market. My checks have shown that some of the major fleets out there that rent out other equipment have mentioned that cleaning equipment and surface care has been a big source of growth for their fleets, especially coming up here in our 2020. Could you comment on whether you've been seeing that, I think, in your business and whether you [indiscernible] opportunity for this year as well?

Well, what I will say is that if you look back over the last five years, the progress we made in the rental market is truly incredible. I mean, it went from an afterthought to one of the biggest parts, especially of our North America business. And so we don't see any reason for that to slow down at all as we go forward.

Yeah, I'd just add in here like -- part of our strategy is to think of our business a bit differently too, all right. So that's going -- not just this year but future years too. So, rental is just a potential, not an option, but there are other things as well. So it's been successful and I think it will continue to be successful.

Okay. And maybe one last one for me. You were mentioning one of your competitors [indiscernible] having some issues with the organic growth within your other parts of the business. Can you give us a sense as to as we ended the year and going forward here, do you see any major shifts in market share globally that we're talking about or is that pretty stable from year to year?

Yeah, I mean, I -- that's not something we're prepared to discuss at this point, but I mean, obviously, we are always looking at our markets, and if there is a competitor weakness in a certain segment, we do focus our attention on that to figure out a way if we can enhance our position and take some market share. So we do that on an ongoing basis. So we'll take advantage of it to the extent that we can.

Okay, I'll leave it there, guys. I appreciate the help.

Your next question is from Chris Moore with CJS Securities. Your line is open.

Hey, good morning guys.

Good morning, Chris.

Good morning. The 2% to 3% organic growth that you're talking about, is -- from a pricing improvement standpoint is -- kind of what's embedded there? Are you assuming that that 1% plus comes on the pricing side annually or how do you think about that?

Yeah, Chris, we are not going to give specifics on what our pricing is as a component of our revenue increase, but it certainly is a component as well as trying to drive the higher volumes. So price is important, but we won't get specifics on what that is and our target and what we've rolled out.

Yeah, and one of the things to remember, I mean, is that we keep talking about reasonable growth with enhanced profitability, right. So we really got to get after our operating model. In the past, we were -- the pressure on growth was such that we could never take some of the actions necessary to actually build this firmer foundation upon which to grow. So that's why it's reasonable growth. We're taking actions, like I said, we're cutting products, it's 100 basis points of growth that we're giving up this year. We basically said we're resegmenting our strategic account customer portfolio, we have either cut off or renegotiated terms with 50% of our 350 distributors in North America. In the short term there's going to be some dislocation from that potentially, long term it's great. We're saying we're simplifying our product portfolio. We used to, basically whenever a customer wanted, figure out a way to provide it, now we're going to a philosophy where we're going to sell what we build. So we're reducing our models and options by 25%. That potentially can have some short-term implications too. But I think once that settled and we're operating with that model it's going to provide great benefits in terms of winning with our best customers and it's going to drive much better value for Tennant. So this is why we don't focus too much on the organic growth there, the early growing. It is a conscious effort on our part to basically restructure the business.

Got it. It's helpful. And a good segue, I mean it looks like all three pillars are going to be kind of key to your long-term success. And just trying to kind of match up those -- the three versus that 15% EBITDA goal that we had talked about -- Andy had talked about kind of 50 basis point to 100 basis point improvement in annual EBITDA leverage. From a visibility standpoint, from what you just said, Chris, there could be some dislocation. But is the most visible piece of that improvement on the second pillar in the simplification and just trying to understand if that 50 basis points to 100 basis points there could be catch-up next year versus is it logical to think that it's smooth?

Yeah, I think, what I would say, first off, I think all three pillars would contribute to our EBITDA expansion, not just the second pillar as they all have important aspects to driving profitability improvement. As Chris mentioned, maybe a little bit more moderate on the top line, but all three pillars contribute to that bottom line growth. So it's really important. And I think, we're building momentum for this. We introduced this stuff internally last year and it's building momentum. I think it will be a fairly smooth ride up. Our goal is predictable, sustainable EBITDA growth over time. That's really our goal.

Yeah, And then -- I'd also say that all three are going to contribute, but probably not all three contribute at the same any given year. So you may see the second pillar driving more of the improvement in year one, and the first pillar driving more of the improvement in year two and three.

Yeah, I guess that's what I was getting at. So it seems like some of the lower-hanging fruit is in two, but then one and three being just as important longer term.

Your next question is from Marco Rodriguez with Stonegate Capital Markets. Your line is open.

Most of my questions have been asked and answered, but just a few quick follow-ups. In terms of the guidance, the long-term guidance, on the -- the increasing EBITDA margins that you're looking at, I know in the past you've talked about the facts that you're going to have to have improvements at gross margins as well as your operating structure. Just trying to get a little bit better of a sense if you can maybe split it out a little bit, I mean, is there any equal share with your strategic pillars that will see an increase in gross margins as well as a decrease in the operating cost structure, or is there one area that's a little bit heavier than the other?

I'd comment that it's probably relatively equal. We need to see improvement in both to achieve the EBIT levels you want to hit and we're not giving specific guidance at that level. But it is, rest assured in your models, that it should be an improvement in both those metrics. Gross margin needs to improve as well as S&A needs [indiscernible] leverage on our S&A expenses.

Gotcha. And then just circling back on the commentary on the Americas market, your expectations as far as some growth, albeit maybe a little bit slower than the prior year. Can you maybe talk a little about some differences between North America and Latin America, if there are any?

I mean they are different market dynamics. I mean, North America over the last number of years actually had a stronger economy. The amazing thing for us in a country like Brazil that even through good times and bad times, our team down there seems to knock it out of the park. In Brazil, we have the highest market share we have anywhere in the world. And we're leveraging that experience in Brazil, which is the largest market into Mexico, where we've had newfound progress over the last two or three years, and it's kind of growing faster than the rest of our Latin America businesses. But we have a great team in place in Latin America. The business is obviously much smaller, has lots of potential, but growing more rapidly than in the North America businesses. But what I'm so impressed with in a very tough part of the world that we seem to operate very consistently and deliver good results year-over-year. We're going to do it again in 2020.

Got it. And then in terms of the EPS guidance, you guys have for fiscal '20 and obviously the Corona virus and its impact on the world economy and their Asian economy is extremely difficult. But wondering if, based on your comments before on the prior question, have you baked in some sort of EPS headwind for that impact or has that not been considered as of yet?

The specifics of the Corona virus impact aren't necessarily in our guidance, but things like that, we think we have enough flexibility to overcome that, again, given what we know today. If it extends for a longer period of time that might be a different answer, but given what we know today, I would say we're comfortable with the guidance as we presented it.

Got it.

As we said, one of the things that we've done that really is helping us and dampening the effect of the Corona virus is that we've said we've gone local for local, right. We're manufacturing locally and our supply chain is much more local. So North America and Europe aren't depending on China for parts and components, which a lot of businesses still are that are probably impact their results there in the first, second quarter, much more than they will ours.

Got it. And last quick question, just on the balance sheet, inventory levels, a bit elevated in fiscal '19. Just kind of give us a sense as far as your expectations on inventory levels going into fiscal '20 and if you can provide any sort of mix information on finished versus the work-in-progress type inventory, that would be appreciated.

As far as inventory levels, yes, we agree they certainly are higher than we'd like. And we have a specific teams and initiatives in place in 2020 to work on that. I won't give any specific targets or guidance that we're working toward, but rest assured it's a priority for us and we are working hard to improve those inventory levels from that perspective. In the 10-K which we will file next week, you should be able to get a better split of the finished goods versus the work-in-process inventory too.

[Operator Instructions] Your next question is from Brett Kearney with Gabelli Funds. Your line is open.

Hi guys. Thanks for the color not only on the quarter but the deep dive on the go-forward strategy. It seems well thought-out, well designed and was well-articulated here. So, thank you.

Thank you.

I guess on the third pillar, innovation, are you all contemplating that kind of will manifest itself through Tennant's historical approach combining the strong innovation function internally together with maybe some partnerships with third parties together with potentially some bolt-on technology acquisitions?

We are -- we've opened the aperture. We look at it much more now as an innovation ecosystem where we will -- Tennant will do what Tennant does best and we'll partner for the rest. Our partnership with Brain is a great example of that, yeah. So we are very open. Our relationships in that ecosystem are more broad based and stronger than they've ever been and I think that bodes well for the future and the types of innovations we can bring to the market, not only in terms of our products, but as we said kind of we're looking at digital transformation providing information to our customers can operate more effectively at a lower cost, as an important part of our offering as we go forward.

Terrific, thank you.

And your next question is from Joe Mondillo with Sidoti & Company. Your line is open.

Hi, guys. Thanks for taking the follow-up question.

Yeah.

So I just wanted to clarify the organic revenue guidance, that excludes the divestitures, so including...

No.

So including [indiscernible]?

No, it includes it. It includes it.

Okay. Okay. And then regarding the guidance and sort of all the changes you're making with the Company, first off, could you address what has been the bigger driving factors to the gross margin -- the adjusted gross margin expansion that you saw in 2019? And it seems like the guidance is assuming a lot less expansion at that margin level. Could you just comment on the factors that are going into all that? And what [indiscernible].

There is a number of factors -- yeah, there is a number of factors that drove 2019. So pricing initiatives that we've talked about that helped both revenue and the margin, obviously. And we did have a very robust cost initiatives that went on throughout the year in the Company to drive margin improvement and that really was a big factor. And I think both of those will be factors in 2020 as well. So those are probably the biggest two ones. We continue to face headwinds and inflation in tariffs in 2020, but we think those two factors are the big ones that will help offset any inflations and improve our margins going forward.

But also our new GPS strategy had minimal impact on our 2019 results. The journey is just beginning. And we got a lot of moving pieces in place, right. We've said with a lot of moving pieces internally and externally. And so I think as we get through 2020, we will have a much better sense of where we're getting traction, what the value generation is through those efforts than we do right now. But this is a very exciting year, but we're going to be really disciplined about executing this multitude of initiatives really well to make sure we stay focused on driving the value that we've guided to. And remember, what we're trying to do here is, as Andy said this, is historically I think that we have had great years and then not so great years and all of you did not appreciate that. And so we are really working hard to ensure that going forward that our results are consistent and sustainable year-over-year and we continue to build value creation incrementally over time.

Okay, I appreciate that. Thanks a lot. Thanks for taking my follow-up questions.

Our pleasure.

Yeah, thank you.

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

All right. Thanks, Chris. So we're looking ahead with a real sense of excitement and anticipation given the changes we've set in motion. In the year ahead, we will remain focused on our GPS strategy and the three strategic pillars of winning where we have competitive advantage, reducing complexity and building scalable processes and innovating for profitable growth. So thank you again for joining us today. This concludes our fourth quarter earnings call. Have a great day, everybody.

Ladies and gentlemen this concludes today’s conference call, thank you for your participation and you may now disconnect.